Why can't the city just run smaller vehicles, like minivans or airport shuttles, on less popular routes? Sub-contracting may be cheaper for the city but would make for terrible PR. Since driver salaries are the biggest cost, the only way private companies could make these routes profitable is by doing the very same things Lyft/Uber are criticized for: low wages, no benefits etc.

EDIT: Reading some of the other replies, I suppose making rides on these routes on-demand instead of fixed timetable services may change the economics of less popular routes.