12 December 2011

Why ComfortDelGro Revised Its Taxi Fares

What does an organisation do when the services that it provides cannot cope with demand?

Noting changing trends in the demand for taxi services, in particular, strong population growth, increase in tourist arrivals due in part to the opening of the integrated resorts, opening of more shopping malls, and a more vibrant night life, which have driven up demand for taxi services throughout the day including traditionally off-peak hours and weekends and public holidays, Singapore's largest taxi operator ComfortDelGro revised its taxi fare structure to better match supply with the ever-growing demand for taxi services.

The aim of the revised fare structure is to better meet the increased demand for taxis, according to ComfortDelGro’s Taxi Business CEO Yang Ban Seng; he did not elaborate how this would be achieved, however.

The new fare structure effectively increases taxi fares for many trips, other than trips during periods that were designated peak periods before the fare revision (because either they are no longer peak periods or the peak period surcharge was lowered).

The new fare structure reduces the non-surcharge periods (excluding area surcharges) from 12½ hours to 8½ hours a day.

A market leader in an oligopoly may increase the price of its goods or services in order to increase its revenues.  It will do this if the demand for its goods or services is relatively inelastic so that the increase in price will more than compensate for the decrease in demand (roughly speaking).  If its brand loyalty is weak and if its competitors do not raise the price of their goods or services, its revenue may fall after the price increase.

ComfortDelGro did not say that the revised fares will increase its revenues.  Few companies will admit that they are increasing prices to boost their revenues.  In this case, the higher fares will not accrue to ComfortDelGro unless it raises the rental of its taxis, but its spokeswoman Tammy Tan said that there were no plans to increase rental ("Comfort Raises Basic Cab Fares" TODAY 6 Dec 2011).  Taxi drivers, however, believe that it is only a matter of time before rentals will increase ("Income May Rise But So May Rental, Say Cabbies" The Straits Times 7 Dec 2011).

Until taxi rentals are revised, ComfortDelGro taxi drivers will earn more.  At least, this is what Comfort Taxi Operators' Association and CityCab Operators' Association believe, or hope, will happen.  The fare increase will help mitigate the effects of rising costs, which have held down the net income of their drivers.  There is nothing wrong with seeking to raise the incomes of anyone or any group of people, particularly those who earn less than the national median income.

One risk is that the other taxi operators, who operate 41 per cent of the taxis in Singapore, may not follow suit.  Commuters who are protesting ComfortDelGro's fare increase will then switch to their taxis, if they are given the choice, or may stop taking taxis for now.  This will exacerbate the fall in demand for ComfortDelGro taxis, at least in the near term.  However, most people believe that it is only a matter of time before the remaining taxi operators will revise their fares because there is nothing to be gained by not doing so — commuters will not wait for their taxis when three out of five taxis are ComfortDelGro taxis, even if they can remember which taxi operator offers the best deal.

Moreover, National Taxi Association president Wee Boon Kim said that it was already in talks with other taxi companies and he urged them to adjust their taxi fares as soon as possible.  (National Taxi Association is an association affiliated to National Trades Union Congress.  Its advisers are Mr Seng Han Thong, Mr Ong Ah Heng, Dr Ong Seh Hong and Mr Wee Siew Kim, according to its website.  National Taxi Association president Wee Boon Kim may be the same person as Comfort Taxi Operators' Association president Wee Boon Kim.)

So why did ComfortDelGro raise taxi fares and raise the ire of the commuting public?

Higher fares will dampen demand, at least initially.  If there is overwhelming demand and its fleet of taxis cannot cope, removing the marginal demand may not hurt much, hopefully.

