Internet, Lodging, Leisure and Hotels: Global Insight: Who Will Airbnb Hurt More

Internet, Lodging, Leisure and Hotels: Global Insight: Who Will Airbnb Hurt More - Hotels or OTAs?

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November 15, 2015

Global Insight: Who Will Airbnb Hurt

More - Hotels or OTAs?

Our 4k person survey shows 12% of travelers have used Airbnb &

adoption is rising despite awareness, privacy, and safety hurdles. We

think investors overestimate Airbnb's threat to hotels – <50% of use

cannibalizes hotels and hotels over-index corporate – but

underestimate its threat to OTAs.

Airbnb traveler penetration already 12%...headed to 16-18%: Our

AlphaWise survey suggests that 12% of leisure and business travelers have

used Airbnb at least once, with penetration expected to rise for both groups

next year (18% for leisure and 16% for business). While this could suggest

most of Airbnb's impact has already been felt, we see room for more gains for

both because users are 90%+ satisfied and because only 41% of our survey

sample is currently aware of the service. Among our sample group that is

aware of Airbnb, 25% of them have tried it.

Surprisingly, Airbnb users skew wealthier, though price matters most:

Surprisingly, our survey also shows that Airbnb users skew wealthier than

non-Airbnb travelers, with ~66% of U.S. Airbnb users earning over

$75k/year. This, in our view, contradicts the popular belief that Airbnb users

are largely college students/millennials and individuals with lower incomes.

That said,our survey shows price is the primary reason (55%) for using Airbnb.

These data suggest to us that the service could have broader appeal.

Less than half of Airbnb demand coming at the expense of traditional

hotels: Our survey shows that only 42% of Airbnb users are substituting away

from traditional hotels. 36% switch from bed & breakfasts, 31% are using

Airbnb rather than staying with friends and family, and ~20% are using Airbnb

over vacation rentals. This, combined with the fact that only 7% of Airbnb users

stay 1 night (vs 25% for traditional hotels), speaks to how Airbnb (for now) is

primarily focused on non-hotel, leisure, longer-duration stays, rather

than corporate single-night stays. We believe corporate travel will continue

to be more difficult for Airbnb to penetrate given safety and privacy concerns

holding back adoption, and the higher importance corporate travelers place on

amenities (loyalty programs, business centers, restaurants, etc.).

We remain bullish on the hotel group as heavy corporate travel mix

insulates Airbnb cannibalization risk. The differences between leisure and

corporate travelers matter given the major hotel groups' corporate-heavy

bookings mix (~70% of business from corporate demand). Our survey shows

how Airbnb leisure use is growing faster (+50% NTM increase) than

corporate use (+33%). Further, our new hotel supply and demand model

shows that even if Airbnb reaches ~37% penetration of online travelers (our

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Airbnb bull case, assuming no let-up in annual penetration growth through

2020), we see the business having only a 20bp negative impact on annual

hotel occupancies and a 70bp negative impact on annual RevPAR growth. Our

Airbnb base case assumes 10bp off annual hotel occupancies and 50bp

off annual RevPAR growth, quite immaterial on an annual basis...and could

be lower if Airbnb's corporate penetration continues slowing. Of course,

Airbnb could compound a cyclical lodging downturn if rising unemployment

further increases supply on the site (as only 5% of survey respondents have

listed on Airbnb) but in our base case, we don't see Airbnb materially

impacting the hotel industry, which leaves us bullish on the sector.

Some of our top Overweight picks are HLT, HOT, and SHO in the US, and IHG

and WTB in Europe.

Remain cautious on OTAs as Airbnb is a larger leisure travel

competitive threat: Airbnb's threat to the OTAs is larger and multifaceted.

First, the more hotel demand Airbnb cannibalizes – impacting occupancy and

RevPAR – the harder it will be on the OTAs. We don't believe hotels would

turn to EXPE/PCLN if Airbnb causes more macro weakness than

expected...if anything they are likely to turn to Airbnb. Second, the fact that

the OTAs over-index toward leisure (80%+ of EXPE/PCLN bookings from

leisure demand) puts them in more direct competition with Airbnb. Third,

Airbnb's cannibalization of non-hotel categories – like bed and breakfasts and

vacation rentals – further impacts OTA demand. We acknowledge the OTAs

have posted strong room night growth in 2015 even as Airbnb has ramped,

but longer-term we see the online travel players competing more

directly for online travelers' wallets, which keeps us cautious on OTA long-

term growth and earnings power...and on the sidelines. Indeed, even if only

20% of Airbnb's long-term (2020) room nights come at the expense of

OTAs it would lead to a 7% downward revision to our long-term OTA

room night forecasts. We are Equal-weight PCLN and EXPE and look for

incremental data points on Airbnb's adoption and cannibalization before

getting more actionable.

Could Airbnb be a long-term positive for hotels and an even more

direct competitor to the OTAs? It will also be important to monitor Airbnb's

relationships with the major hotel groups, as if Airbnb ever decides to allow

hotels to list properties on their site – a likely positive for Airbnb's user

conversion and monetization – it would create a more comprehensive, faster

growing, lower cost OTA competitor. Airbnb currently charges properties 3%

on transactions...while OTAs charge hotels 12-18%. Even if Airbnb offered

the hotels a commission rate that is triple its standard 3% rate, it would

be positive for hotels, likely leading to lower average customer acquisition

costs and giving the hotels more leverage against the OTAs. Suffice it to say,

this would be a further negative to the OTA industry.

Exhibit 1: What accommodations are Airbnb users

substituting away from? A variety of accommodations, with

less than half coming from hotels.

Source: AlphaWise, Morgan Stanley Research

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Table of Contents

Assessing the Airbnb Competitive Threat

Key Debate #1: How Big is Airbnb and Who is Using it?

Key Debate #2: Where is Airbnb's Demand Coming From?

Key Debate #3: How Big a Competitive Threat is Airbnb to Hotels ?

Key Debate #4: How Big a Competitive Threat is Airbnb to OTAs?

What is Airbnb?

Appendix

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Assessing the Airbnb Competitive Threat

AlphaWise Survey Methodology

The following note showcases our first AlphaWise survey around Airbnb usage. We use our proprietary

survey of 4k+ consumers in 4 countries in order to track adoption trends by country and the key drivers

and hurdles to growth. In November 2015 we surveyed 4,116 adults aged 18+ evenly distributed across

the US, UK, France, and Germany. The sample is representative of the online adult population in terms of

age, gender, income, and region in each country. We posed a series of questions around Airbnb, leisure

/corporate travel, travel accommodation behavior, and demographic data. Conclusions based on the total

sample have an estimated maximum margin of error of 3% at the 90% confidence level. Our findings are

as follows.

The market seems to think Airbnb is a material threat to the hotels but not the OTAs...we disagree on

both fronts

Airbnb and its disruptive model have become top of mind for investors in both the lodging/hotel and online

travel sectors. Yet, in our view, current consensus investor sentiment – that Airbnb is a material threat to the

hotel and lodging group, but not a competitive threat to the online travel agencies (OTAs) – appears

offsides...and runs contrary to the conclusions we draw from our latest AlphaWise survey.

In the following note, we analyze our AlphaWise survey data of Airbnb's core use trends – who is using it, how

they are using it, etc. – and attempt to quantify Airbnb's potential impact on the lodging and online travel

industries. In all, we see Airbnb as less of a threat to the hotel group (reinforcing our positive view on

the group) but more of a threat to the OTAs (leaving us more cautious on the long-term competitive

threats to EXPE and PCLN).

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Exhibit 2: US Lodging Brand Companies' NTM EV/EBITDA multiples have compressed over the last 6 months

as a result of business cycle and Airbnb concerns...

