Ride-Hailing Firms: Will Automated Vehicles Make Them Profitable, or Will They Create Other Challenges?

There is no denying the ride-hailing business-led by Uber and Lyft-has experienced lightning-fast adoption and a massive effect on traditional modes of transportation. The number of people using ride-hailing services, and the number of ride-hailing trips, continues to grow.

That said, it's equally undeniable that ride-hailing companies have been racking up substantial financial losses. Uber, which has never recorded an annual profit, lost $2.8 billion in 2016, and another $4.5 billion 2017, according to published reports. Lyft, which is estimated to account for about 20-25% of ride-hailing revenues in the United States, reportedly lost $600 million in 2016, and another $600 million in 2017.

While it's not clear exactly where the bulk of Uber and Lyft's losses are incurred-neither is required to publicly publish their financials-industry experts attribute most of the losses to two causes.

First, Uber and Lyft have been busy buying market share, subsidizing the cost of rides to build a stable customer base, and a recurring future revenue stream. Recently, one industry publication estimated Uber customers are paying for only 41% of the overall cost of a ride, while the company (and its investors) are paying the rest.

The second major obstacle to profits is the cost of paying ride-hailing drivers. Again, while firm figures are not publicly available, it is estimated 65-75% of ride-hailing revenues go to the drivers, with the remainder going to the ride-hailing companies. The estimated gross revenue (i.e., total ride-hailing receipts) and net revenue (total revenue received, minus payments to ride-hailing drivers, plus refunds, etc.) recorded by Uber and Lyft bears this out in the chart below. These appear to confirm the bulk of revenues are not going to the ride-hailing companies themselves.

Uber and Lyft, Estimated Gross Booking Revenue/Net Revenues by Year*

md_ridehailingprofitable_web.jpg

*Estimates based on published sources, including Business Insider, Bloomberg, Crunchbase, Future Advisor, and Forbes.

While ride-hailing companies have been tinkering with different solutions to narrow their losses and eventually swing to profitability (e.g., pre-sales, bulk sales, lower pay for drivers), perhaps the most frequently mentioned solution is the elimination of drivers altogether. This would mean a wholesale changeover to automated vehicles. The reasoning is that if the driver cost can be eliminated from the equation, the profitability of ride-hailing companies will skyrocket.

At first blush, automated vehicles sound like an exciting solution to a vexing financial challenge for the industry. But has this scenario been completely thought through?

While drivers are certainly a major cost center, they also deliver critical services besides simply acting as chauffeurs to ride-hailing customers. For example, ride-hailing drivers:

• Purchase, register and insure their vehicles at their own expense;
• Refuel, maintain and clean their vehicles (inside and out) at their own expense, on their own time and on a consistent basis;
• Park and secure their individual vehicles at their own private residences during non-working hours, without a need to pay for extra parking facilities or security for the vehicles.

Transitioning to automated vehicles would eliminate the need to pay drivers, but it could potentially create a slew of other logistical challenges and questions. Would ride-hailing companies, for example, be willing to buy, register and insure their own fleet of vehicles (numbering in perhaps the tens of thousands, hundreds of thousands or even millions of vehicles)? Who would refuel, maintain and make sure the vehicles remain clean, especially if a passenger left trash in the vehicle? Where would these vehicles be kept when not in use-and wouldn't that require storage and security costs?

There is a reason that certain industries prefer to work with independent franchisees to sell and service their products and services. Individuals, especially if they are invested in a company, tend to take better care of their products, customers, and employees than large entities where the individual ultimately responsible the success or failure of the enterprise is far removed from paying customers.

Given this reality, ride-hailing companies that use automated vehicles might eventually opt to franchise their operations, in which franchisees are responsible for the overall administration and operation of their fleets. Or perhaps a three-way ride-hailing service company emerges-one in which an automaker provides the automated vehicles, a ride-hailing company attracts and manages customers, and a service company (like a rental vehicle company) maintains and secures the vehicles when they are not in use.

Whatever outcome emerges, it seems clear that simply eliminating drivers and transitioning to automated vehicles will not suddenly make ride-hailing companies immensely profitable. A lot more thought and planning-about how to manage automated vehicle fleets and how much that will cost-will have to be addressed before driverless ride-hailing companies can become a super-profitable reality.

BY: J.D.POWER