Procurement professionals are rightly suspicious of travel
supplier mergers and acquisitions. Look no further than the domestic airline
market of recent years for a case study in how consolidation can diminish
corporations' pricing leverage.
With Hertz on Tuesday sealing its acquisition of Dollar Thrifty after a long courtship, conventional wisdom suggests that rental car
companies are poised to regain leverage in corporate negotiations and raise
rates. Yet, that thinking may be unfounded, at least in the short term.
Industry pricing forecasts and at least one analyst suggest that U.S. price
increases in 2013 are unlikely given broader economic variables beyond M&A.
Even with consolidation, rental car suppliers have continued
to compete aggressively for corporate business, said industry veteran and
consultant Neil Abrams. With Dollar Thrifty under Hertz's wing, the combined
company could further heighten competition to the benefit of buyers.
A New Landscape
At first glance, the figures are daunting: Combined, the
four largest U.S. rental car companies—Avis Budget, Enterprise, Hertz and
Dollar Thrifty—last year accounted for about 97 percent of the market at the
top 50 U.S. airports, according to Abrams Consulting Group data. Now that Hertz
has finalized its acquisition of Dollar Thrifty, the industry will have only
three major companies.
"With this deal, you'll have three companies
controlling the eight major brands," said Abrams. "That is of concern
to regulators because of the potential for pricing power." The U.S.
Federal Trade Commission last week cleared Hertz's purchase with some
While pricing-power implications also concern buyers, Abrams
noted that Hertz's plans for Dollar Thrifty, a bit player in the corporate
market, poses little threat to them.
The Hertz brand will continue to emphasize "premium"
business and leisure segments, while Dollar targets the "value"
business and leisure segments and Thrifty takes on the "spartan leisure
segment," according to statements by Hertz CEO Mark Frissora.
In other words, according to Abrams' analysis, rather than
killing corporate competitors in search of pricing momentum, Hertz will adopt
entirely different pricing and branding schemes for Dollar and Thrifty. Abrams
contended that Hertz's addition of Dollar Thrifty could benefit some corporate
travel buyers, as Dollar "creates a new brand offering to the secondary
corporate marketplace"—essentially another tier for Hertz corporate
accounts. This is how other multi-brand companies are structured: Enterprise
can supplement subsidiary National's premium brand in corporate agreements,
while Budget can fill out the Avis corporate portfolio.
"The only significant movement we'll see here is not
pricing pressure on the Hertz side, but Dollar entering the corporate world,"
Abrams said. "If you talk to Dollar Thrifty management, they would
probably tell you they've always marketed to the corporate sector, but they've
never been able to support the corporate world the way they needed. They didn't
have the money, processes and systems to support the corporate community."
Now, the Hertz sales team can bring to the market a new
brand and price point. "If you don't need all the bells and whistles, if
you don't need special inventory access capabilities, and you don't need
reporting mechanisms, then Hertz now has a value brand for this corporate
sector," said Abrams.
What Pricing Power?
Corporate pricing this year fell as much as 3 percent year
over year, following a similarly soft 2011, according to travel management
companies, rental car companies and analysts.
Carlson Wagonlit Travel forecast that rental car suppliers "will
struggle" to raise prices in 2013. Even with consolidation, CWT views a
rental car marketplace that "remains highly competitive with just a few
suppliers vying for corporate business." American Express projected that
North American car rental rates would decline in 2013, citing "increased
competition." While Advito also pointed to "fierce competition"
in its outlook calling for stable pricing trends into 2013, the BCD Travel
consulting unit also suggested that in the long-term, "the effective
completion of consolidation of the marketplace following the Hertz-Dollar
Thrifty deal could put upward pressure on corporate rates."
An earlier version of
this report originally appeared in the November 2012 issue of Travel Procurement.