‘Sharing’ challenge must be met by innovation, supply upsurge
On the sidelines of the Hamburg Aviation Conference 2017 which took place this week, Bratati Ghosh, Chief Marketing Officer of IBS, stated her views on why the aviation, travel and hospitality industries absolutely require innovation to sustain themselves for the long term. "The industry is going through a ton of disruption, with challengers that are carving away a lot of market share," she pointed out, referring to the likes of Uber and Airbnb which are poster children of the sharing economy.
Industry website Hospitalitynet quotes an HVS study, which estimates that Airbnb captures approximately $450 million in direct revenues from traditional hotels every year. Compared to around 480,000 room nights booked in hotels between September 2014 and August 2015, Airbnb accounted for 2.8 million, which is expected to grow by around 80% annually by 2018. These new companies compete directly with traditional players on the demand side, but do not provide adequate foundations on the supply side to support the model.
Ghosh recognizes that "Traditional players are large organizations which have to manage incredibly complex operations," highlighting the inherent disadvantage faced by these traditional players when competing with disruptive business models. In order to foster a startup culture within their existing ecosystems, these companies need a reliable technology partner who not only understands the nuances of their business but also enables them with the agility they otherwise lack. Even if the core of the business model temporarily stagnates at some point in its evolution, technology can help deliver the same services in a more efficient manner and improve the value proposition to the customer.
Lower marginal costs of adding inventory, relatively no accountability and thereby much lower overhead costs gives these new age businesses tremendous amounts of momentum when it comes to breaking into new markets and expanding in existing ones. Yet, the majority of 'growth' we see on the supply side of the sharing economy is through existing infrastructure that wasn't previously offered for renting/sharing. Whether absolutely new infrastructure is consistently created solely for the sharing economy remains to be seen.
While traditional hospitality companies are at a disadvantage when it comes to agility and cost overheads, having higher predictability and control over their inventory supply gives them a good opportunity to innovate. The pressure they face on the demand side can be overcome through innovative service models and dynamic pricing patterns to cater to different segments of the market that prioritize value for money over budget limitations. New brands or spin-offs providing budget accommodation will also play a key role in the game, by boosting supply.
To put it very simply, it is important to recognize that the old and new business models are not two paths to the same goal; they differ at a very fundamental level. The sharing economy focuses on connecting new demand to existing supply, which it assumes will grow in sync with the demand. It doesn't – in the present form – drive creation of new infrastructure as the traditional players do. That means, a hotel chain like Hilton or Hyatt invests in expanding infrastructure directly or indirectly before they market it to customers. On the other hand, Airbnb takes no such responsibility from a financing perspective when it comes to generating fresh supply, especially because they have or envision no real control over the inventory which is marketed through their platform. Both models work in the present scenario owing to the strength of demand, but one is built upon a questionable foundation.
"Travelers themselves are changing in their behavior. They wish to engage with companies in completely different ways and you have to enable them! A large segment of customers appreciate and make use of the sharing economy. We will be paying close attention to how the supply side responds to this," concludes Ghosh.