Wednesday 28 September 2016

Facing a price war, Uber now bets on volume in its quest for profits

The car-hailing service has cut its fares while at the same time promising an imminent profit. Now square that circle, write Eric Newcomer and Ellen Huet

Eric Newcomer and Ellen Huet

Published 24/01/2016 | 02:30

This is the third year in a row that Uber has discounted fares in January. It calls the cuts seasonal but says they could last indefinitely.
This is the third year in a row that Uber has discounted fares in January. It calls the cuts seasonal but says they could last indefinitely.

It's becoming a bit of a holiday tradition for Uber: ringing in the new year by lowering fares. Amid a price war with rival Lyft, the ride-hailing leader reduced its rates by 10pc to 45pc in 100 cities across North America.

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In Detroit, Uber drivers' per-mile rate is less than it takes to cover their gas and the depreciation of their cars, according to American IRS figures.

"It's depressing," says Bill Scroggins, an Uber driver in Indianapolis. "I'm not even sure I want to drive anymore. It feels like I'm doing it for free."

This is the third year in a row that Uber has discounted fares in January. It calls the cuts seasonal but says they could last indefinitely.

Last year, rates never rose again in almost a third of cities; only in two did they return to pre-cut prices. Uber has instituted temporary hourly-wage guarantees to limit drivers' earnings declines. The company has assured Scroggins and other outraged drivers that they'll come out ahead by making more trips an hour thanks to increased demand.

That may be what Uber is telling itself, too.

A few months ago, its chief executive, Travis Kalanick, told employees that the company's North American operations would turn a profit in Q2 of this year. The goal sounds less realistic in light of the price cuts.

"Uber has to sacrifice profits for growth," says Evan Rawley, a professor at Columbia Business School.

"We care deeply about driver earnings," says Andrew MacDonald, a regional general manager for Uber. "We believe in price cuts when demand slows."

On January 15, Uber's rival Lyft said it would cut fares, too. "With recent price changes from the competition, we need to take action," Lyft wrote in an email to drivers.

The company also announced a €930bn round of funding on January 4 to help keep its pink-mustachioed cars on the road. That brought Lyft's fundraising total to about €1.86bn - a long way from Uber's €9.3bn, but enough to dash Kalanick's hopes of knocking Lyft out of the market.

Uber is also churning through cash a lot faster than Lyft, having said it will spend billions to push its way into China, India, and Southeast Asia. In the first quarter of 2015, Uber lost €356m on €266m in revenue, according to leaked figures published by the Information, a tech news site.

And losses are growing: In the third quarter, Uber lost €645m on €461m in revenue, according to a person briefed on the numbers. Over the first three quarters of 2015, Uber lost €1.57bn on €1.1bn in revenue. For perspective, during Amazon.com's worst-ever four quarters, in 2000, it lost €1.3bn on €2.6bn in revenue. Chief executive Jeff Bezos responded by firing more than 15pc of his workforce.

As it tries to expand abroad, Uber is counting on the US as a moneymaker. Kalanick predicted the continent's imminent profitability last September, during a company-wide gathering in Las Vegas.

Globally, Uber tends to lose money per ride, but ridership is growing. Total trips increased about 40pc from the second to the third quarter of 2015, says a person familiar with the data. On a November call with investors, Uber's acting chief financial officer Gautam Gupta said the company is profitable in two of its biggest countries, though he wouldn't name them.

In the US, Uber has inched toward profit, even with lower fares, in large part by leaning on drivers. It takes as much as 30pc of a driver's fares now - up from 20pc two years ago.

Since 2014 it's been charging riders an upfront Safe Rides fee, which goes directly to Uber. The fee started at $1 per ride; it's up to $2.50 in some cities. Uber has said it uses the charge to help fund things such as safety education and background checks.

If drivers win rights as employees or manage to form unions, Uber may have to change strategies. For now, a steady influx of contractors means the company can get away with added fees and rate cuts. While veterans complain that rates used to be higher, as one old hand says, "the new guys just don't know".

Bloomberg

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