Ride-sharing market: Fuel Costs

Part
01
of one
Part
01

Ride-sharing market: Fuel Costs

This report expands upon early findings to provide details about fuel costs and spending in the ride-sharing and ride-hailing market. The report includes data on current spending, as well as data and information on factors that are likely to impact fuel spending and costs for this market in the near future. Additionally, this report details insights on factors that are likely to impact the ride-sharing and ride-hailing market over the next five years, including: the intersection of ride-sharing and ride-hailing services with public transportation, increasing government regulation of transportation network companies, and increasing pressure for reform in employee relations and labor compensation in this industry.

Fuel Costs for Ride-Sharing and Ride-Hailing Drivers

Current Spending

  • A 2018 study from MIT reported that the average ride-hailing driver spent about $200 a month on fuel, with most spending at least $100 a month, and a small portion spending upwards of $500 a month.
  • The early findings in this report showed an average fuel cost of $0.30/mile, but further research has shown that this is actually the total cost for the median driver which includes insurance, maintenance, repairs, depreciation, and fuel. Data specific to fuel consumption shows that all drivers spent somewhere between $0.05-$0.27/mile on fuel, with the largest peak around $0.12/mile, and a smaller secondary peak around $0.07/mile indicating the large number of drivers using hybrid vehicles (most often the Toyota Prius).

Potential Changes

  • The findings above show that switching from a traditional car to a hybrid vehicle decreases fuel costs by about 42%. This means that a large scale switch from traditional combustion engine vehicles to hybrid vehicles would mean the average driver would spend only $116 a month on fuel instead of $200.
  • Calculated for the estimated total number of drivers reported in the early findings (about 1.66 million), a wide scale change from traditional to hybrid vehicles would drop total annual cost of fuel for ride-sharing and ride-hailing drivers from about $3.98 billion a year to about $2.31 billion a year.
  • Projected over five years with a CAGR of 15.9%, a change to hybrid vehicles would reduce fuel spending from about $8.3 billion a year to about $4.8 billion a year in 2025.
  • In an effort to decrease fuel costs and minimize environmental impact some ride-hailing companies have begun offering incentives and pilot programs for electric and hybrid vehicles.
  • In 2019 Lyft began testing an option called "Green Mode" which allows passengers to specify that they would like to be picked up by an electric or hybrid vehicle.
  • As a supplement to its Green Mode initiatives, Lyft said it would also add thousands of electric vehicles to its rental program Express Drive, which allows Lyft drivers to rent a car to use while working through the Lyft platform, while maintenance and insurance payments are covered by Lyft. Lyft announced that drivers will pay less for borrowing electric vehicles through the Express Drive platform, and that savings in rental fees and fuel costs would contribute to higher earnings for drivers.
  • In 2018 Lyft announced a multi-million dollar investment plan with the goal of becoming a carbon neutral transportation service, and stated that by 2025 they hope to facilitate at least 1 billion rides per year using electric autonomous vehicles.
  • Uber also launched a pilot program in 2018 that would provide cash incentives for drivers to switch to electric vehicles. The pilot was planned for seven different cities across the US and incentives varied by location. In 2017 Uber provided 4 million trips in electric vehicles to consumers in Canada and the US. The pilot program and its incentives aimed to increase this number to at least 5 million for 2018.
  • Increasing concerns over climate change and carbon emissions, along with increasing pressure for services like Lyft and Uber to provide better compensation for their drivers (with fuel cost reductions as one potential avenue for decreasing driver costs and increasing take-home earnings), have already begun to influence the policies of ride-hailing services such as Uber and Lyft, and the findings above indicate that these changes could translate to a decrease in fuel costs per driver over time, and perhaps a decrease in fuel spending overall in the ride-sharing and ride-hailing market.

