Uber and Lyft have a chance to save themselves — and the rest of us

It’s been 10 years since Uber revolutionized ride-hailing. 2019 was to be the year that consecrated a decade of tremendous growth with record-breaking IPOs.

Unfortunately for the ride-hailing platforms, 2019 is actually about to become an annus horribilis. Their stories of expansion are not enough anymore for investors whose interest is shifting toward margin stories. IPO prices were nowhere near as high as expected and have steadily decreased over the last year. Both Uber and Lyft announced record losses.

In parallel, public authorities are increasing pressure on these platforms to address sustainability and contribute to the greater good. Earlier this year, New York City announced a cap on empty cruising for drivers, and the state of California recently gave its final approval to proposition AB5, which requires companies to treat contract workers as employees if they perform core business activities, which should significantly impact ride-hailing platforms. (On initial examination, it would cost Uber and Lyft an additional $10K per driver per year in order to offer an hourly minimum wage of $20 for a part-time chauffeur driving an average of 15 hours per week.)

Further, New Jersey’s Department of Labor has asked Uber to pay $650 million for years of unpaid employment taxes. Last but not least, Transport for London said this week that Uber will not be granted a new license to operate in London due to safety failures.

We can’t consider the ride-hailing industry and its giants too big to fail anymore.

In order to regain the trust of authorities and make itself indispensible, the industry needs to define itself as the a force to fight against congestion and solve huge public problems — helping to dramatically reduce the use of solo vehicles and the carbon footprint. Solving these problems is worth hundreds of billions of dollars, so there’s clear incentive for the ride-hailing platforms and local authorities to work together to unlock that value.

A pivot like this would provide a way forward for ride-hailing, since profitability and the greater good would be linked. It is a roadmap to deliver 15-20% EBITDA, while doubling wages for drivers. It’s time to end the gig economy and the uncontrolled asset proliferation era.

Taking stock of the first decade

Taking a step back, we should acknowledge that Uber is responsible for the “new mobility revolution” we are experiencing. Within a decade, the company has undeniably changed the urban transportation landscape. It has scaled on-demand transportation and democratized smartphone-based mobility. We could argue that ride-hailing has had a positive impact on city mobility, especially in areas where public transit is inefficient, by helping people access economic and social centers of activities more quickly. What’s more, from a quantitative standpoint, the industry is indisputably responsible for net positive job creation.

However, these positives are largely countered by negatives, for which Uber and Lyft are rightly to blame. Over the years, academic studies have shown the negative effects of ride-hailing on traffic congestion and air pollution in cities. And on the job creation front, ride-haling has actually mostly created an “underclass of freelance drivers” who work long hours, are underpaid, and lack social protection. In short, Uber’s expansion has not delivered on its promises of contributing to the greater good of society.

Transforming to the original purpose: ‘More people into fewer cars’

The mantra we heard from Uber in 2016 — “more people into fewer cars” — is still a good one, and more important to focus on than ever before. So far, Uber’s car-pooling service, UberPool, has not been successful due to negative incentive for drivers, non-performing trip optimization algorithms, and overall, a risk of turnover dilution.

To deliver on the car-pooling promise, platforms must employ drivers so that they follow the employer’s orders. This would allow fleet operators (i.e. ride-hailing companies) to fully optimize all trips to maximize total fleet revenue and better serve demand. Drivers would no longer be able to switch apps or refuse trips, solving one of the most important inefficiencies of the current model.

On top of dispatch optimization, platforms would have to truly promote pooling and rethink how to serve the same level of demand with fewer vehicles. This would require Uber to turn UberPool into its largest (if not its only) business line. Recent studies by various mobility field experts (academics and specialized startups) show that optimizing dispatch at fleet level and pooling passengers into vehicles could lead to a fleet that’s 5-7 times smaller than what riding-hailing companies have today.

Applying these ratios to Uber or Lyft’s P&L, ride-hailing companies could target a 15-20% positive operating margin by operating and optimizing a fleet at scale (see Exhibit 1 below). This only takes into account limited economies of scale on vehicle lease and insurance, which is the third lever of optimization of current model. As drivers are no longer tied to a single vehicle, platforms can namely optimize asset utilization and benefit from economies of scale on vehicle access and underlying fleet services.

A chart showing the operating margin for ride-hailing companies under the proposed model

The needed paradigm shift: ride-hailing as public transit

Reaching this level of optimization requires managing a fleet of critical size and limiting competition effects. Under these specific conditions, ride-hailing platforms become operators of on-demand public transportation at scale. This would solve the two most important problems facing the current ride-hailing market: asset sub-optimization and money wasted incentivizing riders and drivers. In this new model, the profitability of ride-hailing operators is in harmony with issues relating to the public good, such as reducing traffic congestion and pollution in urban areas.

And the opportunity doesn’t stop there. Ride-hailing companies can go even further by offering cities and public authorities top-notch tech capabilities, and a large customer installed base. City authorities are trying hard to modernize management of mobility and transportation — for instance through the so far rather unsuccessful creation of data platforms or multimodal marketplaces (MaaS), which bring together multiple transport providers into a single mobile app to seamlessly handle travel and payments. Tech-native mobility companies like Uber and Lyft could find a central role to play here in helping to forge a more successful approach.

Beyond their core services, ride-hailing companies could offer their services for the creation of MaaS platforms or the design of simulation tools to help optimize urban planning design. The companies would also be useful in implementing congestion pricing and could provide additional services leveraging their driver base (e.g. equip cars with air pollution sensors). There are plenty of opportunities for win-win collaborations between platforms and city authorities.

Yet to enable this kind of collaboration with cities, ride-hailing platforms would have to change their organization dramatically. Cities require tailored solutions, and the current “one-size-fits-all” Uber approach would not work. Ride-hailing companies need strong local teams with strong decision-making power that can ask for specific features, similar to how public transit operators are structured. This requires a clear shift in mindset.

So the big question is: Are Uber and Lyft prepared to make that kind of shift while the window of opportunity is open?

Joël Hazan is a managing director and partner of Boston Consulting Group

Pierre-François Marteau is a project leader at BCG.

Benjamin Fassenot is a consultant at BCG.

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