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IN FOCUS |
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by Matthew W. Daus, Esq. |
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WHY THE NYC MEDALLION IS ALIVE AND WELL, AND WILL SURVIVE! [1]
The New York City (NYC) medallion system is alive and well, and will survive market disruption by smartphone app behemoth Uber, the new Green Boro taxis, and other
competitive and regulatory forces. I cannot say the same for other United States (U.S.) markets and for similar systems abroad, but the facts, available data, and the unique aspects of the regulatory system in NYC show promise in the long term.
There has been a tremendous amount of fear in the marketplace caused by well placed media articles during the last year. Some media do not paint the full picture, or adequately portray the facts about the NYC medallion market and other markets. The purpose of this article is to offer my perspective on this issue as the longest serving NYC Taxi and Limousine Commission (TLC) Commissioner/Chair.
I have extensively studied and helped oversee the most successful medallion system in the world. I have examined the economics, laws, procedures, policies, and orchestrated numerous medallion auctions over the years raising hundreds of millions of dollars for NYC. Let’s start from square one and build on what gives a medallion its value, identify why some markets are in trouble, and discuss why NYC is likely to survive.
The taxi medallion, the physical tin that embodies a legally protected property interest, operates in a closed market with the ability for the city to control supply through a cap on the number of medallions, while allowing for transferability
(buying and selling) on the open market. These are the two most important factors that have allowed the medallion to attain values that demonstrate more stability and growth, or investment return over a long period of time, than real estate, the stock market, and the price of gold.
The medallion, just like a seemingly overpriced townhouse adjacent to Central Park, is worth, well, whatever someone is willing to pay for it. But there are various factors which contribute to the price or value of a medallion on the open market which buyers, sellers, and lenders rely on in determining value. These factors include, but are not limited to:
- interest rates on medallion loans,
- labor supply in terms of available taxicab drivers,
- adequate cash flow and return on investment for drivers and owners,
- ridership demand and projections, and
- the overall stability of the regulatory system in which these medallions operate.
While the prices may have increased over time, from $2,500 in 1947 to the apex of $1,320,000 in 2013 at an overall growth of 52,700%, there have been very few significant or sustained dips. Individual medallions, that must be operated by owner-drivers, had prices on the open market rivaling corporately owned and operated medallions that could work the streets 24/7. The “owner must drive rule” in 1990 caused the price to adjust below corporate prices.
- While it never recovered to the extent of exceeding corporate value again, individual medallions’ own price growth by more than 717% since then has been staggering, indeed. This is an example of a policy that could affect valuation.
- Another example of a prolonged decline was in the late 1990s and early 2000’s following a series of reforms by then Mayor Rudy Giuliani’s administration that targeted unsafe drivers removing thousands of drivers from the road.
- Following many lawsuits and a 1998 taxi strike, a combination of financing balloon payments, a driver shortage, and the economic shock to medallion values after September 11, 2001, all contributed to a significant decline of medallion values - 24% from $277,318 in 1998 to $209,458 in 2001. Fewer drivers mean that medallions do not operate as much as they could resulting in reduced cash flow for owners.
Since the advent of technology enabled disruptive transportation app companies in the U.S. such as Uber and Lyft, there has been a worldwide seismic change in the for-hire transportation industry. From Seoul, South Korea to New Delhi, India and in many cities in the U.S., the industry has witnessed a consolidation of services wherein transportation apps have consumed small market players with aggressive and lucrative marketing strategies.
- surge or demand pricing, sometimes 3x more than average fares,
- using unlicensed drivers/vehicles and less regulated licensed limousines or sedans, and
- providing metered, on-demand taxi service with the smartphone app’s built-in meter.
Smartphone app drivers basically work less while earning more money, and this development has been a game changer. This disruption has affected medallion transfer prices in almost all cities that have introduced and financially benefited from the medallion system since its introduction in the 1930s.
In the past two years, medallion transfer prices in New York City, Boston, Chicago, and Philadelphia have all lost significant value, with some cities completely abandoning or putting their plans to auction more medallions on hold. Others, such as New York City, registered some of the largest decreases in medallion transfer prices in the case of New York City falling from $1,320,000 in 2013 to $950,000 over 17 months.