Source: Company data, Morgan Stanley Research

Exhibit 3: ...while OTA forward EV/EBITDA multiples have expanded through consolidation

Source: Thomson Reuters, Morgan Stanley Research

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What do our AlphaWise survey data show us about Airbnb user penetration and demand?

In all, our AlphaWise survey data show that 12% of leisure and business travelers have used Airbnb at

least once...and that both groups expect to use it more over the next 12 months (See Exhibit 4). We expect to

see continued adoption, but believe Airbnb will have to overcome awareness challenges (which can be

done through advertising), safety, and privacy concerns (See Exhibit 5). Note that while 12% of leisure and

business travelers have used Airbnb, this is not representative of share of wallet...as one use would lead to a

"yes" response. Between 16-18% of travelers expect to use Airbnb in the next 12 months, and while some

may argue a meaningful share (12% / 17%) of Airbnb's impact has already been felt, we expect to see continued

traveler experimentation and adoption beyond this.

Exhibit 4: According to our AlphaWise survey, 12% of leisure and corporate travelers have used Airbnb in

the last 12 months...with both expected to rise over the next 12 months

Source: AlphaWise, Morgan Stanley Research

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We are often asked by investors whether or not Airbnb's demand is entirely coming at the expense of hotels;

our survey suggests not as only 42% of Airbnb demand is coming at the expense of traditional hotel

demand (See Exhibit 6 ). This, combined with the fact that (See Exhibit 7) only 7% of Airbnb users stay 1 night

(vs 25% for traditional hotels), speaks to how Airbnb (for now) is primarily focused on non-hotel, leisure,

longer-duration stays, rather than corporate single-night stay segments. In addition, we believe corporate will

continue to be more difficult for Airbnb to penetrate given the aforementioned safety and privacy concerns, as

well as the higher importance corporate travelers place on amenities (loyalty programs,business centers,

restaurants, etc.).

Exhibit 5: Awareness, privacy, and safety were the main reasons why respondents did not use Airbnb

Question: You have stated you have not used Airbnb, and do not plan to; please indicate the main reasons

below in order of importance.

Source: AlphaWise, Morgan Stanley Research

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Exhibit 6: Airbnb users are replacing a variety of accommodations, with less than half of demand coming

from hotels

Question: You stated that you have used Airbnb in the past 12 months; which of the following

accommodation alternatives did it replace? Select all that apply.

Source: AlphaWise, Morgan Stanley Research

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Remain bullish on hotel group as heavy corporate travel mix insulates Airbnb cannibalization risk

These differences between leisure and corporate travelers matter given the major hotel groups' corporate-heavy

bookings mix – around 70% of their business driven by corporate demand. We believe this will limit the

potential cannibalization impact from Airbnb, as, by our math, even if Airbnb reaches ~37% penetration of

online travelers we see the business having only a 20bp impact on annual industry occupancy and

taking 70bp off annual RevPAR growth by 2020 (See Exhibit 8and Exhibit 9). Our base case is for a much

smaller impact, and would be lower still if we adjusted for Airbnb's lower expected corporate penetration.

Material increases in Airbnb user frequency (more than the current 4 room nights per person), potential Airbnb

material success in the corporate market, or a cyclical lodging downturn would likely have worse effects...but i n

our base case, we don't see Airbnb materially impacting the hotel industry...which leaves us positive

on the group. Some of our top picks are HLT, IHG, HOT, SHO and WTB.

Exhibit 7: Airbnb is much less focused on single night stays, which is where hoteliers are focused with their

corporate demand

Question: When you booked on Airbnb or stayed at a traditional hotel, how many nights did you stay?

Source: AlphaWise, Morgan Stanley Research

Exhibit 8: Scenarios for hotel industry occupancy under Airbnb Bull/Bear/Base case

Source: STR Global, MKG Group, Company data, Morgan Stanley Research

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Remain cautious on OTAs as Airbnb is a larger long-term competitive threat

Airbnb's threat to the online travel agencies (OTAs) is multifaceted, but also dependent on user penetration

growth and frequency of use. First, the more demand Airbnb cannibalizes – impacting occupancy and RevPAR –

the harder it will be on the OTAs given their dependency on a strong hotel market for growth. Our Airbnb base

case calls for a fairly muted macro impact, but bear in mind, the OTAs over-index toward leisure (80%+ of

Expedia and Priceline's business stems from leisure demand) which puts them in more direct competition with

Airbnb. In addition, as shown above in Exhibit 6 , Airbnb is also cannibalizing non-hotel categories – like bed

and breakfasts and vacation rentals – that the OTAs also serve. As such, we believe Airbnb's demand

cannibalization risk is likely higher for the OTAs.

To be fair, the OTAs have posted strong room night growth over the past year even as Airbnb (we believe) has

doubled its room nights from ~40mn to ~80mn global room nights. That said, we question whether this can

continue over the long-term (given limits to the pace of online travel penetration growth and potential increased

head-to-head competition). For perspective, i f 20% of Airbnb's 183mn 2020 room nights (in the U.S. and

Europe) in our base case came at the expense of OTAs, it would lead to a 7% downward revision to

our long-term OTA leisure room night forecasts (See Exhibit 10). This keeps us cautious on the OTA

long-term growth and earnings power...and on the sidelines. We look for incremental data points on

Airbnb's adoption and cannibalization before getting more actionable.

It will also be important to monitor Airbnb's relationships with the major hotel groups because if Airbnb ever

decides to allow hotels to list properties on their site – a likely positive for Airbnb's user conversion and

monetization – it would create a more comprehensive, faster growing, lower cost OTA competitor. Airbnb

currently charges properties 3% on transactions...while OTAs charge hotels 12-18%. Even if Airbnb offered

the hotels a commission rate that is triple its standard rate, it would be positive for hotels, likely

leading to lower average customer acquisition costs and giving them more leverage against the OTAs. Suffice to

say, this would be a further negative to the OTA industry.

Exhibit 9: Scenarios for RevPAR growth under Airbnb Bull/Bear/Base case

Source: STR Global, MKG Group, Company data, Morgan Stanley Research

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Please see the Appendix for our full Airbnb demand model.

Exhibit 10: If 20% of our base case long-term Airbnb room nights (in the U.S. and Europe) come at the

expense of OTAs, it would reduce our long-term OTA demand estimates by 7%

Source: STR Global, MKG Group, Company data, Morgan Stanley Research

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Key Debate #1: How Big is Airbnb and Who is Using it?

Market View:

Airbnb is a small but growing platform for booking leisure accommodations online. It is mainly used by

college students, millennials, and lower-income travelers...while corporate travel remains an opportunity

for Airbnb.

Our View:

Our AlphaWise survey data indicates Airbnb has already been used by 12% of both leisure and corporate

travelers. This may seem high now, but Airbnb awareness is still low (less than 50% of survey

respondents had heard of Airbnb) which speaks to its potential forward growth opportunity. Awareness,

safety and privacy are concerns to the long-term pace of adoption. While the majority of respondents

booked on Airbnb for its "lower prices," Airbnb users skewed wealthier in the US, UK, and Germany.

Where We Could Be Wrong:

Our user penetration data do not take into account share of wallet (those indicating they used Airbnb

may have only used the platform one time), so this penetration could just speak to experimentation

rather than recurring use.

Airbnb Travel Penetration Already at 12%...Expected to Rise to 16-18% over the Next Year

Our AlphaWise survey data suggest that Airbnb has already been used (at least once) by a double digit

percentage of leisure and business travelers. In all, 12% of leisure and business travelers have used Airbnb

at least once over the past 12 months. Use is expected to rise further, with leisure user adoption expected to

increase by 50% over the next 12 months to 18%, and business user adoption is expected to rise by 33% to 16%.

