Ride-Hailers Must Decide Who Pays Up to Gas Up
Mar 09, 2022
As gas prices continue to rise, ride-hailers must decide whether to slap their contractors or their customers with the tab
Rising gasoline prices could help or harm ride-hailers. It might depend on who they expect to pay the tab.
Ride-hailers have been assuring investors since Covid-19 first hit that a full recovery is inevitable, but a prolonged pandemic has kept their shares depressed. Now it seems macroeconomic trends could compound that pressure even if others recede. Shares of Uber Technologies UBER +2.33% and Lyft are both down more than 40% over the past year.
UbeR’s Chief Executive Officer Dara Khosrowshahi said Monday he expects the coming travel season to be one of the strongest ever. But it might be one of the most expensive to get around. As of February, retail gas prices had already risen nearly 40% year on year nationally, according to data from the U.S. Energy Information Administration. The average price per gallon of regular gas in the U.S. reached a record high on Tuesday, up nearly 18% from where it was just nine days earlier, according to GasBuddy, and they are expected to rise even further following a Tuesday announcement from President Biden that the U.S. will ban Russian oil imports.
Uber and Lyft expect their drivers to pay for their own gas. Like any other expense, the more they pay to fuel up, the less cash they take home. Drivers who want to earn the same return from their labor will require higher fares that compensate them for their costs like wear and tear or fuel. The process would be indirect since ride-hailing prices reflect supply and demand. When some drivers stay home then the ones on the road pick up the slack at higher prices—unless, that is, the companies choose to soften the blow just as demand is recovering.
Both platforms have been offering most drivers the ability to get some of that cash spent on gas back through a platform called GetUpside, but the recent meteoric rise in gas prices makes such compensation—typically up to $0.25 a gallon—seem insufficient.
Ride-hailers spent heavily last year to reup their driver supply after losing drivers amid the pandemic. The balance between driver supply and rider demand, which has only recently rightsized, seems to have helped temper soaring ride-hail prices a bit, making them more palatable for consumers. An analysis by Gordon Haskett’s Robert Mollins found the population weighted average cost per ride for both ride-hailers in February was cheaper than it was in October with Uber fares nearly 10% more affordable on that basis.
That has likely boosted passenger traffic as Omicron fades. Uber said in a filing Monday that trips and gross bookings for Uber’s ride-hailing segment rose throughout February, reaching 90% and 95%, respectively, of 2019 levels.
If higher gas prices feed through to fares and customers respond by cutting back, ride-hailers won’t want to risk turning reacquired drivers away. Uber says gas expenditures are currently a high-single-digit percentage of U.S. driver earnings. The company said it was looking at various levers it can pull to support drivers’ net earnings should gas prices climb even higher. Uber described driver supply as “relatively stable” month over month as of February. The company said that, for every 20% increase in gas costs from today’s average, rider fares would only need to increase 1% for drivers’ earnings to remain consistent.
“Surge pricing” is taking on a whole new meaning.