Medallion Men

March 11, 2015

New York taxis have been the subject of debate recently with taxi app Hailo announcing that it is ending its experiment in the US. Hailo has cited the intense competition from San Francisco-based Uber and Lyft as its main reason for not breaking into the US market. Indeed, Uber even abandoned its ‘surge pricing’ policy to offer reduced taxi fares in New York to break into the market.

 

Uber’s business model threatens the incumbent ‘stand and hail’ method used by London’s black cabs and New York’s yellow cabs. As a result, Uber has faced opposition across the globe from Australia to South Korea. The New York City Taxi and Limousine Commission (TLC) has however mounted a robust defence by launching its own ‘e-hail’ service and allowing firms like Uber to integrate into it. By bringing the Silicon Valley start-ups into the fold, New York taxis have been protected.

Obviously, the TLC has an interest in protecting its members, but the potential prize is much bigger than the standard $2.50 per mile. There are billions of dollars at stake.

To collect passengers in Manhattan requires the car to have a medallion pinned to its body. This practice was initiated during the Great Depression when people deprived of their livelihood started unofficial minicab services to earn a living. Traditional taxis petitioned the City, went on strike and held protests including setting taxi cabs alight in Times Square. Eventually the City responded and in 1937 the Hass Act was passed issuing 13,595 taxi medallions at a cost of $10 each.

Since then the number of medallions has ebbed and flowed. During the Second World War a few diligent citizens returned their medallions to demonstrate that they would not waste gasoline on non-military activity, and in 2006 the City issued 308 additional medallions mainly for ‘handicap accessible’ taxis. The total number of medallions in circulation currently stands at 13,237.

Meanwhile New York’s population has grown, as has its relative world standing. Medallion costs have risen too. In 2013, two medallions were auctioned for $1.3 million apiece. This increase from $10 to $1.3M in less than 100 years puts New York taxi medallions among the best investments of the 20th century outperforming gold, property and most stocks.

The high cost of medallions puts them out of reach of drivers (‘hacks’) meaning that instead fleet owners and investment companies attend auctions. To obtain the necessary returns, cabs are operated on a near 24/7 basis with multiple hacks per car working in shifts. Now the City is looking to cash in.

Legislation currently under scrutiny would allow the TLC to issue a further 2,000 medallions with a potential one-off revenue of more than $2 billion. There are several obstacles to overcome. The legislation will need to be passed, despite the protests of current medallion owners, and TLC will need to determine how to auction the medallions without significantly lowering the market price.
In the meantime, TLC controls the fares, the auctions and now the e-hail service. Its billion-dollar payday cannot be far away.

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