These data speak to current and rising Airbnb experimentation across both traveler cohorts, but it is

important to remember that these metrics do not represent share of wallet (as travelers responding

"yes" may have only used Airbnb one time). Going forward, user adoption and trends around frequency of use

will be particularly important to monitor. If 16-18% of travelers expect to use Airbnb in the next 12

months,and 12% already do, this could suggest a meaningful share (12% / 17%) of Airbnb's impact

has already been fel t. However, we expect to see continued traveler experimentation and adoption such that

these levels increase.

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But Respondent Awareness Still Under 50%, Speaking to Adoption Opportunity…

A low double digit penetration rate may seem high, but it is important to note that only 48% of overall survey

respondents had heard of Airbnb (See Exhibit 12). As shown, the awareness ranged from 45% to 60% (with

Germany the lowest and France the highest). This, in our view, speaks to Airbnb's growth opportunity as

awareness continues rising...as 12% user penetration with only 48% brand awareness implies that ~25%

of travelers who know about Airbnb have tried the service at least once. We would argue this is relatively

high given this is a physical product with an emotional attachment where the user is renting someone else's

property/home...usually for at least several days. Stepping back, user penetration is probably never going to be

as high for Airbnb as it is for short taxi rides with Uber, or for other lower-touch services like using social media.

Exhibit 11: According to our AlphaWise survey, 12% of leisure and corporate travelers have used Airbnb in

the last 12 months...with both expected to rise over the next 12 months

Question: Please indicate which of the following channels you have used/plan to use for booking your trip

when traveling for leisure/business in the following periods.

Source: AlphaWise, Morgan Stanley Research

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…and User Satis faction is over 90%

Airbnb users in our survey were satisfied too, with 91% of Airbnb users responding that they were satisfied

with the experience…and over half (55%) were “very satisfied.” Only 2% of Airbnb users were not satisfied.We

are admittedly a bit surprised by this high satisfaction given various negative press reports about Airbnb user

stories and even the emergence of websites like www.airbnbhell.com. It also seems a little inconsistent with

surprisingly low repeat rate from our survey, with only 44% of existing Airbnb leisure users expecting to use it in

the next 12 months. That said, if satisfaction stays this high,we believe it will likely lead to repeat use,

which, in our view, speaks to the opportunity for Airbnb to continue to grow share of travelers'

wallets with its growing user base.

Exhibit 12: Airbnb consumer awareness is ~50% in our sample

Source: AlphaWise, Morgan Stanley Research

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That Said, Increasing Awareness and Overcoming Privacy and Safety Concerns Will be Critical to

Driving Forward Growth and Adoption.

The top reasons why people in our survey are not using Airbnb are lack of awareness (59%), privacy concerns

(32%), and safety concerns (27%). Said another way, 59% of people who have not used Airbnb in our survey had

never heard of the site. Awareness can grow over time (with increased advertising and availability, etc.), but in

our view, the privacy and safety concerns may be bigger challenges to long-term growth given Airbnb’s

social sharing model. This is particularly important for corporate users, whose travel managers need to

have safety and regulations in mind. This matches the results of our recent Corporate Travel Survey, where

14% of corporate travel managers claimed to have already used Airbnb Business Travel; 66% of those who had

not used it were "very unlikely" to use it, 9% were "somewhat likely", and none "very likely".

Exhibit 13: 91% of survey respondents who used Airbnb in the last 12 months were satisfied with their

experience.

Question: Please rate your experience with using Airbnb.

Source: AlphaWise, Morgan Stanley Research

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Price the Most Important Factor in Driving Airbnb Use

Price was the most important factor for consumers when deciding to use Airbnb. In all, 55% of respondents who

either used or plan to use Airbnb said that "price" was one of the 3 most important factors that led them to use

or plan to use the service. This is 1.7x larger than "location" (33%) and 1.8x larger than "authentic experience"

(31%).

Exhibit 14: Awareness, privacy, and safety were the main reasons why respondents did not use Airbnb

Question: You stated you have not used Airbnb, and do not plan to; please indicate the main reasons below in

order of importance.

Source: AlphaWise, Morgan Stanley Research

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This is not surprising given that (by our estimates) Airbnb’s global average daily rate ("ADR") is anywhere from

5% to 13% lower than the regional hotel ADRs (See Exhibit 16). Note too that Airbnb’s large amount of lower-

cost inventory in large cities (where hotel ADRs are even higher) is likely to make this price differential even

more pronounced.

Exhibit 15: Price is the most important factor leading to Airbnb use

Question: What are the most important factors that led you to use Airbnb?

Source: AlphaWise, Morgan Stanley

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It's Not Just College Kids, as Airbnb Users Skew Wealthier in the U.S., Germany and the U.K.

Although pricing was one of the most important factors leading consumers to use Airbnb, roughly two-thirds

(66%) of U.S. Airbnb users fall into in the $75,000+ annual income bracket. Given the average household

income in the U.S. is ~$50,500 this, in our view, contradicts the popular belief that Airbnb usage is largely

college students, millenials, and individuals with lower incomes. Indeed, there was notable disparity in income

levels in the U.S. between Airbnb users and non-Airbnb users, as only 31% of non-Airbnb users fell into the

$75,000+ income bracket.

Exhibit 16: Airbnb global average daily rates ("ADRs") are about 5% lower than those in Europe and 13%

lower than those in the U.S.

Source: STR Global, MKG Group, Morgan Stanley Research

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We see similar income demographics in Germany and the U.K, with Airbnb users skewing wealthier than

non-Airbnb users (See Exhibit 18 and Exhibit 19). In Germany, 14% of Airbnb users fell into the highest income

bracket (2.3X more than non-Airbnb users). The U.K. tells a similar story, with 23% of Airbnb users falling into

the highest income bracket (1.9X more than non-Airbnb users).

Exhibit 17: US Airbnb users skew wealthier compared to non-Airbnb users

Source: AlphaWise, Morgan Stanley Research

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Exhibit 18: German Airbnb users skew more wealthy than non-Airbnb users

Source: AlphaWise, Morgan Stanley Research

Exhibit 19: U.K. Airbnb users also skew more wealthy than non-Airbnb users

Source: AlphaWise, Morgan Stanley Research

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Key Debate #2: Where is Airbnb's Demand Coming From?

Market View:

Airbnb is mainly taking demand from traditional hotels, rather than creating new demand and "growing

the total traveler pie."

Our View:

Less than half (42%) of Airbnb demand is coming at the expense of traditional hotels, as Airbnb is also

replacing other non-traditional accommodations like bed & breakfasts, vacation rentals and stays with

friends & family. The last segments make up around 60% of overnight accommodation, and are thus

bigger than hotels. Moreover, Airbnb under-indexes on single-night stays and the average length of stay

for an Airbnb user is much longer than that of a hotel user (only 7% of Airbnb users stay for 1 night,

which compares with 25% of hotel users), which to us indicates Airbnb (for now) is primarily focused on

the non-hotel, leisure, longer duration stay segments than on the traditional hotel, and corporate single-

night stay segment.

It is true that Airbnb's incremental demand creation appears limited at this time (our AlphaWise data

indicates only 4% of respondents would not have traveled if not for Airbnb), though substitution away

from stays with "friend and family" is debateable.

Where We Could Be Wrong:

If Airbnb adoption increases and the product becomes more mainstream (especially on the corporate

travel side), Airbnb cannibalization of traditional hotels could be materially higher long-term.

