Tuesday, May 12th, 2009

Transit Pricing Reconsidered

This is a follow-up to my posting “Small Cities Should Have Fareless Transit”. Assuming that fareless transit isn’t feasible, or that we are talking about larger cities where it is realistic to generate significant revenue at the farebox, what might be a more rational approach to pricing? It strikes me that the idea of a single flat fare throughout the day, perhaps with a modest rush hour surcharge, is a legacy of the old private streetcar systems. But is this rational in the current day?

First let’s ask ourselves what the goal of our pricing policy would be. To me, there are two basic goals one can pursue: revenue maximization or ridership maximization. I would suggest that maximizing ridership is a better goal. Unlike private transport systems, no one operates public systems to earn a profit. They are operated to provide mobility benefits, and hopefully generate positive externalities like reduced emissions, neighborhood revitalization, congestion relief, etc. You only get the system benefits if there are riders.

Also, transit is basically a fixed cost system. That is, once a city has decided to put a certain level of capacity on the street, the cost is not highly variable depending on the ridership. Adding one more rider to a bus with empty seats has a cost of nearly zero. It is only when you need to expand capacity that you have to worry about incremental cost, and this is conceptually similar to building a new factory. That is, it’s an expansion of the fixed cost base moreso than variable cost.

As with an airline, every seat on a train or bus that goes empty expires worthless. We want to fill those seats up and make use of that capacity. How can we do that? I’d suggest that one way is through a more intelligent pricing policy. To do this, we, like an airline, should do a customer segmentation analysis and look at who rides (or potentially would ride) transit and why, and what the value is to them. Airlines know that business fliers are willing to pay more than leisure fliers, so they price accordingly, and use things like Saturday night stay requirements to help enforce it. Of course, people hate airlines for this. So we’d need to be cautious in our approach.

Two simple segments are commuters and non-commuters. A commute trip is more like a business flight. The demand is inelastic. Also, traditional commute trips to the CBD markets best served by transit often feature pricing characteristics for driving that make transit, even with a significant fare, more attractive.

I’ll use myself as an example. My Chicago residence is 5.5 miles from my Loop office. This takes about 35 minutes door to door by transit, not a great speed to put it mildly. The door to door trip by car is 20-25 minutes. However, the parking garage next to my office charges $29/day to park. Even with monthly parking, the price is significant. This makes a $2.25 base one way fare for transit a bargain. Even if prices went up, I’m unlikely to switch to driving. Also, what If I have a dinner on the near north side afterward? Do I take my car and pay yet again to valet park? Or do I cab back and forth, then drive home? Again transit, even with a taxi ride home after dinner, is a better deal.

The case for the non-commute, off peak trip is much different. I’ll use myself as an example again. Mrs. Urbanophile and I decide to go to dinner at a restaurant a couple miles down the street. We can either a) drive there in five minutes and park for free on the street or b) take a 15-20 minute bus ride at a cost of nearly $9 for two people. Transit isn’t very attractive in that case. Transit gets progressively worse as you add members to your party, as each person has to pay a fare. If you’ve got three or four people, it even might be cheaper to cab it – and faster too.

Clearly the logic is different in each of these cases. Driving to work is not only more expensive – by a lot – than transit, it also introduces constraints and problems. For many non-peak, non-commute trips, there is literally no value lever – price, end-to-end journey time, and quality of experience – that is favorable to transit. It should come as no surprise that there are many city dwellers who use transit for getting to work, but for nothing else. To maximize ridership, however, we need to capture more trips to fill up this fixed cost system that is underutilized during big parts of the day.

One way to make it more convenient to take transit is to reduce off peak fares – by a lot. This could be through outright fare cutting and/or things like letting additional members of your party travel at no charge after the first person pays. (Perhaps cheating could be regulated by only posting back the difference on the return trip when using the same electronic fare medium). This might not get it totally auto competitive, but it might not need to. Get it convenient enough and perhaps families ditch one of their cars – a significant personal savings.

