[BY ANNIE GAUS]
Neither Uber (UBER) – Get Report nor Lyft (LYFT) – Get Report has turned a profit — and changing laws in their most important markets could place that goal further out of reach.
On the heels of California’s AB5, New York lawmakers are aiming to pass an employment law that would redefine the standards by which a worker is considered an employee. California’s version went into effect this year — and New York could introduce its own version in a matter of months. Uber shares were down 2.81% to $40.09 on Thursday, while Lyft’s fell 2.95% to $47.03.
According to a report in The Information, New York lawmakers are considering certain clauses that would distinguish their version from AB5: For example, the bill could define employees more narrowly than the California law does; but stakeholder are also weighing a collective bargaining provision that could spell costly headaches for Lyft and Uber down the road. A bill could materialize as soon as this spring, according to the report.
Whatever winds up being proposed in New York, the costs for the ridehailing firms — both of which are aiming to eke out a profit in the near future — could be substantial. Analysts at Wedbush Securities estimate that AB5 could translate into 30% higher labor costs for Uber and Lyft — an added expense that they can ill afford. Uber told investors it’ll turn profitable by the end of this year, while Lyft has set a profitability target by the end of 2021, and both are under pressure to spell out clear plans for getting in the black.
At a recent Goldman Sachs conference, Uber CFO Nelson Chai downplayed the “contagion risk” of AB5, which has attracted some controversy for its potential consequences for freelancers, spreading to other states. In addition to New York, New Jersey recently passed its own version of a gig-worker bill; Illinois could soon do the same.
“I think that other states are seeing what’s going on here and so we’ve seen some back off in terms of some of the incremental discussion whether it would be New Jersey or some others that we’re seeing,” Chai said.
Still, any increase in labor costs in California and New York would be onerous. New York City is the largest consumer market for both firms, according to their respective S-1 filings. And a large majority of their rides in the U.S. are concentrated in a handful of population-dense metro areas, including Los Angeles and the San Francisco Bay Area.
Uber and Lyft appear to be diverging slightly in how they plan to handle new laws, although they have collaborated on an upcoming ballot initiative that would leave the fate of California’s AB5 to voters. Uber and Postmates have also sued California claiming that the AB5 is illegal, but a judge recently denied an injunction to block enforcement of the law.
Uber is experimenting with allowing drivers to set rates for certain fares in California, among other product tweaks, on the notion that such changes will allow them to circumvent AB5. Lyft has announced no similar changes, but is reportedly lobbying for an exemption in addition to advancing the state ballot initiative.
Meanwhile, Lyft is also seeking to reassure shareholders that if new laws increase labor costs, it won’t eat the difference. At an investor meeting in December, Lyft CEO Logan Green said that “prices go up for consumers — we’ll pass 100% of that on” if its labor costs increase.
Investors may not know yet how the chips may fall in the employment law debates happening in California and New York. But another question mark is how riders would react if, as Logan Green warned, ridehailing firms raised their prices to match labor costs.
If what used to be a $10 ride cost $13 instead, would riders take a pass on the service entirely?
In 2016, a group of researchers examined Uber’s surge pricing algorithm, using data provided by Uber, and found that higher prices led demand for rides to drop by a factor of about half. In other words, a 30% increase in price led demand to fall by 15%.
“But that’s a short run reaction to surge pricing,” explained Austan Goolsbee, an economist at University of Chicago’s Booth School of Business. “We don’t know what the long run sensitivity is I don’t think.”