Less than Half of Airbnb Demand is Coming from Hotels, Although This May Be Growing

We are often asked by investors whether Airbnb is cannibalizing traditional hotel demand, or whether it is

“growing the total traveler pie.” The market view seems to be that it is mainly taking share from hotels.

However, our survey respondents said that 36% of usage replaced bed & breakfasts, 31% replaced staying with

friends/family, and 42% replaced staying in a traditional hotel (these are not mutually exclusive answers). Hence,

hotel replacement actually seems to be under 50% (See Exhibit 20). We acknowledge that Airbnb hotel

cannibalization is expected to rise (to 47%) based on our AlphaWise survey (which is something worth

monitoring) but this, in our view, is still less than general market perception.

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This makes sense to us, as there is little evidence in recent hotel data/earnings results of alternative

accommodation channels having an impa ct on RevPAR ("Revenue per Available Room"). US RevPAR

grew by 8% in September and STR preliminary data suggests 5-7% in October, and by 4% in Europe and 6% in

the UK in September (See Exhibit 23). Moreover, as we analyzed in our recent report, Lodging: Is Airbnb's

Impact on Hotels Being Overstated? (22 Sep 2015), there have been twice as many compression nights

(95%+ occupancy nights) year to date in Top 25 US lodging markets than in all of 2006 or 2007, before Airbnb

was founded, and more than in 2013 or 2014 (annualized) when it was a smaller company, with the average

rate premium still ~20%. In addition, we show in Exhibit 21 that hotels make up an average of only 40% of

overnight accommodation in most markets, which suggests that less than half of Airbnb demand is

substitutable from hotels (and maybe much less if Airbnb creates demand).

Exhibit 20: Airbnb users replace a variety of other accommodations, with less than half coming from hotels

Question: You stated that you have used Airbnb in the past 12 months; which of the following

accommodation alternatives did it replace? Select all that apply.

Source: AlphaWise, Morgan Stanley Research

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Exhibit 21: Hotels make up an average of ~40% overnight accommodation...

Source: Eurostat, Company Data, Morgan Stanley Research

Exhibit 22: ...with 1-3 night stays averaging 30% of accommodation nights, which is where hotels are skewed

the most

Source: Eurostat, Company Data, Morgan Stanley Research

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Further, only 7% of Airbnb users stay for 1 night, which compares with 25% of hotel users (See Exhibit

25).This matches other data from Eurostat (See Exhibit 22 ) suggesting only 30% of overnight stays are for less

than 3 nights. It is in this area that hotels play, but less so Airbnb, it seems. Hence, Airbnb seems to be more

focused on the non-hotel, leisure, longer duration stay segments than on the traditional hotel, and

corporate single-night stay segment. This is not to say the mix of Airbnb average length of stays won't (and

can't) evolve over time, but, for now, we don't see a majority of their demand cannibalizing traditional hotels.

It is notable that the branded hotel cannibalization was higher in the U.S than in Europe, with over

50% of U.S. Airbnb users expected to use Airbnb rather than a traditional hotel over the next 12 months (See

Exhibit 26). That said, Airbnb cannibalization of bed and breakfast demand was higher in Europe, with 43% of

European Airbnb users saying they intend to use Airbnb rather than staying at a bed and breakfast over the next

Exhibit 23: No sign of a slowdown in the US or

European Hotel RevPAR figures

Source: STR, MKG. Note TTM is Trailing Twelve Months

Exhibit 24: Number of US Compression Nights in

Top 25 Markets

Source: STR. Note compression nights are periods of peak demand

when market occupancies are >95%

Exhibit 25: Airbnb is less focused on single night stays, which is where hoteliers are focused with their

corporate demand

Question: When you booked on Airbnb/stayed at a traditional hotel, how many nights did you stay?

Source: AlphaWise, Morgan Stanley Research

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12 months (See Exhibit 27). This is not surprising given the differences in hotel room supply characteristics

between the continents (with ~70% of U.S hotel inventory from chain hotels, compared to only ~30% of

European hotel inventory from chains). At a higher level, these data again speak to how Airbnb demand is

frequently – but not mostly, nor exclusively – coming at the expense of traditional accommodations providers.

Exhibit 26: Nearly half of U.S. Airbnb users are using Airbnb rather than traditional hotels...

Source: AlphaWise, Morgan Stanley Research

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Airbnb Doesn't Seem to Be Creating Significant New Travel Demand

Our AlphaWise data (See Exhibit 28) also show that the fully incremental Airbnb travel demand is limited,

with only 4% of users saying they would not have taken the trip without Airbnb. That said, one could

argue that paying Airbnb travelers who are choosing to stay at an Airbnb unit rather than with friends & family

(presumably free of charge) is one way Airbnb is growing the travel expenditure pie.

Exhibit 27: ...while Airbnb cannibalization in Europe is having a larger impact on bed and breakfasts

Source: AlphaWise, Morgan Stanley Research

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Note too thatthe cannibalization away from vacation rentals and HomeAway (for now) is only ~19%.

This marks a distinction between HomeAway and Airbnb's current offerings (i.e., type of inventory travelers are

looking for, average length of stay, etc.). In our view, this is a positive data point for HomeAway. It will be

important to monitor this over time as Airbnb (we believe) looks to grow into more locations (outside of the

major cities) and as HomeAway works to increase its urban offerings (which it cited as one of the factors behind

its pending sale to Expedia).

Exhibit 28: Only 4% of users say they would not have taken their trip without Airbnb

Question: You stated that you have used Airbnb in the past 12 months; which of the following

accommodation alternatives did it replace? Select all that apply.

Source: AlphaWise, Morgan Stanley

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Key Debate #3: How Big a Competitive Threat is Airbnb to Hotels ?

Market View:

Airbnb is a material threat. Airbnb will gain most of its market share at the expense of traditional hotels.

Further, since Airbnb is mainly used by college students and millennials, Airbnb's future impact could be

materially larger as these users may stay with the "sharing economy" and therefore not book traditional

hotel rooms as frequently as their current user base.

Our View:

Our survey data show that less than 50% of Airbnb demand is coming at the expense of traditional hotel

demand. This, combined with the fact that only 7% of Airbnb users stay 1 night (vs 25% for traditional

hotels), speaks to how Airbnb (for now) is primarily focused on non-hotel, leisure, longer-duration stays,

rather than corporate single-night stay segments. The large hotels also over-index toward corporate

demand (70% of bookings) which our AlphaWise data suggests will continue to be slower for Airbnb to

penetrate given users' safety and privacy concerns, as well as the high importance corporate travelers

place on amenities (business centers, restaurants, loyalty programs, etc.). As such, we expect Airbnb's

impact on hotels to be limited, with long-term industry occupancy and RevPAR growth only impacted by

10bp and 50bp per annum in our Airbnb base case model.

Where We Could Be Wrong:

Increased Airbnb user frequency, Airbnb's ability to accelerate its penetration of the corporate travel

market, or a cyclical leisure downturn is likely to negatively impact hotels more than we currently expect.

Sizing Airbnb's Addressable U.S. and European Markets

Using our AlphaWise survey data, we now turn to sizing the Airbnb opportunity...and potential

competitive threat to the traditional hotel groups and online travel agencies. We start with the

addressable user market. We acknowledge that Airbnb has a global presence, but given our survey is focused on

the U.S. and Europe, we mainly focus on those regions. In all, we estimate that there are roughly 300mn people

aged 18+ who travel across the U.S. and Europe and that roughly 44% of those people book accommodations

online (based on comScore travel traffic data). In all, this implies a total Airbnb traveler addressable market of

40mn in the US and 93mn in Europe (or 133mn across the two continents).

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We Expect Airbnb to Generate 64mn Room Nights in 2015 in the US and Europe...

