Introduction
For those who have traveled to New York City know that the streets are filled with yellow cabs.
To the casual people, it seems that these vehicles can be owned by anyone, anyone can drive it
and must collect a lot of money. Let's take a few minutes at how these cab companies work;
there is a lot more than meets the eye when it comes to making money with a cab in NYC.
During the Great Depression, which lasted from 1929 through the 1930s, working men were
laid off. With basically nowhere else to work, thousands of those men became NYC taxicab
drivers. Almost overnight the number of cabs on the road increased tremendously, and suddenly
supply was far greater than the demand. The cab industry was destined for destruction, so the
government decided to step in. In 1937, New York City created the taxicab medallion system.
How does the New York taxicab industry work?
The NYC cab medallion is a piece of metal that is attached to the hood of the taxi means that
the vehicle is legally able to operate as a taxi in New York. The city issues a limited number of
medallions, which controls the taxi market in the city. Historically, the value of these
medallions was quite high as a limited number were issued, and the steady demand for taxi
services. Some medallion owners are individual taxi drivers who own and operate their
vehicles. However, some fleet owners have multiple medallions and operate larger taxi
companies. These fleet owners often lease out their medallions to individual drivers. Licensed
taxi drivers undergo extensive background checks and training and must obtain a taxi driver's
license issued by the Taxi and Limousine Commission (TLC) in New York City. Currently,
there are about 13,500 medallion taxis in NYC. This number is closely regulated by the New
York City government, and “new” taxis are the result of a medallion being bought and sold in
the private market. That means, the city rarely creates new ones. This also helps in the
regulation of supply for taxis down, and the taxi companies in business. The Taxi and
Limousine Commission (TLC) regulates how much a cab can charge per mile and minute,
determines a cab company's leasing fees for drivers, monitors routes taken by the drivers (to
ensure they are not artificially generating profits), and much more. In essence, a taxi company
(or a taxi driver) can only make as much money as the government allows them to make.
What are the fixed versus variable costs?
Fixed Cost: Fixed costs are expenses that remain relatively constant regardless of the level of
business activity or the number of trips taken. These costs do not vary with the number of
passengers served or the distance traveled. Some examples of fixed costs for a New York
taxicab owner or operator include Medallion lease, Medallion taxes & fees, Insurance
Premiums, Loan Payments, Vehicle Depreciation, and Other Licensing and Regulatory Cost.
Variable Cost: Variable costs are expenses that fluctuate with the level of business activity, or
the number of trips taken. As the number of trips increases, variable costs also increase. Some
examples of variable costs for a New York taxicab include Fuel, Toll Chargers, Maintenance and
Repairs, Other Operating Expenses, and Credit Card Processing Fees. It is important for taxi
operators to carefully track both fixed and variable costs to understand their overall expenses and
plan their pricing and business strategies effectively.
What is the profitability?
You may be wondering how these taxi drivers and taxi companies make money. It does vary
based on who owns the vehicle, how they have their business set up, and a variety of other
factors. But for the most part, taxi companies own these vehicles. They lease these vehicles to
drivers who in turn get to keep 100% of the fares and tips, these fares are set by the TLC, and
the amount of the lease of the taxi is also set. Taxi company as an independent contractor leases
a vehicle for about $150 per shift (10-12 hours). This lease amount varies depending on the day
of the week and time (daytime or overnight shift). During their shift, drivers collect 100% of
fares and tips. The difference between what they bring in, and what they pay to lease the
vehicle, is how much they make in wages (around $25,000 - $40,000 per year). Drivers are
considered independent contractors, so they bear all expenses and are not the owner of the taxi.
The real beneficiary here, of course, is the taxi companies. If they have their taxis leased out
every day of the year, they can bring in around an estimated ($80,000 per year). That’s a
substantial sum for one vehicle, but that does not include any taxes, insurance, maintenance,
and the fact that the vehicles must be replaced every 3 years. Even so, if that is eliminated the
returns would be estimated ($25,000 per year), and the vehicle is still earning estimated
($55,000 each year). Suppose the cab company bought a medallion for $1 million, they are now
making $55,000 per year off that medallion. That’s a 5.5% real return on their investment.