If the lost revenue is material, then perhaps it can be recouped through rush hour surcharges. As this travel is relatively inelastic, ridership is less likely to be suppressed as a result of fare increases. This swap of peak for off peak fares also helps insulate rush hour surcharges as hurting the poor. As the poor are more likely to be transit-dependent, the off-peak fare cuts could more than make up the different on rush hour surcharges.

Rush hour surcharges can also have the added benefit of shifting demand from peak to shoulder periods. Some transit systems are overloaded at peak. Rather than investing huge amounts of money to add new capacity that is only needed during very short windows the day, why not use pricing to smooth out the peaks and save that money? Adding capacity at the peak of the peak is the most costly period at which to do it. Perhaps better to spend that money on opening new routes instead, or something more potentially useful to the community. Some basic, voluntary policy changes, such as businesses agreeing to give flexible work schedules to enable shoulder commuting to workers who prove they ride transit by enrolling in pre-tax payroll deductions for transit, could really smooth the way for this.

19 Comments
Topics: Public Policy, Transportation
Cities: Chicago

19 Responses to “Transit Pricing Reconsidered”

  1. Dan Miller says:

    I think you’re on the right track, but I might focus more on quality of service. If the train/bus comes every 15 minutes, I won’t even think about a schedule–I’ll just go wait for the next one. I think a large part of making transit a good substitute for owning a car is to get people to think of it as simply a never-ending stream from one place to another, rather than something that takes place on a schedule. That way, you get more carless people, or households with only one car for more than one adult; and once that decision is made, it locks them in to transit in a serious way.

  2. The Urbanophile says:

    Dan, thanks for the comment. Are you writing from Indianapolis? IndyGo is not real transit that anyone would truly choose as a mobility solution on a discretionary basis (most choice riders have an outside motivation for the most part I would guess – I only take “opportunistic” rides such as when I see a bus coming when I’m walking somewhere).

    15 minute headways is IMO the maximum you could have and not be tethered to a schedule. 10 minute headways would be more like it. The problem with increasing frequencies, however, is that it is an increase in the fixed cost base as I mentioned.

  3. SpeedBlue47 says:

    I agree with Dan that the only way to make transit financially and “socially” successful is to first improve QoS. Quality of Service, though, could realistically be improved by the transit provider shedding inefficiencies within their fixed cost base, and help control the impact of some variable costs(such as fraud and fuel). One way to do this would be to take drastic steps to retool the bus fleet and the route system. A hub-and-spoke system aligned on several “express” lines that featured smaller, more fuel efficient vehicles running “neighborhood” routes that drop off at the hub every, say, 10 minutes so that passengers can switch to a “express” bus of the more typical style that would head to either a Intermodal Transit Center of some sort, or “around the wheel” to another hub could be a concept.

    Finding a way to improve the passenger experience at a low cost in a way that benefits the transit provider as well would seem like another strong move. Bogota did this with their bus stop “tubes” where the fare is paid before entering the tube – which, coincidentally, is the only place the bus can be boarded. This would provide a comfortable shelter to those waiting, and would allow for rapid ingress/egress for the bus. This improves headways, and therefore quality of service.

    Other small details of the bus experience should be changed:

    - Remove the window tint
    - Move towards vehicles that have better seating and lighting
    - Find some way to provide in-bus entertainment
    - Offer space for vendors at stops
    - Either improve the monthly pass system or create a “frequent rider” program that promotes use to those that don’t need to use transit enough to warrant a monthly pass, but could use it more than they currently do.
    - Allow fares to be prepaid at convenience locations around the city
    - Improve visual branding, and create a truly distinctive look that says Indy and also conveys trust in the cleanliness and safety of the system.
    - Improve the two qualities listed above.

    I could go on for hours. I would blog on it, but my stance is still that if transit is not something that can not at least be self-sustaining financially(not necessarily for-profit), then it is a service that is really not needed. If this is truly a “public good” then community organizations and those other voluntary institutions that provide for the poor need to focus their resources on finding the most equitable and efficient way to provide it. The people in that industry have found ways to help people through the worst crises throughout the life of this Republic, I have no doubt that they can craft a better solution than an elected official with weak incentives.