Combining the 133mn addressable user pie, 12% Airbnb user penetration, and the average ~4 Airbnb nights

booked per user per year, we arrive at a total estimated 64mn Airbnb room nights in 2015 (across the U.S. and

Europe, see Exhibit 31). We note that in September 2015, press reports stated that Airbnb was on pace to

"double its nightly bookings this year," growing to 80mn global room nights in 2015. We think our data is

roughly consistent with these reports given our 64mn room night estimate only encompasses the U.S.and

Europe...implying Asia and Latin America will make up 16mn room nights... ~20% of Airbnb's total

global business. We believe this makes sense given Airbnb is still in the early innings of its expansion to Asia.

This back of the envelope math compared to the press reported numbers and our survey data give us

increased confidence in the validity of our AlphaWise survey data.

Exhibit 29: Airbnb's Addressable U.S. and European Traveler Market

Source: Statista, Skift, Comscore, US Census Bureau, United Nations Population Division, AlphaWise, Morgan Stanley Research

Exhibit 30: Airbnb users stay an average of ~4 nights per year

Question: When you booked on Airbnb, how many nights did you stay (over the last 12 months)?

Source: AlphaWise, Morgan Stanley Research

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What is Airbnb's Strategy in China?

Airbnb officially entered the Chinese market in August 2015. The company has created a localized

platform and is focused on China's growing outbound travel demand. According to the company,

outbound travel from Chinese guests through Airbnb has grown 700% in the past year, making it

Airbnb's fastest growing outbound market. In addition to its focus on Chinese tourists traveling abroad,

people in China are also starting to sign up to host international tourists and domestic travelers.

We believe Airbnb's impact on hotels in China will be limited in the near term. Luxury hotel operators we

talked to in China believe Airbnb will not be a threat to high-end hotels, as they target different customer

segments. This is substantiated by survey data from Penguin Intelligence (operated by Tencent.com),

which indicates that only 2.5% of people are willing to pay more than Rmb500 per night for short-term

vacation rentals, versus the average ADR of 5-star hotels in China of ~Rmb700. Economy hotel operators

also believe that Airbnb will have a limited impact on their businesses in the near term, believing that

Chinese people are less likely to rent to strangers, creating a further barrier for accommodation sharing

models like Airbnb. In addition, the survey data from Penguin Intelligence show that over 45% of Chinese

users will use short-term rentals for stays of at least 15 days, and only ~6% of them will consider short-

term rentals for stays under 2 days, suggesting the short-term rental model is targeting different

demand than traditional hotels. This is consistent with our AlphaWise findings in the U.S. and Europe.

We also believe safety and credit will be barriers to Airbnb's ability to grow in China. Unlike the U.S. and

Europe, China does not have a personal credit system in place yet, which is likely to hinder the

willingness from both property owners and users to use Airbnb's sharing model. We believe Airbnb is

likely to face high regulatory hurdles in China too…similar to what Uber is facing now.

Airbnb also Faces Unique Competitors in China

Note too that China’s short-term rental companies – like Tujia and Xiao Zhu Duan Zu – have different

business models than Airbnb. These companies are adopting asset heavy strategies, collaborating with

property developers and agents, and hiring people offline to perform sanitation work and cleaning. We

believe the companies are doing this to meet the unique cultural differences and traveler demands in

China. Speaking to the commonalities across the regions though, it is notable that only 85% of Tujia

users are leisure travelers…again highlighting that these models over-index toward leisure demand and

the higher hurdles in corporate travel.

…But How Many Users Could Airbnb Grow to and How Many Room Nights Would that Mean?

But that is only 2015. And the bigger question (for the hotel group and online travel agency earnings power and

appropriate multiple) is: what happens over the next 5 years as Airbnb awareness and adoption potentially

Exhibit 31: We estimate that Airbnb will generate ~64mn room nights in the US and Europe in 2015

Source: AlphaWise, Morgan Stanley Research

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grow? Airbnb's ability to grow its awareness and overcome safety and privacy concerns will be

important in driving user adoption. User adoption will drive room night growth, as will Airbnb's ability to

grow share of travelers' wallets from the current 4 nights per user per year.

One way to analyze Airbnb's user opportunity is to look at the adoption of other major travel sites. As shown in

Exhibit 32 , our AlphaWise survey shows that 5 6% of people that travel use online travel agencies and

hotels' website s. This is 4.6x more than the 12% that are currently using Airbnb. We don't see Airbnb reaching

this level of adoption (given the privacy concerns, safety issues, and differences in core product discussed

above). That said, we see adoption rising over time. Looking at the data further, it is also notable that

HomeAway and other vacation rental sites (even after 10 years of HomeAway existence) only have

13% user penetration. This, in our view, speaks to the potential "niche-ness" of the non-hotel accommodation

space that could hold back Airbnb's user adoption.

Some Airbnb bulls may argue that Airbnb's "social nature" could make it into a "platform" story like Facebook or

Twitter (with 82% and 24% Internet user penetration, respectively), but we argue that travel sites (and their

user bases) are more apples-to-apples comparisons based on Airbnb's business. Airbnb is also a physical

offering with an emotional attachment where the user is renting someone else's property/home...usually for at

least several days. Stepping back, user penetration is probably never going to be as high for Airbnb as it is for

short taxi rides with Uber, or for other lower-touch services like using social media.

A Path Toward ~250mn Total Room Nights in the U.S. and Europe

Exhibit 32: Of the travelers in our survey, only 12% used Airbnb to book leisure travel in the last 12 months

while 56% used OTAs or hotel websites

Question: Please indicate which of the following channels you have used/plan to use for booking your trip for

when traveling for leisure/business in the following periods.

Source: AlphaWise, Morgan Stanley Research

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Incorporating a series of potential penetration curves and our room night per user data from our AlphaWise survey (See Exhibit 33), we lay out

scenarios where Airbnb could generate anywhere from 81mn to 251mn room nights per year in the U.S. and Europe (the latter being our Airbnb

bull case). At a higher level, this analysis shows that i f Airbnb can grow from 12% penetration of online travelers to 37% over the next 5

years, it would grow its U.S. and European room night base at a 31% CAGR from an estimated 64mn now to 251mn.

Note that in the analysis above we are assuming that Airbnb's room nights per user per year stay at 4 ,

assuming gained wallet share from maturing users is offset by lower volume per user from new users as Airbnb

moves down the adoption curve.

What does this mean for the traditional hotels?

~250mn of long-term Airbnb room nights may sound like big number, but (depending on the rate of hotel

demand cannibalization) may not have a material impact on the traditional hotels.

We have built a model (fully detailed in the Appendix ) using our current supply and demand for the

combined U.S. and European hotel industries and incorporating different scenarios for Airbnb’s user

penetration and growth. We assume 42% cannibalization for all scenarios based on our AlphaWise survey

results.The long-term (2015-2020) average annual impacts are summarized in Exhibit 34. We note that the

Airbnb "bull case" denotes the worst outcome for the hotels and the Airbnb "bear case" is the best outcome for

hotels.

Exhibit 33: Assuming a constant 4 room nights per user per year, Airbnb could grow to 3%-8% the size of

the US and European room night demand

Source: AlphaWise, Morgan Stanley Research

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Getting into the details, our current forecasts call for a blended occupancy in the US and Europe of 67.6% in

2015, rising to 68.6% in 2016 and 69.1% in 2017. We see occupancy peaking in 2017 in the US and 2019 in

Europe, so combined a peak in 2018. Assuming 4% room rate growth gives 5.4% RevPAR growth in 2016, 4.9%

in 2017, 4.2% in 2018 and 4% thereafter.

