Fleet Costs, Key To Car Rental Rates, Lower Than Expected

Car rental companies' fleet costs, used by suppliers in recent years to justify rising rental rates, are leveling off amid rental firms' attempts to diversify their fleets and keep costs down, company representatives and industry analysts said.

Avis Budget Group last month cited lower-than-expected fleet costs in an expected fourth-quarter earnings statement. "Once we saw several years back that the fleet costs and the manufacturers were changing their position so dramatically, we immediately went into the mode of, how do we make things better for the organization?" said Bob Lambert, senior vice president of commercial sales for Avis Budget Group. "Over the past year or so, our fleet guys have done an incredible job to manage our fleet costs accordingly."

The findings from Avis Budget are part of a larger trend in the industry, analysts said. "It certainly has flattened out," said Neil Abrams, president of Abrams Consulting. "Domestic manufacturers realized that they do need the rental companies still. Retail sales have been softer than anticipated. They still have the cars, though. They have to get these cars out of the factory and one of the ways they do that is by creating incentives to the big fleets."

"That's a recent development," said David Balfour, director of advisory services for American Express Business Travel, adding that fleet costs represent 40 percent to 50 percent of a car rental transaction.

"Everybody for the past three years has been crying that the fleet costs are going to be astronomical," said Dave Kilduff, managing director of ground transportation for Carlson Wagonlit Travel's CWT Solutions Group. "Last year, Detroit was saying, 'Hey, we're going to be really tough on you,' and they ended up not being as tough."

Rental firms also are trying to cut costs by diversifying their mix of manufacturers.

"The more they're able to diversify fleet, the better their fleet costs are able to improve," said Rose Stratford, senior vice president of industry relations and GDS for BCD Travel. "In the past, you would pretty much see GM and Ford, but now you go into a rental car company and you're seeing foreign cars, which is very new to them."

Added Abrams: "Rental companies are managing their fleets closer, running tighter fleets so they can keep up demand for fleet they do have. They are buying smaller and less expensive cars, which is what customers want. You see more foreign brands in rental fleets. The bad news is, they're more expensive."

Car rental companies also have been using in their fleets more risk cars—those purchased with the option of reselling them, not returning them to the manufacturer. Amex's Balfour said, "As the car rental companies dig into the risk car area, they've been relatively effective at procuring fleets and securing that fleet at a better price."

ehunter@btnonline.com