  4. Anonymous says:

    “if transit is not something that can not at least be self-sustaining financially(not necessarily for-profit), then it is a service that is really not needed.”

    That seems pretty unenlightened. Whether a transit system makes money or not has little to do with the function and value it provides in a community. NYC couldn’t function and probably wouldn’t exist as it is today without its transit system. The measure of its value to NYC isn’t how much money it makes.

  5. Ahow says:

    I’ve had thoughts on this, however, they were more geared toward large cities like Chicago, Toronto, etc. I don’t know that they could apply to Indy.

    First of all, I agree with the assertion that transit should be free. The funds for transit should come from a disincentive for drivers to drive downtown. Urbanophile already mentioned $29 parking in the Chicago Loop. Additionally, you could add a congestion charge for entering the downtown core, as seen in London. In addition to providing a major incentive to ride/disincentive to drive, it would also allow the downtown core to become more dense be removing the awful parking lots that lower the walkability of many downtowns.

    Part of setting this up would be putting in park and rides out away from the downtown core and having reliable, frequent (10-15 minutes) bus/train trips and setting up either a pass or reduced rate for those who live in the downtown core or having the toll be one-way so it only get charged at the time of entrance into the core.

  6. Dan Miller says:

    Washington DC, actually. Our subway system pretty much fulfills this vision–I live car free–or at least it’s close enough for government work; our bus system emphatically does not.

  7. JG says:

    Nice topic to revisit. Your original Fareless Transit analysis was thought provoking, though I find this one to maintain the progressive spirit but also be more realistic towards meeting the goals – as you stated – increased revenue and ridership.

    I found many of the ideas directed toward larger cities, i.e. Chicago. And so I began to think about small and medium sized cities such as Indy who’s suburban developments do not lend themselves well to public transit. I read the FORBES articles recommended in MIDWEST MISC and recalled the piece by Joel Kotkin called “America’s (Sub)urban Future.” His thesis was for the past 60 years Americans have voted with their feet where they want to live and it is overwhelmingly suburbs, and therefore governments should not put money into urban renewal projects. Maybe he’s right, though please read the article. It is the poor quality of analysis one expects from FoxNews. (This isn’t to beat up on conservatives or Republicans – Fox is just terrible journalism even for cable news.) Kotkin, I suspect, has made a career out of being a suburban design expert and so by default must be a cheerleader for suburban design – too bad it took shots based on inuendos at urban areas.

    Kotkin is right for the meantime people will continue to live in suburbs, and those rings will continue to move further and further out. He adds that many business have moved out of old CBD into low density suburban office parks. This hurts public transit’s ability to be efficient, while doing little to ease congestion. Traffic patterns only get more complicated and many now commute from corner of the city to other corner, instead of corners to center.

    My point is public transit might be the missing component to save older American cities. From Kotkin’s analysis and conclusions I assume he is happy to let older cities rot at their core. Maybe transit oriented development strategies are the proposed solution – I realize this not an original thought of mine. However, a FUTURE POST on how to get the middle class to use public transit from the suburbs into a CBD in medium sized cities would be interesting and timely. Letting the CBDs in American cities rot will down the line culturally and economically also hurt suburbs and exurbs.

  8. Alon Levy says:

    First, you should remember that parking is free because zoning regulations require it. Every city has some requirements for free parking for residences and businesses. Kill these rules and you’ll see parking rates go up significantly.

    Second, in large cities, it makes sense to have wireless fare cards that you can use on buses and trains. In Singapore they started putting the card readers on bus stops, so that you can tap at the station and board more quickly. If a ticket inspector asks for proof of payment, you give him your card and he checks and finds that you tapped at a station and are paying for your ride. This has the same advantages as Bogota’s tubes without requiring so much BRT infrastructure.

