Tag Archives: taxi

Why not every Industry can be “Too Big to Fail”

Thesis: The declining taxi industry of New York is a case of idiosyncratic risk, and the industry should be allowed to fail as it has a readily available replacement.  

This past Thursday in a New York Times interview, taxi mogul Evgeny Friedman called for the city of New York to back all loans made for medallion taxi purchases.  Friedman contends that the taxi market is threatened by lack of credit available to would-be taxi purchasers, and that a lack of action from the city would impact the taxi industry across the entire country.  He even went so far as to claim that the taxi industry is “too big to fail,” comparing the situation to that of the financial industry during that of the mortgage-backed security crisis.  But he is applying the label of “too big to fail” to an entire industry, whereas the term originated (and has historically been used) in reference to single corporations.  And it’s worth asking the question: if an entire industry needs government intervention to keep it afloat, then is it even worth saving that industry?

The financial institutions that received bailout packages during the recession got them because their failure would have meant a nationwide freezing of credit and shock to financial asset prices.  A failure of the medallion taxi cab industry would mean a loss of tax revenue to the city and a shortage of taxis available to riders.  But while the services provided by major banks are incredibly hard to replace, the problems associated with a failure of the taxi industry have easier solutions which would be quick to implement.  As taxi drivers see less and less income and take their cars off the road, their main competitors (Uber and Lyft drivers) will find their services producing more income, and new drivers will emerge until the supply of drivers and the demand for rides hit equilibrium.  And while the loss of tax revenue is certainly material (New York collects 50 cents for each ride, and at 600,000 rides per day [according to a New York City factbook], the city sees about $109.5 million in annual tax revenue), taxes can be applied to Uber and Lyft rides in the same fashion.

What Friedman is really asking for is a “save my business model” bailout.  There are few legitimate arguments to made as to why the taxi industry should not be allowed to fail.  And in reality, taxis probably won’t completely fail for quite a few years.  The price of a yellow medallion cab will certainly fall and taxis on the road will be replaced by drivers from other services, but taxis likely won’t suffer from a sudden mass extinction.  Friedman, who is significantly biased (he owns 1/6th of New York’s taxis – worth about $1 billion), is overstating the economic threat.  He merely overspeculated on the rising prices of an asset (taxis), and is now reaping punishment.

The Demise of Taxis

The rise of Uber to an over $40 billion valuation may seem absurd to most, but Uber is revolutionizing the way people travel within a city. Taxi drivers may scream and moan as much as they want, but Uber is here to stay. The taxi service business has been abysmal at best for years and needed an upgrade.   As Brad Stone mentions in his article Invasion of the Taxi Snatchers: Uber Leads an Industry’s Disruption:

San Francisco, like other urban centers, has long capped the number of taxi medallions, even as the population increased by 300,000 in the last 10 years. Dispatchers at the major cab companies didn’t seem to care about prompt customer service since they make money primarily by leasing their cars to drivers.”

This has caused companies that loan money to taxi drivers to buy a Medallion, such as Medallion Financial Corporation, to be losing share price drastically. As James Sterngold describes this in his WSJ article Uber’s Rise Has Taxi Lender Talking New Route, “But amid a taxi-business showdown that can look more like corporate mud wrestling than textbook market competition, Uber describes its service as a market disrupter and says the recent slide in medallion prices is just the beginning.” Investors in Medallion Financial beware, but this revolution is good for the overall consumer because it means that the supply of taxi like cars will more correctly meet the demand.

No longer will the Average Joe have to stand out on the street curb trying to hail down a taxi for half an hour in the pouring rain. No longer will Jane be late for her meeting because she couldn’t catch a taxi in time. With Uber’s revolutionary concept of its Surge pricing policies to encourage more drivers during high demand times. While these can run to 3x as expensive as a normal taxi trip, it is much more enjoyable than waiting an hour outside of Wrigley Field trying to find an open taxi after a Cubs win as this blogger has done! As Sterngold later mentions, “The taxi industry, including Medallion, and government rule makers “have propped up an artificial market for ages” by constructing “a castle of regulations,” says Corey Owens, head of global public policy at the San Francisco-based company. The result, he says, is that medallions have grown too expensive, making it tough for drivers to earn a living and stifling innovation.”’

This has to change, and Uber has its foot in the door trying to disrupt the ride sharing space, but it’s not going to be easy. As James Sterngold quotes Mr. Murstein, the president of Medallion Financial, “Owning a NYC. taxi medallion is like owning a piece of NYC.,” Mr. Murstein says. “I would never bet against them.” Well Mr. Murstein, it looks like NYC is about to change, for the better I might add!