What are the growing pressures on the New York taxicab industry?
The New York taxi industry has been facing various growing pressures that have been
challenging its traditional business model and profitability. Some significant pressure includes
competition from ride-sharing services like Uber, Lyft, and other similar platforms, high
operating costs, a decline in medallion values and changing customer preferences, regulatory
challenges, the impact of the COVID-19 pandemic, and labor issues and driver rights. Uber and
Lyft’s growth in New York City has decreased the value of yellow taxi medallions destroying
an investment that taxi companies and taxi operators once saw as solid as a gold bar. The
precipitous decline of the yellow taxi business led to a record 510 foreclosures of taxi
medallion-backed loans in 2019. In 2012, when taxis ruled the streets, the daily ridership was
nearly 500,00 trips per day. With each passing year, the ridership number fell further, while the
number of foreclosed taxi medallions rise. In 2019 taxis count was 230,000 rides a day less
than half of what they had sold seven years ago. The steep drop in ridership also explains why
medallion prices have plunged from around $1 million before Uber and Lyft arrived in 2013
and 2014 to between $120,000 and $130,000 today. By 2019, the number of rides sold by
Uber, Lyft, and other apps had grown to around 700,000 per day.
Uber and Lyft are two of the most well-known ride-sharing companies in the world, providing
app-based transportation services worldwide. Both companies operate on a similar business
model, connecting riders with drivers through their respective mobile applications. Now let’s
discuss their fixed and variable costs, as well as their profitability. Fixed Costs for Uber and
Lyft would be technology development, marketing and advertising, insurance, and regulatory
compliance. Variable Costs would be driver earnings, riders' incentives and promotions,
payment processing fees, and customer support. Uber and Lyft both provide professional ridesharing services. Riders input their destinations into an app and the drivers use navigational
software to get there. Drivers are generally polite and well-spoken. They don't even know your
destination before they accept your request. Unprofessional drivers are eliminated because
riders get to rate the driver’s performance. A consistently low rating will keep drivers out of
Uber and its competitors. It is not possible to come up with a definitive or average price for an
Uber. Its pricing varies with every city, and that surge pricing model changes the prices
constantly based on demand. According to Consumer Reports, longer trips are cheaper by Uber,
but short trips can be expensive, and most trips by Uber are short. So, an Uber ride from the
airport to a suburb would be fairly cheaper, but a mile-long trip across a neighborhood could
well be cheaper in a cab and would be cheaper by public transportation (bus or subway).
Consumer Reports also warns that the surge pricing model for both Uber and Lyft can be much
higher prices at busy times of the day and after midnight as there are few drivers available. The
bottom line Uber can be less expensive than a taxi or car service, but not consistently. One
point in its favor, though, is that Uber tells you exactly what the prices will be for the options
available at that time before you confirm the trip. Safety is also an important advantage for
drivers working with Uber and Lyft services. The riders using the service have registered their
identities and their credit card numbers on the app. Uber & Lyft transactions are cashless, a
driver doesn't risk unpaid fares or need to carry cash for change. As drivers are rated in Uber
and Lyft riders are also being rated rude, aggressive, and disruptive passengers are out. Unlike
taxi drivers who work 12-hour shifts or black car drivers who are scheduled by dispatchers,
Uber and Lyft drivers enjoy considerable flexibility and freedom. Drivers pick their working
hours (many part-timers do Uber and Lyft for extra cash) they can log in and out according to
their schedule. Uber and Lyft drivers avoid expensive taxi rental leases by using their vehicles.
They also pay their own fuel and maintenance costs. Everything else being equal, this means
more profit for drivers. Drivers are also spared from any office politics because the app renders
dispatchers irrelevant.
https://www.nydailynews.com/new-york/ny-medallion-foreclosures-taxi-bailout-plan-uber-lyft20200130-s2mjkhjubzgptdxasoxddwdote-story.html
https://www.investopedia.com/articles/professionals/092515/how-nycs-yellow-cab-works-andmakes-money.asp
https://www.investopedia.com/articles/investing/110614/taxi-industry-pros-cons-uber-andother-ehail-apps.asp