    Third, for small cities, I think the only developed country that’s figured out how to make transit attractive is Switzerland. The largest first-world urban rail systems are in Tokyo, Osaka, London, and Paris, but their respective countries are very auto-oriented outside these metro areas. Maybe the best choice is to learn from Zurich and Geneva, which maintain high transit use even though they’re very small by the standards of the US or EU.

  9. Anonymous says:

    Several problems with totally free transit.

    First problem riders. Nominal fees discourage the homeless from moving into the bus to take advantage of the climate controls on the bus.

    The problem riders discourage everyone else from the taking mass transit.

    Second there is the issue of how to decide where to put routes and where to eliminate them when budgets get tight.

    If you are collecting fares its a pretty easy to argue that the lines with the most fair box revenues are the most valuable. The transit resources are going to the people who use it the most. Its a check on allocating transit based upon who has the most political pull.

    Lastly, subsidising sprawl. The more you subsidize tranportation, the cheaper you make it to live far away from from work. The fact that highways are subsidized doesn’t mean that transit should be subsidized too, rather it means the subsidies for driving should be elimated too.

    When you do that you make it more likely that people will choose to live in pedestrian and bike friendly communties. Reducing carbon footprint.

    Ed in Sac

  10. JG says:

    ED: Good points. I am curious what our hosts has to say in response.

    These are barriers you mention but not insurmountable ones. My idea addresses both points. Think of the bus system as the public library – everyone has a card and membership requires responsible use.

    1.) A fareless (or better yet off-peak fareless only) system should still require everyone to swipe a cards before boarding. The transit company collects data on ridership and useage to improve routes and timing.

    2.) By swiping cards for both boarding and exit, the data network can identify patrons who are abusing the system. Certainly the threshhold should be high before eliminating or suspending ones riding privleges but it would cut down the loitering on a particular bus or those who jump all day form bus to bus to avoid suspicion. Other measures could be imposed to supplement this approach’s effectiveness. Additionally it could help with prosecuting crimes commited on buses such as pick pocketing and purse snatching.

    3.) ALON mentioned this one above so read his post, but having a card that one does not have to swipe but merely can be read by other means would make this possible and not increase boarding/exiting times. Possibly something similar to bar codes in library books, or security tags at a department store. Wireless and easy – let some “tech guys” figure it out.

    I recognize your concern about “subsidising sprawl” through transit, though consider that many American cities already contain a 15 to 20 mile radius of solid urban and suburban development that is here to stay and needs to be appropriately managed in the future. Transit oriented development might be the key for redeveloping inner ring suburbs into medium to high density areas with connections to other parts of the city.

  11. The Urbanophile says:

    Dan, thanks for the perspectives on the DC bus system. Believe it or not, I’ve never really been to DC in my life. I flew in for a day trip to Reston once, but that hardly counts. I’ve been to pretty much every other big city in America. (I must admit, I’ve only been to the Philly burbs too).

    Speed, I don’t want to get into libertarian style arguments here, but I do think you need to factor in the positive externalities (e.g., increased land values in dense cities like NYC, Chi, and SF) when evaluating the profitability of transit. I think land value taxation is the right way to finance.

    anon 5:24, if you are getting to where pricing is primarily to discourage homeless people from riding, then I think you’ve already lost. The right answer is to deal with the homeless directly, not to try to implement punitive measured aimed at them throughout our public services, especially when that negatively affects the average citizen.

    Again, great comments everybody.

  12. Anonymous says:

    It’s been a few years since I’ve been to DC but I can’t agree with the comments about the bus system. It’s not as nice as the Metro but it runs pretty regularly and gets you from point A to point B without too much hassle.

  13. Anonymous says:

    “First, you should remember that parking is free because zoning regulations require it. Every city has some requirements for free parking for residences and businesses.”

    I don’t think this is right. Zoning might mandate a certain amount of parking but there’s nothing that says that it has to be “free” parking. There’s plenty of people who pay through the nose to get a parking spot as part of their office or residential space in urban areas even when that parking is required by zoning. The requirement for parking as part of an urban development is usually counterproductive. But it’s presence probably has little impact on parking prices.

