NZ Initiative's Mark Maciolek says making it easier for new entrants could be the best way of ensuring more affordable taxi fares

By Mark Maciolek*

Consumer NZ chief executive Sue Chetwin in Price of fuel falls, but not NZ cab fares said fuel prices should be lower and taxis should try harder to lower their fares.

Cab fares are high but it is not a fuel price thing, it’s far more than that. A simple analysis of the cost incurred shows why.

Fuel prices have fallen to five and a half year lows. It is easy for us to point the finger at hardworking cab drivers; arguing that our pockets should be left fatter after we exit.

However, New Zealand taxi riders’ pockets won’t be fatter according to the New Zealand Taxi Federation - and for a good reason. Let’s put it into perspective.

A litre of regular fuel has now fallen to $1.80 down from about $2 last year.

If petrol prices remain at this level, then will cabbies be making significant profit this year? Well, not really.

The standard cab, a Ford Falcon, guzzles 9.9 litres per 100km. It would cost the cabbie around $2 in fuel to do a 10km trip if pump prices were $2 per litre. If prices fell by 50% to $1 per litre, which they haven’t, that same trip would cost $1. A whopping $1 saving per 10km or 10 cents per km.

My last cab ride in a Ford Falcon was 2.3km and I paid around $18. If fuel prices were $1 per litre and not $2 it would represent a $0.23 saving, or 1.3% of the fare.

Using analogous logic a Toyota Prius, the world’s most prolific hybrid vehicle, and popular in the taxi world,consumes on average 4.7 litres per 100km. If prices at the bowser were $2 per litre, a 10km trip would cost $0.94 in fuel. If prices fell by 50% that same trip would cost $0.47 for the Prius driver. A saving of $0.47 or 4.7 cents per km.

The last Toyota Prius taxi I took from Wellington International Airport cost me $40 for a 7.2km journey. If fuel prices were $1 per litre and not $2, the fuel saving would equate to $0.34, or less than one percent off the total fare.

Members of the New Zealand Taxi Federation have invested significantly in hybrid vehicles, successfully mitigating the fuel cost input of the business. Fuel prices are largely irrelevant and they would also be largely irrelevant for the Falcons too.

Therefore, arguing for cheaper cab rides because the driver forks out a little less at the pump is a bit silly. It is like saying if cheese prices fall, a cheese burger should cost a lot less.

If the price of fuel is not to blame for keeping pockets thin, what is? New Zealand cab fares are often regarded as high on international rankings, but this research generally depicts city to airport route costings. Auckland city is very far from the airport, and New Zealand’s airports often charge taxis for the freedom of picking up passengers at the airport. Not to mention, taxicab regulations do not make it easy for new entrants.

Running a new cab service requires huge operating expenditure on establishing and maintaining 24-hour dispatch. Private hire regulations, like those used by Uber, require pre-specified fares and do not allow metering.

In small markets, these kinds of fixed costs limit competition.

Making it easier for new entrants could be the best way of ensuring more affordable fares over the longer term.

If New Zealanders really care about cab fares, we should make sure that our regulations encourage innovation and entrepreneurial spirit of companies like Uber.

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* Mark Maciolek is an intern at public policy think tank, The New Zealand Initiative. Mark is from Perth and is undertaking his internship through the Mannkal Economic Education Foundation. The NZ Initiative provides a weekly column for interest.co.nz. This is the first one for 2015.