Perhaps, the three most significant things that Uber has done that critically changed the balance, aside from hundreds of millions of dollars being spent on marketing is:
I. Unfettered proliferation of Uber and Lyft cars
The decrease in medallion transfer prices in each city is a consequence of factors that vary depending on how the medallion jurisdiction handled the entry of transportation app companies. For instance, in Chicago, from the taxi industry’s point of view, the government allowed almost unfettered proliferation of Uber and Lyft cars without the same regulatory burdens that are imposed on medallion taxicabs. This may have contributed to actual revenue decline. This, coupled with investor and market fear, has caused the medallion transfer price to drop from $375,000 to $256,000.
As indicated by Chicago’s inspector general recently, an auction of 50 taxi medallions that normally could have secured the city over $18 million has yet tobe completed after more than a year for reasons that remain unclear. Likewise, medallion sales were not consummated in Philadelphia. In New York City, the TLC has placed its planned auctions on hold.
NYC strongly clamped down early on illegal operations of these new technology entrants which led to Uber and Lyft obtaining licenses like everyone else. However, despite the TLC’s notable effort to attempt to create a level playing field for all industry participants, the NYC medallion transfer price has been significantly reduced by over 25% creating a credit crunch. This is a result of financial institutions reluctance to facilitate the financing of medallions.
A critical set of unreported facts have been sitting on the sidelines while the doomsday stories are reported by newspapers, by financial market analysts with a short position in the equity market, and pundits who envision a continued decline of medallion transfer prices and an eventual demise of the medallion system.
II. Uber and Lyft’s predatory pricing techniques
It is the stability and continued growth of NYC’s economy that creates sufficient ridership and ultimately adequate revenue to sustain the cash flow for medallion financing. Moreover, despite Uber and Lyft’s onslaught of the industry by predatory pricing techniques, there has been a very nominal decrease in taxi ridership and revenue in the taxi industry attesting to the health and well being of NYC’s economy and the survival of the medallion.
The 2014 Taxicab Passenger Enhancement Project (T-PEP) data, which contains all the trips and revenue information from all medallion taxicabs, indicates that medallion taxicabs:
- Provided 165,114,361 trips with a daily average of 452,368 in 2014.
- Compared to previous years, total ridership in 2014 has slowed down with ridership declining by 7% from 2012-2014, while the decline in ridership averaged 4%, or a loss of 8,065,398 rides from 2013-2014.
- The 4% decrease (or 8,065,398 fewer rides) in 2014 translates to a loss of $116,786,963 in revenue to the medallion taxi industry assuming that the 2014 average fare was $14.48.[2]
(See Graph 1). As a result, we estimate that each active yellow medallion taxicab[3] has incurred a loss of yearly revenue to the amount of $8,583.98, or $23.46 in daily revenue, and in terms of ridership, less than two rides per day.
Graph 1
III. The expansion of multiple technology enabled transportation apps
Total revenue in 2014 also declined by $40,118,500, (a drop of 1.6%) from 2013 revenue figures (See Graph 2). There are many factors that potentially contributed to the decline in revenue. These factors include:
(i) the expansion of multiple technology enabled transportation apps in the FHV sector of the industry with predatory pricing;
(ii) the quantitative evidence that indicates an increase in demand and market traction of Boro Taxis that reportedly completed 50,000 hail trips a day;[4]
(iii) the expansion of the black car sector which grew from approximately 7,700 vehicles in 2012, to 23,700 vehicles in 2015, an increase of over 200%;[5] and
(iv) the continued attractiveness of Subway transportation by visitors and New Yorkers as evidenced by a record breaking number of MTA passengers every year.[6]
Graph 2
Notwithstanding the decline in ridership in the past two years, driver income, specifically tip amounts, have continued to grow. As shown in Graph 3, total tips have grown from $170 million in 2011 to $249 million in just a few years, which is 46% in combined growth. As of 2014, total tip amount is more than 10% of the total gross revenue of a driver, a significant incentive for drivers.
