It’s tough to make money as an Uber or Lyft driver. But there could be a way to do better as a driver by getting the cost of car ownership lower.
Barron's By Al Root Sept 19, 2019
It’s tough to make money as an Uber or Lyft driver, according to the automotive team at Wolfe Research.
They have crunched a lot of ride sharing numbers, and say drivers could do a little better if they could get the cost of car ownership and operation lower. One solution: Buy a Toyota Prius (or another hybrid vehicle).
Uber (ticker: UBER) and Lyft (LYFT) aren’t profitable yet. Wall Street expects Uber to lose about $1.4 billion in the 2019 third quarter. The Street expects Lyft to lose about $330 million over that time frame. One reason is that the cost of catching an Uber or Lyft is about $1.90 a mile, and about 75% of that, or $1.40, goes to drivers.
That may sound like a lot at first, but Wolfe’s math demonstrates how tough it is for drivers to earn a living.
According to Wolfe, personal car ownership costs 50 to 60 cents a mile for ride-sharing drivers. So if they get $1.40 a mile then, by simple math, they net about 85 cents a mile.
According to that math, drivers would need to drive about 38,000 miles—with paying fares in cars—each year to earn the U.S. median income of about $32,000. Assuming you drive five days a week and take two weeks off a year, drivers would need to drive about 150 revenue-generating miles a day—roughly the distance form Manhattan to Springfield, Massachusetts.
And don’t forget up to half of a driver’s time is spent searching for a fee-paying ride, and the average trip is only about five to 6 miles, according to Wedbush analyst Dan Ives.
The situation might not be quite as dire as that, though, at least according to Wolfe analyst Dan Galves: “The cost per mile drops for as the number of miles increases.”
Nonetheless, getting the cost of operation down is critical for drivers. Electric vehicles or hybrid cars could help. While they cost more than gasoline-powered models at the dealership, they get much better mileage. “Electric vehicles make sense in higher-use settings,” say Galves. The gas savings grows the more you drive an electric car.
EVs are more expensive because batteries are costly, but buying used ones can lessen the pain. A 2015 Toyota (TM) Prius in good condition—that gets 50 miles a gallon—can be had for less than $14,000, according to Kelly Blue Book. Driving a high-mileage, used hybrid can be an effective way for ride-hailing drivers to spend less on vehicle operations.
Of course, this is just fun with numbers. The quality of life for ride-hailing drivers, however, has become a serious political issue lately. California just passed a law which designates gig-economy workers as employees and not contractors, potentially raising costs for Uber and Lyft.
“It’s a clear financial negative,” wrote Ives in a Sept. 11 research report. But “we fully expect gig economy companies to continue to push back and find a middle ground, but it’s unclear if and how much they will start paying in the interim period.”
Uber is already pushing back—it has pointed out it offers some employee benefits and 45% of Uber drivers drive less than 10 hours a week. The company didn't comment for this article, but instead pointed us to past comments. Meanwhile, almost 90% of Lyft drivers drive less than 20 hours a week and have other jobs.
Lyft provided the following statement:
“We agree with Governor Newsom that California still has an opportunity to support the overwhelming majority of ride-share drivers who want a thoughtful solution that balances flexibility with earnings guarantees and protections. We are confident that with his leadership we can reach a historic agreement, but if necessary we are prepared to take this issue to the voters to preserve the freedom and access drivers and passengers want.”
There is another issue that potentially affects ride-hailing drivers even more: Many investors believe the pathway to profits for Uber and Lyft involves cutting drivers out of the equation completely. Galves does believe robo-taxis will lower costs, but notes they could be a couple of years away.
Before that happens, there is still a pathway to profitability for Uber and Lyft without eliminating drivers, according to the analyst, as long as the companies price effectively. “There was a period of intense price competition as Uber and Lyft grew their platforms,” says Galves, who rates Uber shares the equivalent of Hold and Lyft stock at Sell. With the two firms maturing, the level of price competition is falling.
Better pricing mean higher value for drivers, too. With higher prices and lower costs, maybe the economics of ride-hailing for drivers can improve.