CHICAGO TRANSIT AUTHORITY GROUPON DEAL

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THE CHICAGO GOSSIP

Story By: Kathy Posner

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Groupon

In November of 2009, I wrote a blog about the financial woes of the Chicago Transit Authority (CTA) At the time I quoted Jon Hilkevitch of the Chicago Tribune, who had written, “The average fare collected by the CTA is 98 cents, according to the transit agency. It takes into account full-priced fares, reduced fares, passes and free rides. The cost for the CTA to provide service averages $7 per ride, including some capital costs such as maintenance and some system improvements. The cost per ride jumps to $9.90 if major projects such as the ongoing Brown Line capacity-expansion project or the planned extensions of the Red, Orange and Yellow/Skokie Swift Lines are factored in, CTA officials said.”

Since costs have not gone down for the CTA in the past three years, I feel safe in using those per ride numbers in my upcoming analysis of the CTA’S latest deal with Groupon. Followers of this blog are well aware that for years, since Groupon started doing business, I have mathematically proven how the company’s business model cannot sustain itself and the company will eventually implode. There are too many postings to put the links here. But in the case of the recent CTA deal, Groupon won and the taxpayers who support the CTA got screwed!

The Deal:

(1) CTA sold Groupon 250,000 three-day passes for $7.53 or a total of $1,882,500. The normal price of a three-day pass is $14.

(2) If the CTA had sold those passes for the full price of $14, the agency would have received $3,500,000.

(3) So at first look, the CTA had gross revenues of $1,617,500 LESS than they would have received if the passes had been sold at full price. Is this starting to sound like the debacle of selling off Chicago’s parking meters?

The CTA said they were happy to do the deal because the three day passes don’t sell well. Of course the CTA does not sell a lot of three day passes because CHICAGOANS—the people who support the CTA through their tax money- would buy monthly passes if they were using buses. Three day passes would be used by tourists coming for a short visit. There are fewer tourists than there are locals using the buses, so it makes sense that few three day passes are sold.

It is financially better for the CTA if tourists do not buy three day passes because then the agency would receive full fare for every ride they take instead of a discounted fare.

No Deal

Let’s pretend there had been no deal and those 250,000 tourists had to pay full fare.

(1) If they each took four bus trips a day for three days, that would be 12 trips at full fare of a cost of $30.00 per person.

(2) 250,000 people paying $30.00 each would equal a gross revenue of $7,500,000 for the CTA.

(3) But the CTA accepted $1,882,500 which results in a net loss of potential gross revenue of $5,617,500!

If we take this one step further and accept that the CTA said that each ride actually costs the agency $9.90 per ride once all expansion costs and upgrades are figured in, the loss numbers get really scary! Because the CTA has sold those passes at the equivalent of $.67 if they are used for four trips a day for three days, the loss is $9.23 per ride.

Simple math: 250,000 people taking 12 rides during a 3 day period is 3,000,000 trips at a negative revenue of $9.23 per ride costs the CTA $27,690,000.

Groupon will be selling those passes for $9.00 each or gross revenue of a positive $367,500.

Deal or no Deal?

(Frank Sennet's Book on the history of Groupon is fabulous! It is called, "Groupon's Biggest Deal Ever" and can be bought at Amazon.com)


Read More From Planet Posner HERE......