Are Taxi Medallions Obsolete?
BY GARY ROTH | With the emergence of e-hail apps like Uber and the arrival of green boro taxis, the past three years have been a time of historic change for New York City’s taxi industry. The new competitors to New York’s iconic yellow cabs have put pressure on the medallion system, to the loud protest of medallion owners. The City of New York must decide whether to move forward to embrace these changes or attempt to prop up an aging stagnant system.
The medallion system was set up in the Great Depression to both stabilize driver’s wages and reduce traffic. It worked well for many years, but recently became laden with unintended consequences that work counter to the public good.
The initial concept of the medallion as a protection for the working man morphed into an investment and retirement account for a fortunate few. With the supply constrained by government fiat, the price of the taxicab medallion rose above $1 million, far in excess of what was envisioned and in fact, a barrier for working-class taxi drivers who wanted to get a piece of ownership in the industry.
The medallion owners profited handsomely from this government-granted monopoly, deriving phenomenal unearned riches. Instead of working to improve their industry, medallion owners hired government lobbyists and donated to political campaigns to block change while simultaneously pleading poverty. The recent decline in the medallion price begs the question, are taxi medallions obsolete?
In 1937, medallions were handed out for free to all individuals then operating as taxicab drivers to prevent a further increase of the 30,000-strong fleet. As taxis flooded into the city during the Great Depression, their presence alone caused congestion as they jostled for fares. The medallion limited the number of taxis roaming the avenues. Regulations encouraged passengers to hop in the first taxi that stopped, rather than inspecting and negotiating with every driver. Standard pricing (taximeter) and quality control (frequent taxi inspections) created a world-renowned brand — the New York City yellow taxicab.
These regulations both protected passengers from being overcharged and propped up driver’s income. The New York City medallion taxi became wildly popular and complete over 500,000 trips per day. Unfortunately, two factors served to roil the medallion taxi industry: financial engineering and technological progress.
The financial engineering led to a taxi medallion price bubble. As recently as 2011, Andrew Murstein, President of Medallion Financial (stock ticker: TAXI) referred to New York City medallions as “a safe asset” and is quoted in Bloomberg Business as saying, “These are little cash cows, constantly taking in fares and spitting out money to the owners.”
It was commonly believed that as there is no depreciation in the asset, as if an owner defaulted you could simply repossess by popping the medallion off the hood of the taxicab and selling it to someone else. This combined with new entrants to the industry buying huge numbers of medallions at the New York City Taxi and Limousine Commission auctions led to a meteoric rise in their price from $300,000 in 2004 to $1,250,000 in 2013. As owners became richer, medallions became a financial burden to the drivers, pushing the purchase price out of range and increasing the cost to rent medallions.
Recently, smartphone applications offered a new way to hail a taxi. The traditional method of matching drivers and passengers remains unchanged since the dawn of time. Drivers “cruise” their taxicabs in locations they believe passengers are waiting. Passengers wave their arms or shout in an attempt to attract their attention.
In New York City, the taxi medallion conferred permission for drivers to pick up passengers in this fashion. Some areas have too many empty taxis, while other areas have too many passengers waiting. Both drivers and passengers are constantly hunting and fighting in an attempt to connect. The density of Manhattan allows this system to work, but it is stressful for both drivers and customers due to uncertain waiting times between matches. It is also wasteful, forcing drivers to clog the streets and pollute the air as they search for a passenger.
The installation of Global Positioning System (GPS) equipment in taxis combined with the ubiquity of smartphones upended this ancient dance. Now it is possible for a match to be made electronically by an on-demand car service. Drivers simply wait for an electronic request from a passenger.
There are many companies providing an electronic marketplace for matching drivers and passenger. Uber is the most popular provider in New York City, but many other competitors such as Lyft, Sidecar, Curb and Gett are fighting in this space. Matching drivers and passengers electronically reduces and possibly eliminates wasteful cruising and lowers the blood pressure for both parties.
As the matchmakers brand is at risk during every trip, they have an incentive to remove drivers with poor quality vehicles or sloppy driving habits. As each trip is logged, anonymous overcharging by unscrupulous taxi drivers is eliminated. While the use of variable (surge) pricing can be problematic, at least there is a record of the trip to allow resolution by the matchmaker or the city government.
The pricing model to drive a medallion taxi or for an on-demand car service also varies dramatically. If a driver does not own a medallion, he or she is able to rent one from a current owner at the rate of $1,000 per week for the medallion only, and bolt it onto their car.
Alternatively, a driver can rent a taxicab from a garage for about $120 per day for a 12-hour shift. At the beginning of every shift, the driver is collecting fares to pay the medallion owner. Alternatively, under the on-demand car model, it is simply a fee split, generally about 80 percent for the driver and 20 percent for the matchmaker. This allows greater flexibility for drivers, and a potential return of the part-time driver.
As more and more passengers modernize their car hailing habits, the old method of standing on the street corner and waiting for a taxi show up is bound to change. The street hail may be reduced to high volume locations such as train stations, airports and Midtown Manhattan. This may lead to a further decline in the value of the medallion, as demand for the traditional street hail is reduced. Drivers are expected to benefit through an increase in their income and a more flexible working experience.
Our city should be pleased that their regulatory burden is reduced as many of their tasks are successfully privatized. The Yellow Medallion Taxicab brand is still strong. It is possible they, too, can modernize — but medallion owners constant attempts to block change including lawsuits against the Taxi of Tomorrow, green boro taxis, hybrid taxis and Uber, just to name a few, do not bode well for the future of the New York City taxi medallion industry.
One thing is certain — the New York City government should not provide a bailout to the medallion owners, as their greed and unrestrained borrowing led to their current credit crunch. We should welcome the era of improved taxi service brought on by American innovation.
Gary Roth was Senior Policy Analyst at the Taxi and Limousine Commission where he worked from 2006-11, and is an Adjunct Assistant Professor of Urban Planning at Columbia University in the Graduate School of Architecture, Planning and Preservation.