Uber operation cuts fares while promising soaring profits
It is more of a holiday tradition for Uber: announcing low fares in New Year. Amid a price war with rival online taxi service Lyft, the leading online taxi service Uber reduced its rates by 10% to 45% across 100 cities in North America. In fact, Uber drivers’ in Detroit per-mile rate is less than it takes to cover the gas and the depreciation of their cars, according to IRS figures. The vibe is not great among Uber drivers “I’m not happy, GONE DAYS WHEN IT WAS GOOD”, says Andrew Smith in Detroit.
This is the third consecutive year when Uber has slashed fares in January. It calls the cuts seasonal but says they could last indefinitely. Since last year rates never raised again almost a third of cities; only in two did they return to precut prices. Uber has promised temporary hourly wage to bridge the gap in drivers’ earnings, which assured Uber drivers to come out ahead by making more trips an hour thanks to increased demand. A few months ago, Uber CEO Travis Kalanick told employees that North American operations would turn profits in the second quarter of this year.
However profit target 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.” The Rival Taxi Service Lyft announced to cut fares on Jan. 15. Lyft send an e-mail newsletter stating “With recent price changes from the competition, we need to take action”. Lyft also announced a $1 billion round of funding on Jan. 4 to help keep its pink-mustachioed cars on the road, which brought its fundraising total to $2 billion – a ways from Uber’s $10 billion, but enough to dash Kalanick’s hopes of Knocking Lyft out of the market. Moreover, Uber is also churning through cash a lot faster than Lyft, on that note it will spend billions to push its way into China, India and Southeast Asia.
In the first quarter of last year, Uber lost $385.1 million on $287.3 million in revenue, according to leaked figures published by the Information, a tech news website. And Uber losses have grown to $697 million in $498 million in revenue during third quarter, according to a person briefed on the numbers. Over the first three quarters of 2015, Uber lost $1.7 billion on $1.2 billion in revenue. In comparison, during Amazon.com’s worst-ever four quarters, in 2000, it lost $1.4 billion on $2.8 billion in revenue. CEO Jeff Bezos reduced 15% of his workforce. Globally, Uber tends to lose money per ride, but ridership is growing. Total trips increased about 40% from the second to the third quarter of 2015, says a person familiar with the data.
On a November call with investors, acting Chief Financial Officer Gautam Gupta said the company is profitable in two of its biggest countries, though he wouldn’t name them. Even with lower fares in North America, Uber has inched towards profit, in large part by leaning harder on drivers. It takes as much as 30% of a driver’s fares now, up from 20% two year ago. Since 2014 UPFRONT RIDERS FEE goes directly to Uber, which started at $1 per ride; it’s up to $2.5 in some cities. User has said it uses the charge to help fund things such as safety education and background checks.
If drivers win the rights as employees or manage to form unions, Uber may be forced to change strategies. But for now, a steady influx of contractors means the company can get away with added fees and rate cuts, a clear vibe among Uber drivers. While veterans complain that rates used to be higher, he says, “The new guys just don’t know”.
Written By: Zeeshan Yousaf