Our base case is for Airbnb penetration to increase to 17% in 2016 (per our survey). As this would imply 5%

higher penetration in 2016 (vs. 6% in 2015 as usage doubled), we assume the penetration growth decelerates

every year but still grows to 27% in 2020. This implies 183mn room nights, up ~3x from 2015’s 64mn level.

This would mean hotel industry occupancy continues to grow, but at a slower rate, and peaks in 2017 rather

than 2018 (so a year less of lodging stock outperformance but still a ways away). Our Airbnb base case

average annualized impact is 10bp off occupancy growth, and 50bp off RevPAR growth. This is not

immaterial, but would certainly be a much better outcome than many investors seem to expect. By 2020 our

Airbnb base case would yield a cumulative 70bp negative occupancy impact, with 250bps slower

RevPAR growth in total. The impact would be smaller still if we adjusted for Airbnb's lower corporate mix.

Our Airbnb bull case (37% penetration in 2020) would have a modestly larger impact on the hotel industry, with

average annualized occupancy growth 20bps lower and annual RevPAR growth 70bps slower. This would likely

be a more bearish outcome for the hotel group as a whole. Note that our analysis looks only at the impact of

Airbnb – we have not assumed any changes in the hotel cycle beyond 2017 in order to isolate the Airbnb effect.

A more simplistic back of the envelope way of thinking about it. Airbnb is expected to grow from an

estimated 40mn room nights in 2014 to an estimated 80mn this year. Let's say it doubles again, adding another

80mn room nights, and that 50% of those come from hotels, so 40mn additional hotel stock equivalent room

nights. There are around 20mn hotel rooms globally, which at an occupancy of 65% is around 4.5bn room

nights. Hence, this suggests Airbnb would take ~1% of total hotel demand away if it doubles over two years

from here, or ~50bps off annual hotel occupancy, which is close to our bear case scenario.

Exhibit 34: Airbnb 2020 Average Annual Bull/Bear/Base Scenario Analysis

Source: Company data, Morgan Stanley Research

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The Hotel Groups' Corporate Business Shields them from Airbnb, to an Extent

The hotel cannibalization is admittedly an important factor in this model...and as such, it is important to bear

in mind that the traditional hotels – in our view – have a business mix that is relatively more shielded

from Airbnb. That is, the traditional hotels over-index toward corporate travel – roughly 70% of the groups'

business is from corporate travel. And while 12% of business travelers in our survey have tried Airbnb, we still

question the pace at which Airbnb will be able to ramp its corporate business given (we believe) the importance

corporate travelers place on convenience, amenities, business centers, loyalty programs, etc. Hotel pricing may

be impacted by Airbnb’s material incremental supply creation (as detailed below) but, in general, we don’t

believe Airbnb will be a direct material headwind to long-term hotel group demand unless 1) the

company can overcome its privacy and safety concerns and drive faster user adoption or share of

wallet growth and/or 2) Airbnb is able to materially penetrate the corporate travel business.

Increased Airbnb User Frequency Will be Important to Monitor

While the scenarios above assume room nights per user per year remain steady at 4, it is notable that if Airbnb

can increase its user adoption while also materially growing its share of wallet (more room nights per user per

year), its disruptive impact would likely be larger. Indeed, as shown in the sensitivity table below (See Exhibit

37), Airbnb could grow to anywhere from ~180mn-460mn room nights in the U.S. and Europe over time if

frequency picks up, assuming a base case 27% Airbnb penetration. Given Airbnb's 90%+ user satisfaction, this is

indeed a trend worth monitoring.

Exhibit 35: Scenarios for hotel industry occupancy under Airbnb Bull/Bear/Base case

Source: STR Global, MKG Group, Company data, Morgan Stanley Research

Exhibit 36: Scenarios for RevPAR growth under Airbnb Bull/Bear/Base case

Source: STR Global, MKG Group, Company data, Morgan Stanley Research

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When should the hotels get worried about incremental supply from Airbnb ?

Supply gr owth over 2% is a trigger point for Hotels. Our charts show the relationship between supply

growth (LHS) and occupancy and RevPAR performance (RHS, inverted). Although looking at the relationship

between supply and occupancy in this way fails to fully account for changes in demand (the 2008 recession

being a notable example), it is still possible to see the effect on occupancy when supply growth ranges

above and below its long-term average. In the US example (Exhibit 38), the decrease in supply growth in

1990-91 correlates with a positive trend in occupancy and RevPAR growth. Similarly, the fall in supply growth

from around 3-4% to between 0-2% in 2002-08 and 2011-15 have been accompanied by favorable occupancy

and RevPAR growth rates. In the UK example (Exhibit 39), occupancy declined between 2007-09 when supply

was between 2-2.5% and in 2011-12 when supply growth ranged from 2-2.5%. T he post-recession fall in

supply growth below 2% from 2012-15 has supported consistent occupancy and RevPAR growth.

Exhibit 37: If Airbnb can increase user adoption to 27% while also growing its wallet share from 4 rooms per

user per year to 10 room nights, Airbnb could grow total room nights from 183mn to 458mn in the US and

Source: STR Global, MKG Group, Morgan Stanley Research

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Bear in mind, Airbnb has already added supply to the hotel ecosystem. Indeed, the company already has 2mn+

global listings. If 80% of those are in the U.S. and Europe (consistent with demand) and the average listing is

available even only 25 nights per year (which may be conservative) it would already be adding almost 90bp to

total supply growth (See Exhibit 41). However, if only 40% come at the expense of hotels, this is more like

~35bps to supply growth.

But remember that this supply growth has already

come into the hotel ecosystem...with (in our view)

minimal impact on hotel performance. As a result,

the Airbnb demand trends (and what demand they

are cannibalizing) will still be more important to

monitor.

Occupancy growth key for hotel share price

performance. Demand and occupancy are indeed the

critical factor for hotel stocks. Hotel stocks have

outperformed the S&P 500 in 7 of the last 10

years...tending to trade on peak multiples on peak

earnings, and so tending to outperform while

occupancy is rising. We have looked at US hotel

performance relative to the S&P 500 and found that in

the 1990's cycle, lodging stocks peaked 15 months after occupancy had peaked, and in the 2000's cycle this was

8 months. This is on a trailing 12-month basis, meaning there are an additional 6 months between when we

actually start seeing occupancy declines in the monthly data. We have not seen any occupancy declines yet.

Exhibit 38: Occupancy and RevPAR growth rates

are stronger when supply growth is below its

historical average – the US

Source: STR Global, Company data, Morgan Stanley Research

Exhibit 39: Occupancy and RevPAR growth rates

are stronger when supply growth is below its

historical average – the UK

Source: STR Global, Company data, Morgan Stanley Research

Exhibit 40: No sign of a slowdown in the US or

European Hotel RevPAR figures

Source: STR Global, MKG Group. Note TTM is Trailing Twelve

Months

Exhibit 41: Airbnb is already adding ~90bp to

total supply growth

Source: STR Global, MKG Group, Company data, Morgan Stanley

Research

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Once we do start seeing them (at the earliest 12-18 months away, we think), then it could still be a

year until we start to see stocks underperform. We therefore think hotel stocks have at least another

two years of outperformance to come. We have also found that US stocks tend to outperform when RevPAR

accelerates, which happened in 2014. US occupancy has just reached 65.0%, above the peaks of the last two

hotel cycles. However, we think historical occupancy peaks are not necessarily caps in today's environment, as

supply growth is still very low by historical standards (1.0% LTM versus 3-4% when occupancy peaked in

previous cycles), demand is also growing by 4%, so well above supply growth, and US occupancy rates are

much lower than other developed markets. We therefore think occupancy can continue to grow for two more

years, suggesting hotel stocks can still perform.

