Uber and Lyft riders could soon 'start to see prices come down,' analyst says
High Uber (UBER) and Lyft (LYFT) prices may start to retreat as more drivers are hired, one analyst said.
"For all of us who may have taken an Uber or Lyft over the last month or two, or six months for that matter, prices have obviously seemed very elevated,” RBC Capital Markets analyst Brad Erickson told Yahoo Finance Live (video above). “I think that was a combination of demand coming back on the margin more strongly. And then obviously the company is still playing catch up on a driver supply basis."
Erickson added that "as driver supply ticks up — and we do expect it to get better for the industry overall, to be clear — you will actually start to see prices come down."
Uber and Lyft dominate the ride-hailing market. As of mid-2022, Uber accounted for 72% of rideshare monthly sales while Lyft made up the other 28%, according to data from Bloomberg Second Measure.
But despite these companies' command of the space, their profitability depends on retaining an ample supply of drivers while keeping a stable customer base.
On the supply side, inflation has caused more people to take on gig work to offset higher prices, according to Uber CEO Dara Khosrowshahi.
"The supply situation continues to improve, where the number of new driver sign-ups in the U.S. were up 76% on a year-on-year basis," Khosrowshahi said on the Q2 earnings call. "So we have a very strong flow of new drivers who are signing up, coming on to earn. And 70% — over 70% of them have said that inflation and what they're seeing right now in terms of the cost of groceries, the cost of living plays a part in that decision for them to come on to the platform."
But inflation has also played a role in higher fees for riders, which weighs on demand, as ride-hailing services have been known to pass through high fuel costs.
Before the national average U.S. gas price hit an all-time high of $5 per gallon in June, Uber had already rolled out a new fuel surcharge. Since then, gas prices have receded significantly, though it's unclear when the company will roll back that surcharge.
In the meantime, driver utilization could also help bring down prices, Erickson said. "So effectively driving more minutes within, say, a given hour. What's nice about that is actually the companies can allow price to come down, and that's not necessarily a negative thing, financially, for the companies."
Uber, Lyft hit by proposed gig worker rule
There's another development that could affect the pricing of rides and food delivery: Gig worker classification.
On Tuesday, the Labor Department proposed a new rule that may reclassify some independent contractors such as drivers and food delivery couriers. Shares of Uber, Lyft, and Doordash all plunged on the news.
Gig economy companies aim to drive down their operating costs over time by investing in autonomous technology, thus dramatically reducing their expenses in the future. But in the near term, categorizing independent contractors as employees would put pressure on these companies' margins.
Over the past four years, gig economy drivers have pushed for better benefits and compensation through reclassification. Those efforts have largely resulted in stern pushback from app-based service operators, including Uber, Lyft, and Doordash, who spend millions of dollars to lobby against legislation that would materially alter their operational expenses.
We believe this proposed rule will help ensure workers covered under the Fair Labor Standards Act are not deprived of the wage and hour protections they are due under law.
And, it helps preserve critical worker rights and protect freelancers & other small business owners. (1/3) https://t.co/tCNakhVB4r— Secretary Marty Walsh (@SecMartyWalsh) October 11, 2022
Reclassifying gig workers as employees may provide another significant draw for drivers and incentivize them to accept more ride requests, but it also could present even higher prices for passengers or those ordering food delivery if the platforms decide not to cover the added expense.
Lyft issued a response to the Labor Department's announcement Tuesday, stating that the company expected the proposal since President Biden took office and that it does not immediately reclassify drivers or alter Lyft's business model.
"There is no immediate or direct impact on the Lyft business at this time," the company said.
Bradley Smith is an anchor at Yahoo Finance. Follow him on Twitter @thebradsmith.
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