Uber Doesn’t Have to Follow Pan Am’s Tragic Arc
(Bloomberg Opinion) -- Pan Am was the world’s first commercial airline, reducing journeys that once took weeks to days or even hours. Though initially priced to serve only the rich and famous, the airline drove technological advancements that brought costs down to the point that almost anyone could afford a flight. It forever changed the way we move.
At its height, Pan Am’s empire stretched to six continents. Yet by the end of the century, the company that had pioneered and dominated an industry was bankrupt, dispossessing over 100,000 employees of their pensions and erasing billions of dollars of shareholder value.
Uber has mirrored Pan Am’s meteoric rise, driving innovations that have reduced the cost of hailing a ride to the point that almost anyone can afford it, at times even cheaper than public transportation. Today, the company directly employs more than 12,000 people and connects two million drivers who work on its platform across six continents. Uber, too, has transformed the way we move.
Both companies grew thanks to charismatic founding CEOs who charmed and bullied their ways past regulators and boards of directors. They raised record-setting amounts of money based on stupendous early growth, despite persistent losses. As Uber prepares for its IPO in 2019, it is at risk of following Pan Am’s fall as well as its rise.
Those who believe in Uber’s eventual triumph operate on an assumption that transportation is a winner-take-all (most) market. In theory, there’s a virtuous cycle: More demand for Uber means Uber is able to attract more drivers, which makes its service better, which attracts more riders.
The trouble with this "network effect" hypothesis is that it does not hold for transportation companies in the same way as it does for digital companies. Once you’ve joined LinkedIn, you continue to use it because your professional contacts are there, and new networks won’t provide the same connections. But once you are used to the idea of hailing a ride or catching a flight, there are few reasons to stick to the same company every time. If I am trying to commute from Brooklyn to Manhattan by shared black car and Via will do it for $3 compared with $6 for an Uber Pool, I don’t care that Uber was the first ride-hailing app on my phone.
This dynamic already played out in air travel. Pan Am spent the first few decades of its existence singlehandedly building the international aviation infrastructure, “bringing in construction crews by burro and canoe to hack out landing strips from jungles,” as one journalist wrote in 2014. It reaped the profits of being a first mover for a time. But then Pan Am was never able to compete with upstart carriers like American, United and Delta, which targeted strategic routes that complemented their domestic networks, flew newer planes, and were able to invest in computer reservation systems rather than having to hack landing strips out of jungles.
Uber has raised an astounding $17.3 billion to date and spent $10.7 billion of that; Bloomberg noted this year that “few companies in history have grown so fast or lost so much money in such a short period of time.” Pan Am has the dubious honor of being one other such company.
Throughout the 20th century, it set records for how much financing it was able to secure, despite racking up some of the largest losses of any public company. In 1966, justifying the largest commercial deal in history when Pan Am ordered 25 Boeing 747s, CEO Juan Trippe asserted that air travel would continue its breathtaking growth of 15 percent a year for the foreseeable future. Four years later, air travel was growing at a mere 1.5 percent per year, and it never returned to its early growth rates.
Uber has raised its billions while projecting that the ride-hailing market will reach a total size of $1 trillion, 40 times today’s numbers. Yet recent reports suggest that this internal forecast has already been revised down to $100 billion to $150 billion, as studies estimate that ride hailing will hit a growth ceiling. It’s possible the ride-sharing market will never again grow as fast as in the past decade; if it does, there is no guarantee that Uber will own the majority of it.
There are some signs of Uber’s path diverging from its doomed predecessor. Pan Am famously had no idea how much money it was spending (securities laws were more relaxed in those days). After three years without a CFO, Uber named one in August, which many hope will lead to greater financial discipline. Unlike Pan Am, whose board allowed the founding CEO to remain for 40 years despite multiple warning signs, Uber’s board has installed a new CEO with a promising track record.
But will this be enough? Uber must earn $1.7 billion in annual net income just to get a 10 percent return on equity. In 2017, the company lost $4.5 billion on gross earnings of $7.4 billion (while top-line revenue is $37 billion, most of that goes to drivers).
Although Uber is far from profitable, its $2 billion bond offering in October was oversubscribed. Plenty of investors still want in. So buyers beware: When the company is going public next year, anyone considering a stake should take a hard look at Uber and ask how it will avoid Pan Am’s fate.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Gillian Morris is the chief executive officer and founder of Hitlist, an app for finding cheap flights.
Christina Heggie is an investment principal at JetBlue Technology Ventures and invests in early-stage travel startups.
©2018 Bloomberg L.P.