Car Rates On The Rise In Europe As Fleet Costs Climb
<B>Car Rates On The Rise In Europe As Fleet Costs Climb</B>
By Lynn Woods
Car rental rates in Europe are continuing to go up into the double digits as the industry struggles to contain higher fleet costs. "The consensus seems to be that corporate rates will rise on a level of 10 percent to 15 percent in the major markets," said Michael Kern, COO of Paris-based Europcar International. One small comfort: Cost increases are expected to be "somewhat neutralized by the much stronger U.S. dollar, which today buys approximately 10 percent to 15 percent more in European countries than it did just one year ago."
The rate hikes seem to be sticking, since nobody can afford not to raise their prices, executives said. "In the past, rates had been held artificially low by one or two suppliers in the major markets and, as a result, the other car rental companies matched those rate levels to retain their market share," Kern said. "Over the past 12 to 18 months, reality has set in and, as a result, rates have increased significantly, but only now begin to reflect the actual cost structure. The times when certain suppliers have been able to 'buy' market share simply by dropping rates seem to be over."
This year's rate increases come on the heels of previous steep hikes. For example, last year Avis Europe, a separately owned company from Avis Rent A Car with 112 locations in Europe, the Mideast and Asia, increased rates in Germany by an astounding 100 percent. However, that amount was exceptional: Overall rates at the company throughout Europe were up a much more modest 7 percent to 12 percent.
Sixt AG, a leading player in Germany, based in Pullach, Germany, raised rates by 10 percent. Budget Rent a Car (whose money-losing woes on the continent were partially due to a soured relationship with former franchisee Sixt) reported a 10 percent rate increase in Germany, 11 percent increase in France, 25 percent to 35 percent increase in Austria, where it has the largest share of the market, and 8 percent increase in the United Kingdom, where competition from regional players particularly is intense.
Rate increases aren't the only challenge confronting corporate buyers preparing to renegotiate their contracts.
"Since the mid-'90s, all the major car rental companies have concentrated on reducing internal costs to counter higher fleet costs," said Jack Frazee, president and COO at Budget Rent A Car International. "With cost efficiencies virtually maximized, higher fleet holding costs are now being reflected by increased rates in the business sector. Corporate customers have seen costs become unbundled, with such costs as delivery and collection now separated out."
Previously included in the negotiated rate, delivery and pickup of cars by Budget now each carry a £10 ($14) to £30 ($42) fee, depending on distance. Budget also has passed on its increased fueling expenses to the customer in the form of higher refueling service charges, Frazee said.
Besides the new fees, car rental companies also are seeking to recoup their costs by implementing mileage caps in markets where they previously offered unlimited mileage, according to Roger Evans, Europcar director of sales in North America.
In addition, availability of cars and locations is a bit tighter at some firms. The higher prices charged by the auto manufacturers to the rental firms for cars purchased under their buyback plans--which constitute the vast majority of rental car fleets--have caused some rental companies to reduce the size of their fleets and close locations.
Sixt, for example, is closing approximately 20 outlets in Germany to cope with a predicted 10 percent decline in sales and earnings this year. The firm also is buying fewer cars this year--100,000 vehicles, compared with 107,000 last year and 126,000 in 1999.
"The continued weak state of the used-car market will cause a further increase in fleet management costs for rental companies," said a Sixt executive, adding that the company had shifted its strategy from gaining market share to improving profitability, partly through the introduction of new products, including e-Sixt, a Web travel management tool enabling corporate customers to book rental cars, leased vehicles, airline flights and hotels. He predicted that "the changes in the market will lead to a significant decrease in the numbers of operators"--of which Sixt itself has been a force, with its acquisition last year of Kenning Rental Group in the United Kingdom.
A slowdown in the economy also is affecting the industry. "We see good growth in the core markets, though we do not see it at the same level as last year because of uncertainties in the short term about European economies," said Avis Europe CEO Mark McCafferty in a recent speech.
At National Car Rental--which, thanks to its acquisition of EuroDollar in 1997, became the U.K. market leader--"inventory restrictions" are expected in the future, although executives at ANC Rental Group, which owns National and Alamo Rent-A-Car, said the leisure segment would be most affected. National also has increased leisure fares between 15 percent to 20 percent, compared with an across-the-board increase of only 7 percent for business rentals.
National is the only major supplier in Europe to offer a single standard rate throughout the region. Competitors said they have rejected a single rate--despite requests from some corporate buyers--because costs and demand vary widely between different markets. However, the euro is causing some convergence in prices, especially in countries with shared borders. "Belgium and Luxembourg, which have a one-to-one currency exchange rate, have very similar prices for most products," Evans said. "The process is accelerating as transparency has occurred."
Five years ago, it was common practice for the car rental companies to resell their used cars to the retail market. "The car rental companies could sell cars for more than they bought them," Evans said. However, because this undermined demand for new vehicles, "the manufacturers decided it didn't make sense, and they were under pressure from their dealers to realign prices."