Insights

Ride-Share Impact on Public Transportation

  • As a competitor with public transportation systems, ride-hail and ride-share services have the ability to fill gaps in public transportation services, but also to highlight key weaknesses.
  • In cities such as Boston, the rapid expansion of ride-hailing and ride-sharing apps has identified a latent demand for transportation that was not being fulfilled by the city's public transportation systems.
  • These changes and the information provided by these changes is prompting transportation planners and managers to work towards a future where residents can combine different modes of transportation (including ride-sharing and hailing and public transportation) to fit their specific needs.
  • The city of Arlington, TX provides one example of the possibilities available at the intersection of ride-sharing and hailing with public transportation. The city of Arlington was, until recently, the largest city in the US without a public transportation system.
  • To solve this problem and cut down on costs, the city of Arlington partnered with the rideshare company Via in 2017.
  • Via is different from Uber and Lyft in that it does not provide individual door-to-door service. Instead, Via vehicles function like a small bus or vanpool. The Via platform aggregates information about passengers heading in the same direction and provides options for shared rides with nearby pick-up points and proximal destinations.
  • In its partnership with Via, the city of Arlington was able to use Via technology to design a transportation service with specific stops around town that functions much like a small bus, and charges each passenger a flat $3 fare, with no chance of the surge pricing or variable fares of most ride-hailing services.
  • Unlike a traditional bus public transportation systems, Arlington's Via system does not operate on predetermined routes or schedules, and instead functions on an on-demand basis. Passengers can book rides through a freely provided Via app, will generally wait between 10-12 minutes to be picked up for their trip, and will usually be picked up and dropped off somewhere within a two block walk of their desired destination.
  • Since its first launch in 2017, the Via transportation system in Arlington has been considered a great success. The system has been expanded multiple times since 2017 and now includes a fleet of 28 vans and transportation service that covers 41% of the city's total land area, 191,000 people (49% of Arlington's total population), and 89,400 jobs (65% of total jobs in the city).
  • In 2019 Via announced partnerships with the cities of Cupertino and Los Angeles, through which they are providing the cities with access to their ridesharing platform and technology, and providing ride sharing services to transport people to and from busy public transport stations.
  • As cities deal with increasing population, traffic, and transit issues, more and more cities have looked towards partnering with ride-sharing services like Uber, Lyft, and Via to provide better transportation solutions, and by 2018 over two dozen cities in the US were either pursuing or already engaged in these types of partnerships.
  • While some of the pilot programs launched through these partnerships have had varying levels of success, recent studies suggest that these types of partnerships are on the rise, and that while they may not be especially effective or efficient in dense urban areas that are already well serviced by traditional bus systems, they do tend to be most effective in low-density urban and suburban areas and in solving "last-mile" transportation challenges (i.e. getting people to and from larger public transportation hubs).

Increasing Government Regulation

  • The rapid development and expansion of ride-sharing and ride-hailing apps and services has translated to a lag in governmental regulations on these services and companies. More recently, governments have begun to catch up, and ride-sharing and ride-hailing companies are now facing a variety of new and potential regulations.
  • Uber first launched in San Francisco in 2010, and was initially able to avoid regulation by the San Francisco Metro Transit Authority (SFMTA) by claiming that existing regulations did not apply to their new business model. Although Uber was able to avoid many regulations in its first few years, by 2008 every state in the US except for Oregon had instated regulations regarding transportation network companies (TNCs) such as Uber and Lyft.
  • The regulations enacted on TNCs have varied by state and range from preventing ride-sharing apps from operating at airports, to controlling who is able to drive for the apps. For example, proposed legislation in Austin, TX would require potential Uber and Lyft drivers to be photographed and fingerprinted by police to ensure they do not have a criminal record.
  • In 2018 New York City became the first major US city to limit the number of ride share vehicles that could be provided by apps such as Uber and Lyft. This legislation in New York instituted a year long freeze on the issuing of new licenses for registered ride-sharing vehicles. Between 2015 and 2018 the number of registered ride-sharing vehicles in New York City had increased from 12,600 to 80,000.
  • In response to increasing regulation, TNCs like Lyft and Uber have lobbied state governments to pass TNC laws and regulations on the state level that will supersede and override local regulations at the city level, in the hopes that more lenient statewide regulation will allow them to circumvent historically stricter local regulations.
  • While some states have passed regulations on TNCs that override local authority, others have allowed municipalities to retain local authority, or have made particular exemptions to allow larger urban areas to continue to pass and enforce their own regulations. Local regulations have been shown to better serve the public interest, as they have the ability to be particular and sensitive to the environmental and cultural factors at play within a particular city.
  • While it is unclear exactly what regulations for TNCs will or will not be passed in the future, there is a definite trend for increasing governmental regulation of TNCs at the state and municipal level, with many cities looking into regulatory options that cover issues from labor rights and driver compensation to data collection and sharing and the protection of consumer privacy. As regulation continues to increase, TNCs will have to be able to flexibly adapt to changing rules and regulations.

