Wall Street Journal
Uber, Lyft IPOs May Lead to Higher Fares
April 22, 2019
By Eliot Brown
The initial public offerings of Uber Technologies Inc. and rival Lyft Inc. stand to enrich early investors. But for customers of these ride-hailing services, the IPOs might eventually cost them money.
Uber and Lyft have battled each other for years in a price war that wildly undercut taxicab fares, thanks to billions of dollars in venture capital that subsidized the lower prices and supported the companies’ massive losses.
Those days of cutthroat U.S. prices may be numbered. With loss-wary public-market investors likely to add pressure, numerous investors in both companies, former ride-hailing executives and academics who study the market believe Uber and Lyft will ultimately need to raise fares amid the growing red ink.
“You have shareholders who want you to generate profits,” said Mitchell Green, founder of Lead Edge Capital, an investor in Uber. “There are lots of different levers, and one of them is pricing….These companies have more pricing power than people think.”
Much depends on the appetite from the public markets. Low fares could persist if investors end up willing to stomach losses in favor of ridership growth. Both companies will have ample cash to keep funding a market share fight. Lyft raised $2.3 billion in its IPO last month, while Uber, which is facing battles around the world, plans to raise $10 billion in its offering expected in May.
Still, Lyft executives, peppered by questions of profitability, have said they hope to be in the black in coming years—which multiple analysts say would be hard given current prices. Uber also is likely to face pressure given that revenue growth has leveled off recently. Its revenue from ride-hailing—excluding driver incentives and other costs—was $2.31 billion in the fourth quarter, virtually unchanged from the previous two quarters.
When Uber launched roughly a decade ago, it charged far higher rates than taxis for the convenience of hailing a black luxury car from a smartphone. Then Lyft in 2012 began letting people share their own cars at low rates, causing Uber to follow suit and engage in a yearslong brawl over market share. The companies aggressively wooed riders with discounts and drivers with bonuses, aided by roughly $20 billion combined from venture-capital firms and other investors.
To save money, both companies have said they aim to cut expenses such as insurance costs and make routes for drivers more efficient. Further costs could come down as more drivers and riders join the network, they have said. Drivers generally get paid based on a rate for time and distance, different from the upfront fare charged to riders.Their losses piled up as a result. Lyft’s loss from operations last year was $977 million on $2.2 billion of revenue. Uber’s operations loss totaled more than $3 billion on $11.3 billion in revenue. The companies make most of their money by taking a roughly 20% to 25% cut of the fare and giving the rest to drivers.
Jake Fuller, an analyst at Guggenheim Securities who covers Lyft, said to truly stem the losses, the companies also would need to slash the rider discounts and driver incentives—both of which would likely lead to higher fares for riders.
Even so, he said, “it doesn’t look like any of those things would be enough to get you to profitability.”
Paul Hudson, founding partner at Glade Brook Capital Partners, an investor in both Lyft and Uber, said the companies are likely to cut back on rider discounts and encourage loyalty by improving points programs, for example.Uber said it made money in the aggregate on each trip last year—when expenses unrelated to trips are stripped out.
“We’re at the crossroads of the U.S. market,” he said, where the companies’ days of easy fundraising from growth-hungry private investors are over.
Fares already have crept up. Lyft, which is available only in the U.S. and Canada, charged an average of roughly $13 a ride in 2018, up from $11.70 in 2016, according to its IPO filing. Uber, available in 63 countries, didn’t release specific figures but indicated a similar trend.
A recent discount battle in the U.S. highlights the perils of a competitive market.
Late last year, Lyft offered a barrage of discounts to its riders, spurring demand and stealing some market share from Uber ahead of its IPO, according to people briefed on the move. Uber, after holding off for weeks, followed with its own batch of discounts around early February. By March, Lyft pulled back, and Uber regained some of its lost market share, the people said.
Airlines are also known historically for keeping thin profit margins. While the two companies aren’t allowed to coordinate on fares, the competitive dynamics are similar to another transportation industry with frequent price changes: airlines. Typically an airline raises prices on a route or a service like checked bags, and often the other airlines follow, economists say. If they don’t, the first airline usually lowers its price.
For both Uber and Lyft to coexist, they will likely have to raise prices, said Gernot Sieg, director of the Institute of Transport Economics in Münster, Germany, and the co-author of a study on ride-hailing duopolies. If they don’t and losses mount, they will have to slug it out until only one is left.
Then, he said, “the monopolist eventually raises prices.”