Tuesday, May 12th, 2009
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.
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