The challenge of app-based transportation

Uber and the business models of the other app-based transportation providers depends on persons who are in the market for demand responsive transportation service. The customer base of individuals who opt to contract for demand responsive service by sedans that seat up to five passengers (taxis and limousines) or larger conveyances (vans and buses) is composed of a restricted population. The number of people who can afford this service on a regular basis and the number of companies and organizations prepared to subsidize it is composed of a finite population.

Prior to the emergence of app-based services, such as Uber, the customer base for these transportation needs was and continues to be served by the established providers, taxis and limousines.

All of the available statistical evidence confirms that the emergent app services have only managed to secure a small percentage of this available customer base. The assertions by them that they have promoted the creation of additional customers or that they have enticed existing customers to their services is not confirmed by any available hard evidence. All that is known comes from promotional declarations by Uber that their revenue is constantly increasing with the concomitant expansion of their customer base.

A factor that supports the illusion that the app transportation services are having a significant impact on their supposed out-of-date competitors are the irrational anxieties of cab company executives and drivers. Some among the traditional service providers posit a doomsday scenario for themselves that is abetted by media that gives them credence and magnifies them.

In the small corner of the business with which I am familiar, professional hard-working cab drivers continue to thrive. Some of them even supplement their income by using the services of the apps.

Recently, one spokesman for the apps made crude and insulting statements about the taxi industry. The words used reflect an individual who is worried and uncomfortable with the condition of his business. Throwing dirt at the competition supports the conclusion that the source of these missiles is losing confidence in his prospects. Shortly this was followed by an announcement that very large amounts of additional funding ($17 billion or more valuation) had been secured by this app. There are, it seems, investors who have forgotten the South Sea bubble and the tulip bulb craze.

A greater concern about the emergent app-type services is the fact that they are admittedly not insured for the kind of risks that are undertaken by the vehicle operators of their services. The liability exposure to potential losses for unfunded insurance claims is incalculable. The only agencies that have a track on the vehicles and drivers involved in the app services are the app services themselves.

The available information on these vehicles and drivers is that they are literally a floating population. Drivers and their vehicles can, and do, contract with multiple app services. Many utilize combinations of cellphones tuned to several apps in order to maximize their opportunities to generate income.

In concert, this pattern of risky behavior can and will bring about enormous property and injury losses for which there is no known security in the form of insurance. Liability insurance for property damage and personal injury based on losses caused by vehicles is calculated on the number of miles traveled, the type of vehicle and the terrain covered. The greatest risk and highest insurance premiums are in dense urban areas.

The vehicles that provide passenger services in these localities operate in heavy traffic and cross hundreds of intersections in the course of their operations. There is no confirmation that any of the app service providers are adequately insured for the risks and exposure that they create to the public.

Without adequate insurance coverage the losses will undoubtedly have to be absorbed by the public.

What the app-based providers have in effect done is outsource the most expensive and risky aspects of the demand-responsive form of passenger transportation to a host of individual vehicle operators. These operators are obviously ignorant of their exposure and uninformed as to their personal costs in providing these services with their private vehicles. Every mile their vehicles accumulate creates a cost against income. There is depreciation as well as maintenance expense.

Uber calls the individuals who provide these services “partners.” They are partners who supply the tools (vehicles) and labor (drivers) and absorb all of the downside risks and most of the expenses. A more accurate description of them would be “sharecroppers.”

The app-based passenger transportation options are presenting a competitive challenge to the established passenger transportation services. But they are clearly founded on hollow business principles that cannot be sustained. And the established demand-responsive transportation entities (existing taxi and limousine systems) have already started to make the necessary innovative adjustments to overcome this business challenge.

Nate Dwiri, past president and general manager of Yellow Cab Cooperative in San Francisco, has been in the taxi business for 49 years. He has served on boards of various organizations related to paratransit service as well as director of two insurance companies.

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