Management & Operations

EXCLUSIVE: The challenge of a new taxi business models - A London perspective

Posted on December 16, 2015

Disruption is the modern challenge of business. Whether it is new types of discount airlines, local energy generation, Internet shopping and delivery, or previously distant overseas manufacturers entering the local market, established businesses are having to reconsider, if not reinvent themselves, at a startling rate.

Disruption is not new and has been a factor for many years, but what is new is the rate at which it is occurring, the breadth of industries being challenged and the unpredictability of the challenger. Would major hoteliers have expected a business such as Airbnb to be a major competitor in a key global business and leisure market, such as London or Paris, three, yet alone five years ago?

A sector of the mobility industry that possibly thought itself immune from disruption, if not beyond the consideration of “trendy and digital” disrupters, was possibly the humble taxi business. The taxi is an almost universal business model applied from Nairobi to Sao Paolo, and Barcelona to Chicago. Local variations exist in regulations, pricing, types of vehicles, coverage, etc., but the model is clearly recognizable in almost every city. Local demand varies from city to city, but trips to and from airports and railway terminals, as well as between, and to and from, city center leisure and business destinations remain core.

Competition for the taxi trade was typically locally fierce but predictable and included enhanced public transport options, additional local drivers and vehicles — which could be locally “managed” by proactive operator lobbying of the usually city based regulators. The broad market was stable and predictable and the role of the local regulator considered, conservative and incremental. Not much change was forecasted, expected or desired. The arrival of a foreign-based competitor was not plausible, and the role of technology was perhaps centered on card payments, lower emission vehicles and in-vehicle advertising.

A number of years ago, there was some stirring of change via the rise of mobile (cell) phones and changes in customer views of the availability of choice and information. Then, Uber began to definitively arrive on the scene in city after city and revolution in taxi mobility has become perpetual. I don’t propose to comment particularly on the merits of Uber versus its competitors, or other innovations in taxi mobility, as much as that the whole sector is at the center of change in mobility and has been very much unprepared for this.

There are numerous players in the market directly replicating the Uber model of taxi-type vehicles available for call via a mobile app in the UK. These include the pending arrival of Lyft in London. Other models look to work within the structure of the existing taxi trade, such as Hailo, Gett and Addison-Lee. While others, certainly in the UK, provide much better information about the existing taxi services and bring network efficiency, such as Kabbee and minicabit. There is also the wider new industry of ridesharing, including businesses such as BlaBlaCar and GoCarShare. Internationally, some of the players include Ola in India and Didi in China.

In London’s case, like most large cities, there is a locally relevant taxi narrative that has impacted on this story. London has historically had two distinct types of “taxis.” The world famous “black” cabs or “hackney” carriages can pick up on street and, with some limitations, throughout the city. These vehicles are accessible and heavily regulated. Drivers have to possess vast amounts of knowledge of the local street network, which can take years to acquire. However, how relevant this is in the age of Satellite navigation is questionable, and the industry could be accused of focusing on historic business concepts rather than the current needs of users.

Black cabs are also essentially self-employed drivers and choose to concentrate service in selected — and more lucrative — areas of the larger urban area. They are easily available in Central London, to and from the major rail terminals and selected neighborhoods in the rest of London. They are not sufficiently numerous to provide a citywide taxi network and have never performed this task.

Hence, London has a second network of “taxis” — “private hire” or “minicab” vehicles, which cannot pick up from “the street” and have to be called in advance to a location to meet a passenger. The fares are not fixed or metered and open to negotiation with the customer. The vehicles can vary quite widely in type and size and this is often an advantage for the customer, if they have specific needs. These differences in taxis have a long history, and until the early 2000’s, the private hire industry in London was effectively unregulated and subject to minimal legislation from the national government and without any local control. This led to perverse outcomes of unscrupulous operators using dangerous vehicles and crimes against passengers.

One of Transport for London (TfL) and the new Mayor of London’s first tasks in 2000 was to start a long and complicated process of regulating the thousands of private-hire drivers, vehicles and operators and bringing some public order to this previously chaotic, but spatially comprehensive side of the industry. In effect, TfL brought many of the advantages of the black cab industry to the private-hire businesses. Subsequently, the private-hire industry has expanded and gained an improved reputation and new luxury and technology focused operators have entered the market.

