2009 Business Travel Survey: Car Rental Firms At Crossroads As Demand Lags

Damaged not only by a global economic recession and sharply reduced demand but also by the crippling financial maladies of the Big Three U.S. automakers, the rental car industry finds itself at a crossroads in 2009. Competition for remaining business is fierce, and a decimated resale market is leaving the rental companies with lots of cars to rent, but fewer corporate travelers to rent them.

Nevertheless, rental car executives showed signs of what passes for optimism in 2009, offering hopes that perhaps the bottom of the car rental downturn has been reached and conditions might not worsen further.

"Our performance through 2008 was ahead of the market," according to Brad Carr, vice president of corporate business development for Enterprise Rent-A-Car. "We're experiencing what everybody else is, with a backing off of business travel, but I think we're pretty close to the bottom once we get through this spring and summer."

"We've been able to renew business, and we certainly see challenges, but we've signed new midmarket business," said Avis Budget Group senior vice president of commercial sales Bob Lambert. "Bookings in the commercial space have shortened, and it's hard to tell what's coming, but I'm optimistic. Still, there won't be a larger-scale recovery until 2010."

The rental car industry's perennial difficulties in substantially raising corporate rates, owed to the competition posed by four nationwide players, remained in 2009, but Chrysler's bankruptcy and the financial woes of General Motors and Ford have added a new twist.

"Chrysler has been an excellent business partner for this company over the years, and since 2002 we've purchased almost 1 million vehicles from Chrysler," said Dollar Thrifty Automotive Group president and CEO Scott Thompson in May during the company's first-quarter earnings call, according to a transcript published by financial services site SeekingAlpha.

"We're optimistic that the outcome of the pending proceedings will allow them to be successful in executing a turnaround. In fact, we're hopeful to be part of the Chrysler solution," Thompson said.

Other car rental companies said Chrysler's bankruptcy would not have an overwhelming impact. "We're in a fairly good place," Lambert said. "Chrysler is our fourth-largest supplier, and we are well-positioned to handle this."

Added Hertz Corp. senior vice president of global sales Robert Stuart, "We're in good shape. We have a very diversified fleet and no Chrysler in our fleet. One of our advantages is that if a customer wants a Kia, a Toyota, a Hyundai, a Ford or a GM car, we have them available."

Weakened demand and a feeble auto resale market has left the rental companies with somewhat aging fleets on their lots.

Enterprise's Carr said the aging of the average rental car represents only a "percentage of a month average increase," while Hertz's Stuart said the average rental car's age has recently grown from about eight months to about 10 months.

With corporate demand down significantly, buyers and rental companies are in the midst of a balancing act over rates, but suppliers said there has not been widescale across-the-board corporate discounting. "Rates are holding fairly well," Lambert said. "It's a service proposition in most cases, and folks see that."

Dollar Thrifty's Thompson during the conference call said the company's corporate rates have proven resilient despite the downturn.

"Our corporate business is probably about 5 percent of the mix and 95 percent is leisure," he said. "In the 5 percent business sector, I think you might be surprised that revenue per day was up in our business sector and transactions were down, and when you look at the total revenue in the business sector compared to leisure, there is about a 200 basis points difference. We were 8.6 percent in total revenue down overall, and business was off about 11 percent, but rate per day in that segment was actually up."

"It would be a disservice to say they're not trying to get a better rate, but what has changed is that they're seeing there is more than one way to skin a cat," Stuart said, pointing to the internal corporate travel management changes he said some buyers have undertaken, like shifting expenditure from chauffeured transportation providers to car rental firms, or mandating that travelers must rent cars rather than use personal vehicles for trips that exceed a certain distance, to reduce mileage reimbursement costs.

Increasingly, rental car companies are considering new or increased service fees outside of the base rate. For example, Avis Europe in April introduced a E40 or £40 charge for customers who fail to cancel booking before the scheduled pick-up time.

It's believed that such a no-show fee is a rental car industry first, and the possibility exists that it could spread stateside, according to Avis Budget's Lambert.

"A no-show fee is something we're certainly considering, not as a punitive measure but so we can manage our fleet accordingly," he said. "We are the only travel segment that does not have an across-the-board no-show fee—airlines do it, hotels do it, but not car rental. We're considering it, but we can't do it alone. We are looking to have the opportunity to do that at some point in time."

However, others were less enthusiastic about the possibility of new surcharges. "We're always evaluating fees, but there's nothing new in the last eight or nine months," Stuart said, noting Hertz responded to last summer's high fuel prices with a redesigned, usually lower refueling surcharge that stayed in effect through December.

"Our brands have been effective in keeping costs low regarding refueling and other surcharges," Carr said. "We pay close attention to side benefits that are not rate-driven. We recognize that customers want fee transparency and no surprises."

Car rental companies have dabbled in new lines of business, with Enterprise and Hertz each launching car-sharing programs in 2008, targeting cities, local businesses and universities.

Suppliers continue to increase the availability of hybrids in their rental fleets, but the hybrids' premium rate can prove problematic for buyers dealing with travel-spending cuts.

"There's some interest in hybrids," Lambert said, but stressed Avis Budget's emphasis on attaining for its fleet the U.S. Environmental Protection Agency's SmartWay Certification, given to vehicles with low greenhouse gas emissions. •