However, the growing tip amounts also have a direct impact on the quality of customer
service and attests to New Yorkers’ and visitors’ satisfaction with taxi service quality and/or convenience. The total tip growth rate, however, has relatively declined in 2014, representing only a 5% increase. Tips increased at a slower rate compared to previous growth rates of 17% and 18%, in 2012 and 2013 respectively.
Average taxi fares are yet another indicator of the financial health of the taxi industry.
As shown in Graph 4, the average fare has been increasing for the past four years. The 13% average fare growth rate from 2012 to 2013 may partially be attributed to the fare increase that went into effect in 2012. The average fare growth rate slowed in 2014 registering a 3% average fare growth from 2013.
Graph 3
Graph 4
FACT I
As alluded to earlier, labor supply and the availability of licensed taxicab drivers is a critical factor that affects medallion cash flow and values. There has been a loss of drivers over the past few years due to a number of reasons but the primary one is that many taxi drivers are also obtaining for-hire vehicle licenses and working for Uber. Surge pricing allows them to work less hours and earn more money.
The lack of a cap on the number of for-hire vehicles has facilitated the growth of Uber’s bases to over 14,809 vehicles which exceeds the number of taxicab medallions. Uber is now the largest ground transportation company in NYC history. However, the yellow taxi driver shortage is exaggerated. There is still an adequate cushion as the number of licensed taxicab drivers reached an all time high in 2013 with 52,800 drivers, a ratio of 3.92 drivers per taxicab.
As of April 13, 2015, there are 52,578 licensed taxicab drivers. The loss of drivers, while it may have had an impact, has not led to a so called “driver shortage” yet. The number of FHV base permits has increased by 200% with a combined driver pool of 77,721 for all of the different classes of FHV services.
FACT II
Another set of facts missing from the equation is that as market fears have led to a lack of liquidity with lender, buyer, broker, and seller, this has led, for quite some time in NYC, to there being “no market!” Basically, the few medallion transfers or sales that have occurred during the period of decline have not been arm’s length transactions, but mostly below market value transfers that have been effectuated between family members and colleagues. This is the primary reason for the reported price decline and it is artificial.
Despite the nominal decrease in revenue and ridership, and the increase in the average fare and tips, the medallion transfer price has suffered a disproportional decline in transfer price. The question, therefore, is, if medallions are financial assets is their value determined by buyers and sellers relying on the fundamentals of the taxi industry (ridership, revenue, macroeconomic realities of NYC)? Actual and predicted cash flow models, which in turn relies upon the amount of revenue generated by the fare box, also help in defining medallion financial asset value.
What is the cause of the disparity between true economic revenue impact and the medallion transfer price decline while the medallion, as a financial asset, is still stronger than most assets in other secondary markets? The simple and visceral answer is that “market fears”, created by media stories that did not take into account the non-market value transfers or the true revenue data, led to a freeze on liquidity where no transfers are taking place thus contributing to the self fulfilling prophecy of a decline in value.
Lenders, buyers, sellers, and the media are over exaggerating the long term impact of Green Boro taxis and transportation apps encroaching upon the taxicab market share, in my view. Well placed articles timed with the raising of new capital for market disruptors seek to create market confusion. This is intended to pierce investors’ confidence in the medallion system with as much bad news about the taxi industry and medallion transfer prices as possible filling the newspapers.
I guarantee you that in private equity board rooms there is a power point slide somewhere which points to a rise in transportation smartphone app company valuation coinciding with a chart showing the decline of medallion prices. Confusion between price and value results in misunderstanding what is currently going on in the market.
What the NYC medallion is capable of generating in the form of cash flow measured by total revenue (via the T-PEP data), is a nominal 1.6%. The medallion still exhibits a strong performance considering the significant market disruption by app companies.
Medallion transfer prices may be adjusting to the world of smartphone apps, the introduction of Green Boro taxis, and a credit crunch in the medallion secondary market. However, the intrinsic value of medallions is always dependent upon the revenue taxicabs generate, the macroeconomic realities of NYC that sustains current level of ridership, and a sufficient driver pool.
As such, despite the reported demise of medallion value by some estimates to the level of zero, the realities of the taxi market as supported by the 2014 T-PEP data indicate a nominal reduction as opposed to a total collapse of the medallion system. There may be a possible adjustment in medallion price level in the secondary market in the near future.