Visit London
Visit London

It can be argued that TfL’s taxi regulators felt their role was largely fulfilled when the two sides of the industry were regulated in a way that improved customer safety and offered market stability. Issues such as improved vehicle technology and payments would be dealt with in a measured way over years. Unfortunately, as a regulator they missed the key trends that would lead to a disrupter like Uber. However, this situation is not unique to London. Certainly, throughout Europe, if not the wider world, taxi regulators were simply not expecting or really prepared for change. And, this change has proven to be particularly painful. The taxi industry in London, as typically in most cities, is not afraid of using its political power to lobby and influence change, as well as simply to disrupt travel via public demonstrations.

The challenges to Uber and other new entrants are numerous:

  • Do they pay their share of local and national taxes?
  • Are they using safe and qualified drivers and vehicles?
  • Do they have sufficient local street knowledge, and if they don’t, why do the black cab drivers have to spend so much time acquiring this?
  • Do they have sufficient language skills to offer an adequate customer service?
  • Are they treating passengers with disabilities fairly?
  • Are the new pricing models fair, transparent and equitable?
  • Are they disobeying the law by in effect picking up passengers a few seconds after they make an online request and thus, taking on street trade?
  • Is there simply too many taxis on the streets and is this generating too much congestion and pollution in central London to the detriment of all users including the core bus users?

All of these issues are real and need to be considered. However, I don’t propose to take a definitive view in this article. The broader issue is that a new series of entrants have entered the taxi market and a significant number of customers are choosing to consider and use these services. A market failure certainly existed in terms of the needs of consumers. Over time, regulatory issues will need to be addressed, and Uber, in particular, has not been as helpful as it could have been in working with existing regulators within the market structure — that said, they would likely say that the regulators, and certainly the existing operators, had no interest in working with such a disruptive new provider. Thus, Uber has simply chosen to begin operation and deal with the regulators at a later date. This is a common strategy in digital disrupters and famous examples include Napster’s role in music sharing or Amazon’s role as a local, national, or global retailer and where and which retail taxes it sees as being applicable.

The market challenge in London from new taxis has been fierce and existing operators fear for the viability of their established businesses. Lobbying has led TfL to propose a series of market interventions to calm the situation in December 2015. In summary, these include:

  • Operators (non-black taxi) need to provide confirmation to the customer at least five minutes before the journey occurs.
  • Not being allowed to show vehicles available for hire visually or virtually in real time.
  • Needing to offer the facility to pre-book up to seven days in advance.
  • Drivers may only work for one operator (private hire firm) at a time.
  • Controls should be put in place on ridesharing in public vehicles (an attempt to block the introduction of UberPool).

To view the Private Hire Regulations Review, click here.

Other European cities have tried to defend their existing taxi services from the new entrants through a mixture of regulatory prohibitions as well as new customer focused innovations, such as high quality taxi stands and in-vehicle visitor information as seen in Paris or TfL’s marshalled and organized taxi ranks.

Meanwhile, the European Parliament and the civil servants in the Commission, as arbiters and defenders of the European Union’s open markets, are becoming concerned and in an attempt to “defend” the customer and ensure cities and nations don’t adopt policies that stifle the economic growth represented by the flourishing digital sector, as well as simply don’t choose to defend incumbent or local businesses through protectionist legislation have become involved in the debate.

Anti-Uber taxi protest in London, June 2014.
Anti-Uber taxi protest in London, June 2014.
David Holt

UK political reactions veer from “no intervention” and “let the free market decide,” to “provide support to any new technology business” as London is trying to maintain a role as a global center of digital innovation to “protect the role of important London icons such as the black cab” to, particularly with the history of the earlier lack of regulation of the private hire industry, “some regulation must certainly be in the public interest to protect consumers,” to simply “can we slow change down to a rate that isn’t so disruptive or leads to such vociferous protest.” Mayoral elections will take place in London in 2016 and as the existing Mayor is stepping down a new candidate will be elected. The protest from taxi drivers is an issue that most politicians would rather do without in the coming months.

Sadly, disruption is not usually conveniently scheduled for elections or takes its time while existing businesses consider their options or develop rock-solid defenses. Uber and its compatriots are here now and are taking as much market as they can manage. Customers are clearly interested and using these services. They are also rapidly diversifying and entering complementary businesses. In fact, the existing core public transport operators need now be concerned that this business could shortly begin to challenge and redefine the design or need for the bus network, particularly in areas like outer London.

What is the new role of the regulator? It probably isn’t to defend existing businesses in any industry from competition and change. It also isn’t to stifle and confuse new and innovative businesses. Yet, it should defend good, safe, accessible services to customers throughout the city.

Giles K Bailey is a director at Stratageeb Ltd., a London based consultancy assisting businesses think about their strategic vision and innovation.

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