The auto makers subsequently reduced new car prices by 20 percent to 25 percent, and the residual value of the rental companies' fleets crashed. In the United Kingdom, the rental companies' problems were intensified by a cut-throat competitive climate resulting from rate cutting brought about, in part, by the buying up of regional and local operators by Sixt and National.
Today, the ubiquity of manufacturer buyback programs, enabling the auto companies to regain control of the supply and repurchase of rental vehicles, has caused both a tightening of supply and higher costs. Some car rental companies determined that they couldn't raise rates high enough to recoup those costs and decided to cut back by closing locations.
While car rental in Europe has emulated the U.S. industry, as companies introduce express rental services and Web booking, there are some key differences. For example, because the European car rental industry is far smaller--Evans estimated that the volume of car rental per capita is one-quarter of that stateside--it lacks the economies of scale of the U.S. industry. Infrastructure also is less developed: at Paris Charles De Gaulle airport, for example, car rental takes up about half of the space dedicated to taxi service.
Despite these constraints, demand is growing. A study cited by Frazee-- Datamonitor's 1999 European Car Rental Report--forecast that the market will grow from $8.5 billion in 1999 to $10.8 billion by the end of 2004.
The United Kingdom is the largest vehicle rental market, with an expected market value share of 20.4 percent by 2004, followed by France and Germany; the three countries will account for nearly 55 percent of the short-term car rental market in Europe by 2004. Italy accounts for the fourth largest share, followed by Spain.
Airline deregulation, which has led to cheaper fares, and spurred a higher volume of passengers, also has helped to boost strong growth in airport rentals, Budget's Frazee said.
Vehicle leasing is another market that is expanding. And while high-speed rail is an increasingly popular alternative, Europcar executives said that train travel is helping the growth of car rentals.
"We see rail companies as partners, not competitors," said Europcar's Kern. "The saturation of the skies in combination with a continuing expansion of high-speed train service will shift some of our customers from airports to train stations, but they will remain our customers at their destination nonetheless."
Europcar has cooperative agreements with German rail group Deutsche Bahn and Spanish rail system RENFE, in addition to maintaining counter space at many U.K. and European train stations.
Europcar, which currently claims it has an overall market share of about 25 percent in the top markets, primarily contracts with multinational accounts within Europe. Along with its rail partnerships, the company sees growth potential in chauffeur-driven service, which it offers in primary cities in the leading markets. The tendency of Europeans to take shorter and more frequent vacations also is expected to spur growth in rentals.
Business travel remains the cornerstone of Europcar's business, with corporate rentals accounting for 65 percent of total business. The company offers express service, either through a frequent traveler card that entitles the holder to a master rental agreement and dedicated phone number, or self-service kiosks. Delivery of cars carries a fee, although Europcar offers free delivery of vehicles to all hotel properties in the Accor hotel chain. In early 2000, Volkswagen bought out Accor's 50 percent ownership share of Europcar; the German car manufacturer maintains an alliance with the hotel company.
Europcar also offers a loyalty program in France and partners with numerous airline frequent flyer programs.
The company uses a soup-to-nuts automated system, incorporating reservations, counter operations and back-office systems, which it claimed was the model for National's Odyssey system, and plans to introduce handheld devices in the return lot in the near future. Europcar also is developing a traffic display to provide customers with real-time information about areas of major congestion at the time of rental.
For its part, Budget, which suffered a $286.6 million loss in its European operations in 2000, has reduced its fleet and headcount, curtailed expenditures and halted expansion of new distribution points, according to Frazee. It has been completing its plan to sell numerous corporate-owned locations to franchisees in France, Germany, Spain and the United Kingdom--although the busiest markets, such as the London, Paris and Nice airports, will remain under corporate ownership. Budget will continue to maintain its corporate operations in Austria and Switzerland, which are profitable.
At the beginning of the year, Budget sold numerous locations in the United Kingdom to franchisee Jaeban U.K. Ltd. and reduced the number of corporate locations to seven. In May, it sold 116 locations to franchisees in France, leaving five corporate locations. When the restructuring is complete, Budget will have a total of 300 locations in the country. It currently has nearly 90 locations in Germany--a slight reduction from last year--which are a mixture of corporate, agency and franchise locations, but more restructuring is planned.
Sixt, which has a U.S. alliance with Dollar Rent A Car and locations in 30 European countries, has put much of its energy into e-commerce. It has developed online rental systems for major accounts using Internet or intranet applications, a travel booking system introduced in the second half of 2000 and leasing management software.
To further service business travelers, who constitute 60 percent of its business, it has frequent travel partnerships with Lufthansa, Hilton and other travel suppliers. Nine out of 10 of Sixt's leasing contracts--a significant growth area--are with corporations.