One could also argue that the competitive bidding that took place during the successive auctions over the last twenty years has caused higher than expected prices on the market, and what is simply happening is a natural adjustment. Corporate medallions are owned mostly by individuals who have enough wealth and assets that they will always pay their loans. So, in theory, with favorable market conditions, there is no bubble. There is a potential for medallion transfer prices to bounce back and continue their growth trajectory just as the prices of real estate in Manhattan have.
The individual medallions, however, are another story. There are only so many years that a medallion driver/owner can take to pay off a loan given revenue generation and income expectations. As such, these medallions are subject to value constraints and limitations.
- First, Uber and other smartphone apps are being used in NYC taxicabs, and do at times benefit yellow taxicabs.
- Second, a smartphone app, during most times of the day, will never be as quick and convenient as putting one’s hand in the air and hailing a taxicab in seconds in Manhattan’s Central Business District.
In sum, the NYC medallion market will survive. Let’s deploy some common sense to the situation:
I. The likely impact that Uber has had on medallion taxicabs includes usage during peak rush hour times and late at night (off-peak hours in remote locations), when one could not hail a taxicab anyway. This does not lead to any revenue loss.
II. One could argue that Uber, with licensed vehicles, has had an impact on replacing Green Boro taxis or illegal liveries and black cars rolling down their windows to pick up passengers during rush hour when most taxicabs are on shift change or occupied. But let’s just summarize the NYC medallion facts:
(1) ridership has declined only slightly (4%);
(2) the taxicab driver pool remains substantial with over 52,000 active drivers as of April 2015, and is still above the all time high I was touting when I left office in 2010;
(3) tips and revenue for drivers are up 5%, as well as the average fare having increased to $14.48;
(4) there are no arm’s length medallion transfers taking place on the market, so the last true value before fear dried up liquidity is $1,200,000 in July 2014;
(5) ridership, tourism, and all other demand variables are solid and will climb over time with more people moving to NYC’s urban environments without owning cars, and population and income growth in medallion service areas still increasing; and
(6) most importantly, medallion owners have been paying their loans and there are no foreclosures!
So, the sky is not falling in NYC, and for the foregoing reasons it is highly likely that the medallion prices will level off and remain high and thrive over time once again. As long as the NYC TLC ensures that a fair and level playing field is in place and that taxicab fares and lease rate caps are appropriate and strong, with all else being equal and while there is cause for some concern, the media reports and hype are just that – exaggerations based on speculation and hyperbole in place of facts.
If certain legislation and other changes being considered are made, the following could lead to further stabilization and recovery of the NYC medallion market:
- A cap on the number of for-hire vehicles;
- Applying wheelchair accessibility requirements equally beyond the yellow taxicab industry;
- Extending the MTA surcharge beyond taxis; and
- Passing laws limiting or eliminating surge pricing.
Investors, lenders, medallion owners, buyers, sellers, and brokers should give advice and make decisions based upon facts, not fear or speculation. I hope the foregoing has helped shed light on this seemingly dark situation. It represents an objective but factual perspective on the changing but thriving taxi/car service industry.
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1. Contributing Author: Brook Taye is a Regulatory and Economic Analyst at the law firm of Windels Marx Lane & Mittendorf, LLP. Brook is responsible for conducting studies on legal and economic settings of the various for-hire industries in the US and around the world for the purpose of advising clients on current market valuation of taxi medallions, changes in the regulatory environments that could affect taxi medallion finance, the introduction of new technologies to the for-hire industry and their impact on current market participants, and to update clients on all new data and information collected and analyzed as part of the various market studies. |
Brook is a PhD. Candidate at École Polytechnique in Paris, France. His PhD. research area focuses on High Growth Entrepreneurial Firms in Africa. Brook has a law degree from University of London at the School of Oriental & African Studies in London, England; European Master in Law and Economics from University of Ghent, Belgium; Master in Economic Analysis of Law and Institutions from Université Paul Cézanne Aix -Marseille III, France; and Master in Law and Economics from University of Bologna, Italy. 5. http://www.nyc.gov/html/tlc/downloads/pdf/testimony_03_05_15.pdf (Last visited March 16, 2015) |
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