Khosrowshahi enters ride-hailing sector as traffic is building

Lyft recently said it would increase from eight to 40 the number of U.S. states where it offers full coverage.
Lyft recently said it would increase from eight to 40 the number of U.S. states where it offers full coverage.

Having just left a company whose revenue quadrupled during his 12 years at the helm, new Uber CEO Dara Khosrowshahi has jumped into the fray in the ride-hailing industry, where demand might well dwarf that growth rate. But handling that growth profitably will be another issue altogether.

Khosrowshahi is tasked with managing growth in a market in which smaller U.S. competitor Lyft is expanding, overseas growth has been tricky and competition from the beleaguered taxi industry could return if it adopts the same technologies that fueled the ride-hailing sector.

Amid its challenges, Uber remains by far the world's largest company in an industry where demand is expected to continue to surge as older travelers embrace the concept, services expand beyond major metropolitan areas and providers grow horizontally to expand in market niches such as black-car rides or on-demand transportation for kids or handicapped passengers.

In a May report, Goldman Sachs said that global ride-hailing revenue doubled to almost $36 billion last year and predicted it would surge to $285 billion by 2030 as self-driving technology becomes more commonplace. During the same period, global taxi revenue will fall to $54 billion from $108 billion last year, according to the report.

"Uber was in desperate need of adult supervision, and he's just the person to provide that kind of oversight," Evan Rawley, associate professor of strategic management and entrepreneurship at the University of Minnesota, said of Khosrowshahi. "There's a lot of market share left to be controlled."

That growth continues to lure investors. While Uber raised as much as $15 billion in funding in the first half of the year, its global competitors raised about twice that amount, according to venture-capital analyst CB Insights. And last month, Singapore-based Grab raised $2.5 billion in an equity round. Toyota is one of the investors.

Still, such growth has come at a steep cost so far. Earlier this year, Uber disclosed that it took a $2.8 billion loss on $6.5 billion in revenue last year when it sold its money-hemorrhaging China operations to Didi Chuxing.

Meanwhile, Lyft, whose investors include General Motors, said last week that it would increase from eight to 40 the number of U.S. states where it offers full coverage, meaning that Lyft customers can use the app in all but 10 states.

That kind of competition means Uber could be hard-pressed to raise prices enough to approach profitability.

Additionally, some taxi cooperatives have adopted some of the app-based dispatching technologies pioneered by the ride-hailing sector, raising the possibility of taxis regaining some market share, according to Rawley.

As a result, he called Khosrowshahi's reported goal of taking Uber public in as little as 18 months "wildly optimistic." While he estimated that U.S. ride-hailing revenue could quadruple in the next decade, he added it might take half that time for Uber to approach profitability.

Dara Khosrowshahi
Dara Khosrowshahi

Regardless, U.S. business travelers who might have initially hesitated to forego the traditional taxi for Uber or Lyft appear to have established ride-hailing as the preferred method of ad hoc ground transport.

Expense-management technology company Certify said in late July that Uber's share of second-quarter U.S. ground-transportation receipts was 77%, about the same percentage as in the first quarter. In the same time frame, Lyft's share rose 3 percentage points, to about 11%, while taxis' share fell to 12% from about 14%.

Christopher Anderson, director of the Center for Hospitality Research at the Cornell School of Hotel Administration, said Khosrowshahi has the opportunity to widen that gap by deploying the same type of management controls and culture he introduced at Expedia, in this case to improve driver conditions.

"People chose Lyft at some level because it was a little more driver-friendly, while people stuck with Uber because there was so much demand," Anderson said. "If Dara can adjust things to make Uber more driver-friendly, there's a huge opportunity."

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