    From the developer’s perspective, parking is an amenity but it’s also a hassle. It sucks up leasable space and often requires expensive construction (parking decks for example) to provide it. But how many major cities require parking in their downtown core?

  14. Ironwood says:

    Urb:

    Let me focus on one thing you stated in your post: “There are two basic goals one can pursue: revenue maximization or ridership maximization. I would suggest that maximizing ridership is a better goal.”

    I don’t see these as either/or propositions, except in the theoretical sense you learn about in Microeconomics 101, where a demand curve and a cost curve cross at some point.

    I think you can both maximize revenue (net revenue, that is) and ridership at the same time. But to do so, you need to focus on two other variables: (a) time of day of travel and (b) destination. They go hand-in-hand in establishing peak demand.

    To explain, I’ll elaborate on your analogy to airline pricing, which is spot-on. Airlines manipulate their ticket prices for two reasons.

    The first reason, which you point out, is to maximize revenue for the price-inelastic segment of the market – the business traveler. You can spot him/her, because s/he often has no choice but to fly at peak times. Further, those travelers often are travelling to identifiable destinations (in the case of Chicago, for example, NYC, DC, LA, ATL – Orlando? Not so much). So you capture that higher fare by charging more to fly at peak times and also charge a premium if that trip is to a high-demand city-pair.

    The second reason, which you don’t discuss, but which, I would argue, is even more important to the airlines, is to actually DECREASE peak ridership. For airlines, like public transit systems, peak demand drives fleet size. It also drives other capital costs, such as the number of runways needed, size of terminals, etc. – all costs that are ultimately borne by the airlines. The more you can shift ridership to off-peak hours and to less-travelled airports, the more efficiently you use your infrastructure. This allows you to reduce fleet size. It also allows you to reduce your on-the-ground costs, by using excess runway and terminal capacity at, say, the Orange County or Baltimore airports rather than pouring more concrete at LAX or Reagan in DC. Charging peak prices at peak times will incentivize the price-elastic market segment to shift to off-peak travel times and to less congested airports. You have now effectively shifted – but not reduced – demand. Voila. This was the backbone of the Southwest Airlines strategy, and it allowed it to effectively beat the pants off the bigger airlines.

    That’s why I argue that in the real world you don’t have to choose between maximizing [net] revenue or maximizing ridership — except at the peak. The name of the game is to redistribute demand geographically and temporally, and the fare structure is the perfect way to accomplish this.

    Seems to me that a transit authority should charge whatever the market will bear for peak-time commuter service. Likewise, it makes sense to charge what the market will bear for trips to a high-demand destination like a CBD. Number 1, you can. You’re largely dealing with a price-inelastic market segment. And your competition, in terms of alternative commuting modes, is particularly pricey, when you figure in parking charges, commuting times, scarcity of taxis at that hour, etc. (As for lower-income commuters with jobs who have to travel at peak times and who will have more trouble paying peak fares, there are a number of ways you can subsidize them individually or as a group, but for heaven’s sake, don’t subsidize the entire ridership. Why should a junior ad exec get a subsidy, too?)

    Number 2, if you can level off the peaks, you can reduce fleet size and frequency of service during rush hours, thus reducing both capital/fixed AND variable costs, plus achieving other off-balance sheet type costs, such as overall traffic congestion (reduced air pollution through idling time, etc., etc.).

    As for-off-peak use mass transit, you might as well give it away for free, for all the reasons you previously discussed. Given the other factors at work (convenience, predictability, possibility of cheaper parking at a non-CBD destination, possibly shorter travel time due to travelling at non-rush hour, etc.), the competitive advantages of alternatives to mass transit are all over the place, and saving a buck or so isn’t going to be the deciding factor for the typical traveler.

    Cheers,

    Ironwood

  15. Ironwood says:

    Urb:

    Cheesh. Just re-read your original post — last para — and I see that you did, in fact, touch on the basic point I was making in my comment. Only difference between your observation and mine is that yours seems to have been a bit of an after-thought, while mine is actually the driving factor. We’d need a good spreadsheet to see whose emphasis is more accurate, I guess. Maybe another reader can weigh in on this?