Could Airbnb actually be a benefit for hotels?

While most investors we speak with view Airbnb as a competitive threat to hotels, we argue that there

are scenarios in which Airbnb could actually benefit the hotel industry. We can see three possible gains

that could offset some or all of the headwinds we detailed above.

1. Airbnb could allow hotels to list on its site, which could bring down hotel distribution (OTA)

commission rates. Currently, the large listed hotel operators sell 5-15% of their inventory through OTAs for

commission rates that we estimate are in the 12-18% range. If Airbnb sold hotels on its site, it would arguably

have a superior consumer platform than the OTAs...offering both its unique non-hotel inventory as well as

standard hotel inventory. As we see in other e-commerce businesses (like Priceline and Amazon, among others),

more selection often leads to higher traffic conversion, so this could theoretically increase Airbnb's user

monetization as well. For the hotels, Airbnb's standard 3% host fee would represent a material savings on traffic

and customer acquisition costs and give the hotels more bargaining leverage over the online travel agencies.

Exhibit 42: Hotel stocks tend to outperform when occupancy is rising, and underperform around 12 months

after occupancy peaks. In this cycle, occupancy is above the last two cycles but continues to grow

Source: Company data, Morgan Stanley Research

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2. Airbnb is highlighting many of the services that hotels offer but are perhaps taken for granted by

travelers. Hotels have to abide by health and safety regulations covering everything from fire protection

(sprinkler systems, fire exits, extinguishers, fire resistant furnishings, etc) to security (CCTV, electronic door

locks). They also tend to offer trained hospitality staff, have strict cleaning requirements for the bedrooms, and

many offer lobbies, bars, restaurants, and health facilities. Many offer loyalty schemes. While staying in

someone's home may have the advantage of a more "authentic" local experience, hotels do offer many

amenities that Airbnb hosts may find hard to replicate.

3. Airbnb could be increasing the overall travel market. While only 4% of our AlphaWise survey users said

they would not have taken the trip without Airbnb, one could argue that paying Airbnb travelers who are

choosing to stay at an Airbnb unit rather than with the 31% who said they would have stayed with friends and

family (presumably free of charge) is one way Airbnb is growing the travel expenditure pie. Indeed, in response

to a recent report on Airbnb's impact on New York City hotels, Airbnb's spokesman said it was based on the

false assumption that its guests would have otherwise stayed in a hotel room: “In fact, without Airbnb many of

these travelers wouldn’t be able to visit New York City at all or would have cut their trip short." (Bloomberg

News, 10/30/2015).

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Key Debate #4: How Big a Competitive Threat is Airbnb to OTAs?

Market View:

Airbnb is not going to negatively impact the OTAs. Airbnb is largely creating incremental travel demand

and expanding the online travel addressable market. If anything, Airbnb will be a larger competitive

threat to the traditional hotels than the OTAs. This could lead to a weaker hotel industry which would be

positive for the OTAs (as hotels would become more reliant on OTAs to fill their room nights).

Our View:

Arbnb's competitive threat to the OTAs is larger than that faced by hotels. First, the more hotel demand

Airbnb cannibalizes – impacting occupancy and RevPAR – the harder it will be on the OTAs. Second, the

fact that the OTAs over-index toward leisure (80%+ of Expedia/Priceline bookings from leisure demand)

puts them in more direct competition with Airbnb. Airbnb's cannibalization of non-hotel categories – like

bed and breakfasts and vacation rentals – further impacts OTA demand.

The OTAs have posted strong room night growth in 2015 even as Airbnb has ramped, but longer-term

we see these players competing more directly for online travelers' wallets. Indeed,even if only 20% of

Airbnb's long-term (2020) room nights come at the expense of OTAs it would lead to a 7% downward

revision to our long-term OTA room night forecasts.

We see further long-term OTA risk if Airbnb ever decides to allow the traditional hotels to list on its site.

Where We Could Be Wrong:

The overall online travel pie could grow faster over the long-term and the OTAs may not compete with

Airbnb. In addition, both Priceline and Expedia have been building out their inventory of "non-hotel"

accommodations (bed & breakfasts, chalets, apartments, etc). Priceline has been adding non-hotel

inventory to its Booking.com site and has created a stand-alone site (Villas.com) for booking non-hotel

accommodations. Expedia has recently announced its intention to purchase HomeAway, one of the

largest global platforms for finding and booking vacation rental properties. This greater diversification

makes the OTAs stronger competitors against Airbnb.

We See Airbnb as a Bigger Competitive Threat to the OTAs than the Hotels

Airbnb's competitive threat to the OTAs is multifaceted. First, as with the hotels, Airbnb's competitive threat

to the online travel agencies will be dependent on Airbnb's user penetration and frequency of use

(See Exhibit 37). The more hotel demand Airbnb cannibalizes – impacting occupancy and RevPAR – the harder it

will be on the OTAs given their dependency on a strong hotel market for growth (See Exhibit 43 and Exhibit 44).

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OTA bulls may counter that a weaker hotel industry (because of Airbnb) would be positive for the

OTAs as hotels would become more reliant on OTAs and – as we have seen in other cyclical downturns – give

them more rooms at lower commission rates . We don’t necessarily believe this would be the case as this

assumes 1) the OTAs are able to give the hotels the demand they need (i.e., that they are not being cannibalized

by Airbnb) and 2) that Airbnb does not allow the hotels to list their properties on the site.

In addition, we believe that Airbnb's demand cannibalization risk to OTAs is likely higher than that of the

traditional hotels given 1) the OTAs have a heavier mix of leisure business (we estimate 80%+of Expedia and

Priceline's total bookings are leisure) and 2) the OTAs serve multiple categories of accommodations – hotels,

bed and breakfasts, vacation rentals, etc. – that Airbnb is cannibalizing (See Exhibit 45). This is particularly true

for Priceline and its core Booking.com business (especially in Europe).

Exhibit 43: Scenarios for hotel industry occupancy under Airbnb Bull/Bear/Base case

Source: STR Global, MKG Group, Company data, Morgan Stanley Research

Exhibit 44: Scenarios for RevPAR growth under Airbnb Bull/Bear/Base case

Source: STR Global, MKG Group, Company data, Morgan Stanley Research

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Speaking to limits on the pace of incremental online penetration, for demonstrative purposes, in Exhibit 46 we

show a bottom up US and European room night demand model. As shown, if we hold our current OTA

forecasts constant and we assume 50% of Airbnb's demand is cannibalistic away from OTA demand,

"brand.com" (hotel websites) plus smaller OTAs will fall from 22% of online leisure demand to 7%.

This seems draconian for brand.com and it seems logical to us that the OTAs will likely feel some impact as well.

Exhibit 45: The OTAs serve multiple categories that Airbnb is cannibalizing

Question: You stated that you have used Airbnb in the past 12 months; which of the following

accommodation alternatives did it replace?

Source: AlphaWise, Morgan Stanley Research

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Our AlphaWise survey data indicate you are starting to see some movement away from the OTAs and

brand.com (see Exhibit 47), which would be consistent with this trend. So while we are not cutting our long-

term OTA forecasts now, we are closely monitoring other data points on substitution and where

demand is coming from.

Exhibit 46: For now, we are assuming Airbnb's gains come at the expense of brand.com and smaller OTAs...

Source: PhoCusWright, MKG Group, STR Global, Company data, Morgan Stanley Research

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Looking at things another way, in Exhibit 48, if we assume that 20% of our 183mn 2020 base case Airbnb room

nights come at the expense of OTAs, it would shave off 7% of our estimated long-term (2020) total OTA leisure

demand in the U.S. and Europe. This cannibalization factor may be conservative...and if 40% of Airbnb long-term

demand comes at the expense of OTAs, it would reduce total demand by 13%. These data, in our view, speak

to the higher cannibalization risk the OTAs face from Airbnb...which leaves us cautious on the group.

