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Rideshare Companies Aren’t Just Unprofitable, They’re Destructive

Rideshare Companies Aren’t Just Unprofitable, They’re Destructive

Few companies, even tech companies, have captured the public imagination more than private transportation companies founded in the last ten years. To liberals, these rideshare apps and high-speed train lines promise increased mobility outside of private vehicle ownership or air transit without relying on cash strapped governments. To conservatives, they promise to show government wastefulness by offering a profitable alternative to money-losing public transit agencies. These companies will fail to deliver on both these promises. Worse still, the massive, inevitable, highly public failures of companies like Uber and Lyft may irreparably diminish support for practical solutions to mobility, congestion, and pollution problems.

To understand why these efforts were doomed before they started, it’s helpful to understand how most public transit agencies were formed: bankruptcy. In nearly every city, government agencies stepped in to take over routes from private companies that could no longer generate a profit. This is a reason to be skeptical that a private company can simply achieve profitability by being more efficient than the government — private companies already tried and failed. Passenger transportation was so unprofitable that 20 out of 26 eligible freight rail companies provided enormous amounts of capital to launch Amtrak and relieve themselves of passenger route obligations. The remaining six either followed suit in subsequent years or ceased operations entirely. 

Subsequent decades have brought major technological changes, and companies like Uber and Lyft are banking on these changes bringing sufficient efficiency to counterbalance its major cash flow shortfall. Silicon Valley is famous for its belief that the right technology can solve any problem, from climate change to death itself. But technology alone will not rescue Uber from its terrible balance sheet. Let’s look at two of the major causes of rideshare losses: research and development, and low fares. 

Uber and Lyft are both funneling enormous amounts of money into research on self-driving cars. Indeed, this would be the easiest path to profitability for the companies. Fleet expenses bring their own woes, but right now about 80 percent of each ride’s fare goes to the driver. Even an arrangement in which these companies don’t own their own self-driving vehicles would help out: an owner can be coaxed to let out their vehicle for a lot less than it would take to coax a human driver away from whatever else they were doing. This is Uber and Lyft’s best hope.

However, that doesn’t make it a realistic one. Despite Elon Musk’s claims to the contrary, we will not have fully self-driving cars in 2020. By most estimates, fully automated vehicles are a decade or more out, and even then, they may still require drivers. Uber and Lyft are good at raising cash to burn through, but they’re not so good they can keep doing it another ten years and still have investors at the end. 

As for the low fares, in 2015 one estimate put riders paying an average of about 41 percent of the true cost of a trip. Exact numbers are hard to come by, but fares certainly have not gone up in subsequent years. In raising venture capital funds and from its IPO, it’s clear that Uber investors care more about the number of riders than the profitability of a trip, but at some point, people are going to expect to see a profit. The trouble is that the true price elasticity is unknown. Uber was able to grow so rapidly because of rock bottom fares, but it has no guarantee riders will stick around once fares increase. A $10 Uber ride may compete with a $2.50 subway journey, but once that $24 fare reflects the true cost of service it’s a hard sell. 

Now, let’s look at why Uber chose to go public when it did. It’s important to reflect that many other tech companies also chose or are likely to choose 2019 as the year to go public. The Trump tax cuts helped give some companies the illusion of profitability, as a one-time boost raised the bottom line without relying on an improvement in the business model. In addition, Uber sold off some holdings in the year prior — additional one-time boosts to profitability. These short term gains, however, did not come with any indication Uber’s operating profits are going to increase.

To be clear, the IPO has made an enormous amount of money for early investors in Uber and Lyft. But future investors stand to lose everything they put in. Phrased that way, it looks an awful lot more like a pyramid scheme than a transportation company. The cracks are starting to appear: workers are facing mass layoffs while being asked to find ways to save the company money like cutting back on latex balloons. And it’s starting to attract the attention of regulators: its practice of squeezing drivers to increase profitability has caused some states to consider regulations that will reclassify its drivers as employees, an enormous blow to its business model. Keep in mind that high pay and generous benefits are the main reason public transit agencies operate at a loss. 

All this has added up to Uber’s share price slipping lower and lower since its IPO. Perhaps the private market was more susceptible to the energy and excitement of the founder, whereas the public market demands a clearer path to profitability. In fairness to Uber, the deck truly was stacked against it; we’re so used to paying less than the full cost of getting from one place to another that we’ll balk at the thought of laying out real money for the service. But transportation companies have dealt with this dynamic for decades, and have done so without burning amounts of cash rivaling the GDP of a small country.

But what’s the harm if they fail, given that they’re fully private operations? Well, first of all, these companies are already relying on a complex set of subsidies or even receiving direct payments from governments. Uber and Lyft benefit from the massive subsidies we give to cars, and other private transit options like Brightline have already issued tax-exempt government bonds to fund the service. Second, the more central these services become to everyday life, the higher the pressure will be on government agencies to take over the service. This means either massive cash payments to insolvent companies or a full transfer of services, and either will always serve as a source of public skepticism when transit agencies push for more sensible solutions. 

Transportation in most cities leaves room for improvement. But Uber and Lyft, promised as the modern solution to decades-old problems, can’t be a part of that improvement in their current forms. The best-case scenario is that investors are out billions but the public chalks it up to rampant tech stock overvaluation and it fades from our memories. But the companies have worked so hard to tie their futures in with a public vision for a grand new transportation structure, which means the worst-case scenario is far more dire. When these companies fail to deliver on their promise, they may demolish public support for other, more realistic but equally grand transportation visions. We can’t let that happen.

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