Corporate travel buyers largely have been able to stave off increases in negotiated car rental rates, although major suppliers recently have reiterated a need to push higher revenues from corporate clients in order to offset increasing business costs.
American Express Business Travel in March reported that car rental rates increased by 4.5 percent, year over year, in 2006. That number includes a mix of both corporate negotiated rates and rack rates available to the general public, although the bulk of Amex's measurements come from its corporate rates, said David Balfour, American Express senior practice leader for car rental.
Hertz Global Holdings, the rental car industry's leader in revenue from corporate rentals, increased rates in corporate contracts by about 3.8 percent on average at the beginning of 2006, the company reported in its full-year financial results. Rate increases were softer throughout the rest of the year, but that's because the bulk of its corporate contracts are up for renewal at the beginning of the year, according to Hertz.
"We are the price leader, recognized by most industry standards, and the issue comes down to timing," Hertz chairman and CEO Mark Frissora said to investors in March. "We always lead most price increases."
Avis Budget Group, meanwhile, acknowledged in its earnings call in February that its corporate rate increases in 2006 were lower than expected. Leisure pricing was up in the mid- to high single digits, compared with corporate pricing in the low to mid-single digits, according to Bob Salerno, Avis Budget's president and COO.
Just the year before, Avis Budget—then a part of Cendant Corp.—had notified corporate customers of a 7 percent to 8 percent increase in rates
(BTN, Aug. 15, 2005). This year, the company will make a continued push to increase corporate negotiated rates, as previous increases were noted as barely sufficient to achieve forecasted earnings.
"Make no mistake, financial results in 2007 are highly dependent on our ability to get pricing in both the commercial and leisure arena," Avis Budget chairman and CEO Bob Nelson said in February. "While we continuously manage our costs as carefully as anyone, we cannot cut our way into growth. The full-year impact of higher fleet and financing costs cannot be overcome simply with cost reductions."
Dollar Thrifty Automotive Group primarily focused on the leisure travel market and said in its 2006 earnings report that this year it would push for a 7 percent to 9 percent rise in revenue per day, even though same-store rental days were expected to be flat or slightly down compared with 2006.
At the core of the push for rates is the increased cost to car rental companies. "The underlying pressure here is the cost of fleet," Amex's Balfour said. "In the United States, car manufacturers have firmed up their pricing position to the car rental suppliers. They've increased the cost of fleet cars, and they've also been selling a higher-content car, in the belief that it will be more profitable as a used vehicle."
Avis Budget, for example, reported fleet costs rose 13 percent in 2006 from 2005 despite an increase of only 3 percent in fleet size.
Fleet costs should level off a bit this year, Amex's Balfour said, and Avis Budget's Salerno said he expected fleet cost increases to normalize with model year 2008 purchases, although increases still could be above the rate of inflation.
Outside of corporate rate increases, car rental companies are eyeing other opportunities for savings and revenue generation. Dollar Thrifty, for example, recently announced it would outsource some call-center operations to reduce costs. At the beginning of this year, Hertz announced that it was trimming its workforce by about 5 percent, the equivalent of about 1,550 people.
In seeking ancillary sources of revenue, Avis Budget has added a number of tools for customers to use, including an advanced global positioning system unit that it began to roll out at the end of last year and portable wireless Internet service, both available at an additional cost to renters. Avis Budget, Dollar Thrifty and Hertz introduced electronic toll-paying tools in certain markets as well.
Car rental companies also continue to expand their presence in off-airport locations, a territory long dominated by Enterprise Rent-A-Car. Avis Budget said it opened 197 new off-airport locations in 2006 and has increased its off-airport revenues by 37 percent in the last two years.
"While we are still early in the growth phase of our off-airport initiative, our business model has allowed this segment to already become a profitable business for us today and should increase in the future," Avis Budget's Nelson said.
Hertz added 40 such locations in the fourth quarter of 2006 alone and expects to open 130 more this year. As with Avis Budget, Hertz's Frissora said its off-airport locations have become profitable.
Off-airport locations are relevant to corporate travel buyers looking to avoid the high taxes that generally accompany on-airport rentals. Such taxes have climbed to an average of 28 percent over the base rate of car rentals, according to a Travelocity study
(BTNonline, Dec. 12, 2006).Buyers, meanwhile, are watching a rumored merger between Dollar Thrifty and Vanguard Car Rental Group, parent company of National Car Rental and Alamo Rent A Car
(BTN, March 5). Neither company is commenting on what they call "market speculation." Competitors, however, said any impact on rates would be slight. "I'm not sure that the competitive balance, merging Dollar and National, affects commercial pricing at all," Avis Budget's Nelson said. "Presuming they will be all public, that adds an additional level of discipline."
If anything, analysts have said such a move could spell pricing relief, as it would give the two companies a chance to leverage their fleets. Dollar Thrifty's fleet comes largely from the DaimlerChrysler line. Vanguard's main supplier is General Motors. Yet, with only one brand, National, focusing on the corporate rental market, Amex's Balfour said, corporate rate impact would be tempered.
"The environment will stay more or less the same, because you're not eliminating the corporate player," Balfour said. "We don't see a great deal of change in regard to competition in the corporate market."