Exhibit 47: The travelers in our survey indicated they plan to decrease their use of OTAs and hotel websites

over the next 12 months...and increase their use of Airbnb

Question: Please indicate which of the following channels you have used/plan to use for booking your trip for

when traveling for leisure/business in the following periods.

Source: AlphaWise, Morgan Stanley Research

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What if Airbnb Allows the Hotels on its Platform?

In addition, we believe thatif Airbnb ever begins allowing hotels to list their inventory on its site, it will

be an incremental negative for OTAs...as Airbnb would offer a lower cost, rapidly-growing distribution

alternative. As shown in Exhibit 49, Airbnb's current 3% host commission rate is 9-15% less than Expedia and

Priceline. This means that even if Airbnb tripled its commission rate for hotels (going from 3% to 9%) it would

create a new channel that is 3-9% less expensive than the OTAs. In addition, if Airbnb charged the hotels a

higher fee than it does other properties, it would give the company more flexibility to reduce its current

consumer booking fees (ranging from 6%-12%) which, in our view, would likely be required if the company

hopes to encourage consumers to book standard hotels (available to book without a consumer fee elsewhere).

For Airbnb, adding hotels to its platform would be a positive, as it would lead to increased selection

(across multiple types of inventory), make Airbnb into more of a full-service online travel

platform...and likely lead to higher user conversion and user monetization (as we see with other

industry players like Priceline, Expedia and Amazon). The online travel pie is only so large and, just as we are

seeing Expedia and Priceline diversify into new accommodation categories (like vacation rentals), over time, we

expect to see Airbnb offer hotels and other unique offerings (like the recently announced "Airbnb Experiences")

that will bring them into more direct competition with the OTAs .

Exhibit 48: If 20% of our long-term Airbnb base case room nights (in US and Europe) come at the expense of

OTAs, it would reduce our total OTA leisure demand estimates by 7%

Source: STR Global, MKG Group, Company data, Morgan Stanley Research

Exhibit 49: OTA property commission rates are 9-15% more expensive than Airbnb's

Source: Company data, Morgan Stanley Research

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What is Airbnb?

Founded in August 2008 and based in San Francisco, California, Airbnb is an online marketplace for people to

list, discover, and book unique accommodations around the world. Airbnb offers more than 2 million

accommodations in more than 34,000 cities and 190 countries. Airbnb is privately owned, and according to

press reports, was most recently valued at $25.5bn (The Wall Street Journal, 6/26/2015).

How does Airbnb make money?

Airbnb charges two separate fees: a host service fee and a guest service fee.

Airbnb charges hosts a 3% host service fee every time a booking is completed on Airbnb's online platform,

based on the complete price of a reservation before any other fees have been added.

Airbnb charges guests a 6%-12% guest service fee every time a booking is completed on Airbnb's online

platform, based on the complete price of a reservation before any other fees have been added. The exact

percentage is determined by the size of the reservation, and declines on a sliding scale from 12% to 6% as the

reservation cost increases.

Who competes with Airbnb?

Exhibit 50: Screenshot of Airbnb website interface

Source: Airbnb.com

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Airbnb competes with most accommodation/lodging providers such as traditional hotels and motels, extended

stay hotels, online travel agencies (OTAs), bed & breakfasts, and vacation rentals.

What differentiates Airbnb from competitors? Unique selection: One of Airbnb's main differentiating

factors vs. competitors is its unique and broad selection of accommodation properties. Airbnb inventory ranges

from the standard (entire apartments, entire homes, entire vacation rental property), to the extravagant (multi-

million dollar mansion), to the most basic (a single room or a couch within a single room in an apartment).

Authentic experience: A key value proposition is the opportunity to have a travel experience that is more

unique and culturally immersive than staying at a chain hotel. For example, an Airbnb user could visit a foreign

country and stay in a local resident's home.

Low prices: Airbnb's average price per room night ($100) is cheaper than the hotel average ($115 in the U.S.).

What are the key controversies around Airbnb?

Rental regulations: In some U.S. states and international regions, it is illegal to rent out one's home/apartment

on Airbnb. This could be a limiting factor on Airbnb's supply growth.

Safety: Airbnb is a marketplace that connects hosts and guests, and as such, disclaims liability for the conduct of

individual hosts and the activities that occur at their properties. In contrast, hotels are subject to stricter safety

regulations (i.e., required to have smoke/fire alarms) and are liable for the well-being of their guests.

Consistency: Airbnb is unique by design. Therefore, guests must rely on the description and pictures on the

host's listing page for details about the property (size, amenities, cleanliness, noise level, etc.)...and they may not

be exactly as advertised. Hotels offer more predictability and certainty.

Convenience: Renting on Airbnb can be a less convenient travel experience than staying at a hotel, from the

logistics of the host/guest room key exchange to the absence of a concierge or front desk.

Reliability: Airbnb hosts can cancel a guest's reservation after it is confirmed.

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Appendix

Exhibit 51: Our Bear case scenario is that Airbnb

gets to 115mn room nights in the US and EU in

2020

Source: Company data, Morgan Stanley Research

Exhibit 52: Our Base case scenario is that Airbnb

gets to 183mn room nights in the US and EU in

2020

Source: Company data, Morgan Stanley Research

Exhibit 53: Our Bull case scenario is that Airbnb

gets to 251mn room nights in US and EU in 2020

Source: Company data, Morgan Stanley Research

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Exhibit 54: Morgan Stanley's Airbnb Base Case Room Nights and Booking Forecast Model

Source: Company data, Morgan Stanley Research

Exhibit 55: Airbnb users as a percentage of leisure and corporate travelers calculation

Source: Company data, Morgan Stanley Research

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Home Inns & Hotels Management Inc., HomeAway, Inc., Host Hotels & Resorts, Inc., IAC/InterActiveCorp, JD.com, Inc., La Quinta Holdings Inc,

Ladbrokes, LaSalle Hotel Properties, LinkedIn Corp, Marriott International Inc., Momo Inc., Playtech Plc, Priceline Group Inc, Qihoo 360 Technology Co Ltd,

Qunar Cayman Islands Ltd, Shutterstock Inc, Sohu.com Inc, SouFun Holdings Limited, SSP Group PLC, Starwood Hotels & Resorts, TrueCar Inc, Twitter

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GrubHub Inc., Hilton Worldwide Holdings Inc, Host Hotels & Resorts, Inc., La Quinta Holdings Inc, LaSalle Hotel Properties, MGM Resorts International,

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Hospitality Co, eBay Inc, Edenred, Etsy Inc, Expedia Inc., Facebook Inc, Gaming and Leisure Properties Inc, Google, Groupon, Inc., GrubHub Inc., Hilton

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International Inc., Melia Hotels International SA, Merlin Entertainments, MGM Resorts International, NetEase, Inc, Penn National Gaming, Inc., Phoenix

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Gaming and Leisure Properties Inc, Google, Groupon, Inc., GrubHub Inc., Hilton Worldwide Holdings Inc, HomeAway, Inc., Host Hotels & Resorts, Inc.,

IAC/InterActiveCorp, InterContinental Hotels Group, Jin Jiang Int'l Hotels (Group) Company, Jinmao Investments, King Digital Entertainment PLC, La Quinta

Holdings Inc, Ladbrokes, Las Vegas Sands Corp., LaSalle Hotel Properties, LinkedIn Corp, Marriott International Inc., Melia Hotels International SA, Merlin

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| November 15, 2015

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