Tips on determining fares and hiring rates
Introduction
These tips have been prepared to help taxi-cab operators (operators) in the Regional Zone and Country Zone to determine their own maximum fares or hiring rates.
The information contained in this note is current as at 30 June 2014 and is provided for general information and guidance only and should not be relied upon as legal or financial advice.
What issues should I consider in determining my fares?
1. Cost recovery
In setting your own maximum fares, you will need to consider how you are best able to recover your costs, including allowance for your own labour time and a return on capital invested. These costs should be the expected future costs rather than historically incurred costs, although in practice, the historically incurred costs can provide a good guide to future costs.
There are two broad types of costs to consider; namely variable costs and fixed costs.
(a) Variable costs
These are the costs that are incurred for operating a taxi for each shift. The key costs include:
· Fuel,
· Maintenance and repairs; and
· Administrative costs specifically related to a shift.
It will only make economic sense for a taxi to be made available for a shift if the revenue that can be obtained by the operator at least covers the costs incurred by that shift. If the taxi is driven by an driver, the revenue will need to at least cover the driver’s share of the fare box in addition to the above costs. If the owner-operator is driving the taxi, the revenue should cover the opportunity costs of his or her labour in addition to the above costs.
How do I recover the variable costs?
To calculate how the variable costs are recovered from fares, you should consider whether these costs should be recovered per kilometer, per trip, per minute or a combination.
· Per trip (i.e. flagfall charge): administration costs and a small proportion of other costs will depend on the number of trips, and might be best recovered from a per trip charge.
· Per kilometer charge: fuel costs and most maintenance charges will generally result from the number of kilometers travelled and might be best recovered from this type of charge.
· Per minute charge: a ‘waiting charge’ could account for a lower proportional share of the fuel and maintenance costs when stationary or going less than X km/hr.
(b) Fixed costs
Fixed costs are the costs that are incurred regardless of whether a taxi operates a shift or not. These are usually determined on an annual basis and may include:
· The annual licence fee, assignment fee or required return on a licence owned by the operator;
· The annualised cost of the taxi (annualised capital including deprecation and rate of return or lease cost);
· An NSP’s affiliation fees;
· Insurance; and
· A share per taxi of fixed overhead office and depot costs as applicable.
You also should also aim to recover these costs from taxi fares to make it worthwhile to continue in business.
How should I recover the fixed costs?
There is a range of ways that the fixed costs might be recovered from taxi fares, but some are more economically efficient than others. A key consideration is the preferences of customers as this will affect customer demand and therefore the ability to generate sufficient revenue to recover both the variable costs and a share of the fixed costs for particular shifts. This is discussed further below.
2. Customer demand
Customer demand will determine your ability to recover both variable and fixed costs. The inability to recover variable costs from available demand means that it is not economical to operate a taxi in a shift. However, the variable costs are relatively small compared to the fixed costs that must be recovered over all shifts. That means that customer demand considerations are important in deciding how fares should be structured to recover fixed costs.
A common way to recover fixed costs is to add these as an equal average amount to the variable cost components such as the average of the fixed costs per trip, per kilometer or per minute. A more economically efficient way is to allocate these costs according to the relative responsiveness of customer demand to increased prices. This means that more of the fixed cost is added to the variable costs for trips or times that are least responsive to price (i.e. have more inelastic demand), such as special events or times of the week when there is higher demand for taxis.
Having allocated and unitised the expected variable and fixed costs, the allowance for driver payments or the opportunity costs of labour in the fare can be made simply by escalating the unitised costs by a factor to reflect the share of the fare box. Based on a 55% farebox split to an independent driver this factor is equal to 1/(1-0.55) = 2.22. An operator-driver might settle on a different proportion or allow for his or her opportunity costs of labour directly in variable costs.
Another factor to consider in your choice of cost recovery method is how competing operators are likely to respond in their pricing and market entry decisions.
3. Use of the former regulated fare rates
A simpler alternative to setting fares and hiring rates based on the cost and customer demand framework detailed above, is to use the former government regulated fare rates for country and regional taxis as a base.
These fares might be adjusted upward or downward to reflect:
· Differences in the cost of particular components of these fares between operators in different parts of the State, such as fuel costs; or
· Changes in particular costs over time such as the price of fuel;[1] or
· Changes in costs overall including the driver payment as measured by the change in the consumer price index (CPI) multiplied by the fare.
· Varying demand conditions. For example if your trips are mainly of a very short distance, you could increase the flagfall component of the charge and lower the per kilometre charge in order to improve cost recovery from these trips, while ensuring that you obtain more high kilometre trips.
For standard or regular trips (for example, between the centres of two towns) you might decide to charge a fixed fare instead.
In adjusting fare rates, you will also need to consider the impact on customer demand as well as how competing operators are likely to respond in their pricing and market entry d
2
Taxi Services Commission
Level 23, 80 Collins Street, Melbourne VIC 3000
GPO Box 1716, Melbourne VIC 3001 Phone: 1800 638 802 (toll-free) www.taxi.vic.gov.au
July 2014
DTPLI7670_S104_07/14
[1] In either case this difference or change can be determined as the existing fare times the share of the input cost (e.g. fuel) in the fare times the difference or change in the price of the input times 2.22.