The Uber and Lyft initial public offerings could cause complications for corporate travel managers.
Neither company had a stellar IPO, which means they are now under pressure to increase profits.
Uber Technologies Inc. shares closed last week at $41.51, up 2.6 percent from the previous day. Lyft Inc. shares closed at $57.10, down 1.74 percent. But both are trading below their IPO prices, leaving investors to wonder if the ride-sharing business is going to be a lucrative one.
D.A. Davidson & Co. senior research analyst Tom White wrote in a note to clients that Uber’s initial poor performance “reflects investors’ evolving views on ridesharing models.”
In other words, investors are not sure it is a profitable way to go.
Each company has expanded over the years while enduring losses. Uber lost $1.8 billion last year. Lyft was down more than $900 million.
So how can the two companies, which have been floating on money from private investors and venture capitalists, expect to turn profits?
Experts say that the solution could be in raising fares for passengers and cutting payments and incentives to drivers.
White said that could hurt the companies’ growth. “If one or both of these levers are ‘pulled,’ would the size of UBER/LYFT’s addressable market opportunity be restricted/reduced as a result?” White wrote to clients.
Economic Policy Institute fellow Lawrence Mishel wrote in a paper that Uber drivers earn the equivalent of $9.21 an hour after accounting for Uber’s commissions, fees and vehicle expenses. That also calculates a modest health insurance plan and other benefits that a regular employee with a W-2 would earn. That is not even $2 above the minimum wage.
Uber drivers went on strike earlier this month ahead of the company’s IPO May 10, meaning further cuts in any benefits won’t go over well with them.
In its S-1 filing with the Securities and Exchange Commission, Uber acknowledged that it expects tensions with its drivers to continue as it cuts incentives to become a more viable business.
“Driver incentives, consumer discounts, promotions, and reductions in fares and our service fee have negatively affected, and will continue to negatively affect, our financial performance,” the company wrote in the filing. “Additionally, we rely on a pricing model to calculate consumer fares and Driver earnings, and we may in the future modify our pricing model and strategies. We cannot assure you that our pricing model or strategies will be successful in attracting consumers and Drivers.”
Will cutting into drivers’ profits mean that the business traveler will have to make up for it?
Business travelers have increasingly turned to ride sharing services as an alternative to taxis and public transportation for the pricing and the convenience of not having to swipe a credit card and collect a receipt.
According to the Certify Q1 2019 SpendSmart Report, almost 72.7 percent of business travelers used Uber. Lyft is gaining in popularity, though, with 21.6 percent of travelers using it in the first quarter of this year, up from 17.7 percent in the first quarter of 2018. Certify helps companies and travelers track their business travel-related receipts.
Corporate travel managers have been willing to accept such expenses, even amid complaints from taxi companies that ride sharing services don’t have to go through the same rigorous background checks that their drivers have to complete. Critics of ride-sharing apps have said they are not as safe as regulated ground transportation companies.
But business traveler use of ride-sharing apps is likely to continue as long as fares remain reasonable. Now that Uber and Lyft have to answer to shareholders every three months, the companies will be under pressure to grow.
Uber, in particular, is planning to invest in self-driving cars, but that is likely a long way off from becoming a reality.
And its rivalry with Lyft most probably won’t translate into savings for consumers now that both companies are public and have more stakeholders involved.
In the meantime, the best corporate travel buyers can do is to monitor prices while the two companies go through the growing pains of going public.