  16. Alon Levy says:

    Ironwood: I don’t think the airline analogy is quite right. Leisure travelers can fly at off-peak times; commuters can’t. The bulk of the ridership of every transit system consists of commuters, who can’t change the time they ride without changing their working hours. At most, differential pricing can slightly shift demand to the shoulders, when car traffic is less congested, making cars or taxis a viable alternative for transit to compete with.

  17. Ironwood says:

    Alon:

    I largely agree with your point that the majority of rush-hour trips are made by workers with little flexibility in their schedules. In fact, that’s my point. That’s what makes this a price-inelastic market segment, one that’s ripe for the pickin’, in terms of higher fares.

    But, while it may be a majority, it’s not the vast majority. Example: I choose to get up at a reasonable hour, have a reasonable cup of coffee and catch the 156 in Chicago at about 7:45 — peak time. The buses are full. SRO. I roll into work between 8:45 and 9:00. If properly incentivized monetarily, I could leave before 7:30, when you always get a seat. Ditto return trip.

    I think the days when working hours are strictly regimented no longer apply to a pretty good segment of commuters, especially professionals. They commute at peak times out of habit, convenience, whatever, but there’s no overriding necessity for them to do so.

    But even if only 10% of rush-hour ridership could time-shift, that would have a huge effect on peak capital capacity requirements. Even five percent.

    Plus, I believe your argument is based more on what the state of affairs is today. A steep fare differential could change the dynamics and actually increase the percentage of work-bound riders who can be flexible. How?

    The larger the surcharge placed on rush-hour commuting, the more pressure will be exerted on employers to experiment with flex-time. This creates a virtuous circle, no? (And I’m contemplating a surcharge of a dollar or two on a one-way rush-hour trip to a CBD — $20/week, $80/month. That’s enough to get some employees and employers thinking.)

    Best,

    Iron

  18. The Urbanophile says:

    Ironwood, I agree completely with you on the price elasticity of demand for commute trips. This was a centerpiece of my prize-winning CTA plan to get to one billion rides. I’m not sure I would phrase it as “ripe for the pickin'” however. I think price to value is a better way to look at it.

  19. Alon Levy says:

    Iron: not all kinds of work can use flex-time. Anything involving customer service, or coordinated production, needs strict hours. If you work in retail or at a call center, or if you’re a teacher, or if you work at a factory, then you can’t be on flex-time.

    The problem with the large fare hikes you’re contemplating is that not everyone is your idealized worker, who works regular hours but can get up an hour earlier and who has no access to mechanized transportation other than rapid transit. In fact, most people aren’t. In New York, when subway fares kept rising in the 1970s and 80s, ridership first fell and then stayed low, even as the quality of service was increasing. People just chose not to take the subway – they took taxis or drove if they could afford it. And although parking downtown is hard, you can do it – even in Manhattan, if you know a neighborhood well enough, you’ll know where to find free parking there.

The Urban State of Mind: Meditations on the City is the first Urbanophile e-book, featuring provocative essays on the key issues facing our cities, including innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism. Included are 28 carefully curated essays out of nearly 1,200 posts in the first seven years of the Urbanophile, plus 9 original pieces. It's great for anyone who cares about our cities.

Telestrian Data Terminal

about

A production of the Urbanophile, Telestrian is the fastest, easiest, and best way to access public data about cities and regions, with totally unique features like the ability to create thematic maps with no technical knowledge and easy to use place to place migration data. It's a great way to support the Urbanophile, but more importantly it can save you tons of time and deliver huge value and capabilities to you and your organization.

Try It For 30 Days Free!

About the Urbanophile

about

Aaron M. Renn is an opinion-leading urban analyst, consultant, speaker, and writer on a mission to help America’s cities thrive and find sustainable success in the 21st century.

Full Bio

Contact

Please email before connecting with me on LinkedIn if we don't already know each other.

 

Copyright © 2006-2014 Urbanophile, LLC, All Rights Reserved - Copyright Information