Labor Issues

  • The most well-publicized issue for many ride-sharing and ride-hailing services in recent years has been their labor relations and driver compensation models. Driver restrictions, decreasing fares, and below minimum wage compensation has prompted many drivers to push back against companies like Uber and Lyft.
  • At the center of this conflict for drivers and TNCs in the US is the question of whether drivers for companies like Uber and Lyft should continue to be considered independent contractors, or if they should be considered employees, and as such be entitled to better pay, health benefits, and the right to unionize.
  • This is an issue that has already cost TNCs a lot of money through lawsuits, such as in April 2019 when Uber paid $100 million dollars to settle a lawsuit brought against them by drivers in California and Massachusetts, who took the settlement money in exchange for agreeing to remain independent contractors.
  • These types of lawsuits are expected to continue as more and more drivers come to resent the low pay and lack of benefits offered through the gig economy model by which Lyft and Uber operate. In New York City Uber drivers have come together to pursue a lawsuit demanding that Uber pay them at least minimum wage, and in Austin, TX drivers for both Uber and Lyft have sued for back pay and benefits after the companies abruptly stopped service in the Austin area in response to new driver fingerprinting regulations.
  • While lawsuits have become a costly issue, they pale in comparison to the expenses that Uber and Lyft would incur if their drivers were to be considered employees. A 2019 report from Barclay's estimated that the reclassification of drivers from independent contractors to employees would cost Uber and Lyft an average of $3,625 per driver in California.
  • This reclassification would increase Uber's annual operating loss by over $500 million and Lyft's by over $290 million. Analysts from the Barclay's report commented that this reclassification would "be a material negative for ride-hailing and further put into question the long term profitability of the industry."

Research Strategy

Findings for fuel costs and spending for this report started with the MIT report "The Economics of Ride
Hailing: Driver Revenue, Expenses and Taxes" which provided details on average monthly spending for an Uber or Lyft driver. This report provided some information on the impact of hybrid vehicles on fuel spending, and from here, reliable news sources and press releases were used to find information on the future of hybrid and electric vehicles for ride-sharing and ride-hailing services, and how this might impact overall fuel costs in the market. To find information on insights relevant to the future of the ride-sharing and ride-hailing industry, the research team consulted market research, reliable news sources, and company press releases to identify primary issues and ideas that are likely to have an impact on this market in the next five years. Some mathematical calculations were used in this report, and are explained below.

Calculations

Reduced Fuel Spending for Hybrid Vehicles

The findings in the MIT report show that most drivers spend about $0.12/mile on fuel, while a small subset (explained as those who drive hybrid cars) spend about $0.07/mile on fuel. From this we can calculate that using a hybrid car decreases a driver's fuel costs by about 42% using the following formula:
  • ((0.12-0.07)/0.12) * 100 = (0.05/0.12) * 100 = 41.6%
Assuming a fuel cost reduction of about 42% changes average monthly fuel spending from $200 to $116 using the formula:
  • 200 - (200 * (42/100)) = 200-84 = 116
The early findings estimated the total number of ride-sharing and ride-hailing drivers to be about 1.66 million, and from this we can estimate the current total cost of fuel per year, as well as the theoretical total cost per year if all vehicles used were hybrids:
  • Total annual cost of fuel = (total number of drivers) * (fuel cost per month) * (12 months)
  • Total annual cost of fuel = (1.66 million) * (200) * (12) = $3.98 billion a year
  • Annual cost of fuel for hybrids = (1.66 million) * (116) * (12) = $2.31 billion a year
We can conduct similar calculations to predict fuel costs over the next five years, given a projected CAGR of 15.9%
  • Fuel cost by 2025 = (Current annual fuel cost) * ((1 + CAGR/100) ^ 5 years)
  • Fuel cost by 2025 = ($3.98 billion) * (1.159 ^ 5) = $8.3 billion a year
  • Hybrid fuel cost by 2025 = ($2.31 billion) * (1.159 ^ 5) = $4.8 billion a year

Sources
Sources