Taxi operators have to meet Quality of Service standards set by Land Transport Authority.  These include the ease of getting a taxi over the telephone, the accident rate, and number of complaints.  Taxi operators are fined if they don't meet the service standards.  ComfortDelGro was fined $20,465 and CityCab (a subsidiary of ComfortDelGro) was fined $6,948 in the first eight months of this year, in both cases for failing to meet the cater rate (i.e., the taxi operator must match at least 90 per cent of all call bookings with taxis).  ComfortDelGro handles 2.4 million calls per month, about 47 per cent more than that in 2007.  This works out to 80,000 calls per day, or 19 per cent of the daily trips logged by its taxis.

The other way of better matching demand with supply is to raise the supply.

Supply may be raised by increasing the number of taxis and the number of taxi drivers.  ComfortDelGro's fleet declined from 15,777 taxis last December to 15,672 taxis in September 2011.  In contrast, the total number of taxis in Singapore increased from 26,073 last December to 26,713 in September 2011.  In other words, ComfortDelGro's competitors increased their taxi fleet from 10,401 to 10,936 over the same period.

Increasing one's taxi fleet is an expensive proposition.  A certificate of entitlement for a taxi costs more than $52,000, and this cost has to be reflected in the taxi rental eventually.

Getting enough taxi drivers should not be difficult.  There are 93,407 individuals holding a taxi driver's vocational licence.  Getting good taxi drivers may be a different matter.

ComfortDelGro's taxis made an average of 421,700 trips a day ("Comfort Raises Basic Cab Fares" TODAY 6 Dec 2011), or 26.9 trips per taxi per day.  The national average was 20.6 trips per day for one-shift taxis and 30.5 trips per day for two-shift taxis for the period January-September 2011.  The national average for all taxis would have been 26.9 trips per taxi per day (i.e., the same as ComfortDelGro's) if the ratio of the number of trips by one-shift taxis to the number of trips by two-shift taxis was 36:64.  Thus if this ratio had been, for example, 30:70 instead, the national average number of trips per day would have been higher than ComfortDelGro's.  (Because ComfortDelGro's taxis account for nearly three-fifths of all taxis in Singapore, its average accounts for three-fifths of the national average, and every positive (or negative) 1.0 percentage point deviation of its average from the national average means a negative (or positive) 1.5 percentage point deviation of its competitors' combined average.  The further ComfortDelGro's average deviates from the national average, the further (by 1½ times) the competitors' combined average will deviate from the national average in the opposite direction.)

In any case, anecdotal evidence (e.g., "Higher Fares, But No Better Service?" TODAY 7 Dec 2011) points to some taxi drivers (whether driving ComfortDelGro or other taxis) who are spoilt for choice and prefer waiting for call bookings, waiting in long queues at the airport, or waiting for peak periods to start, or drivers who seem not interested in maximising their driving time for reasons best known to them (and to the many people who would or could have been their passengers).  Thus the taxi companies have had to introduce a plethora of surcharges to attract their drivers to make supposedly unattractive trips.  ComfortDelGro's latest revision includes extending the City Area surcharge to Sundays and public holidays so as to attract drivers back to the city area where demand is.  As mentioned above, the new fare structure reduces the non-surcharge periods (excluding area surcharges) from 12½ hours to 8½ hours a day.

Perhaps, the objective of ComfortDelGro's fare revision is to encourage its taxi drivers to make more passenger trips per day.  Will it succeed?  Or will some of its drivers, who some passengers say may not be not hungry enough under the present rates, become less hungry and more choosy with the revised rates?

4 comments:

  1. Encourage? Enough carrots. They didn't work. Now the stick...

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  2. A good read.

    "Perhaps, the objective of ComfortDelGro's fare revision is to encourage its taxi drivers to make more passenger trips per day. Will it succeed?"

    One brutal way to do it is to raise taxi rentals. That would make cabbies cruise around more in their shift. Heh. Presumably Comfort would delay that possibility as long as it can as it wants to give the impression that the fare hikes are to benefit its drivers.

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  3. One oft-forgotten fact is that many many taxi drivers are part-timers - who are in it, to 'pass time and yet make some pocket money', the already retired uncles, who are not really 'hungry' and can really afford to cheery-pick.

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