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U.S. car rental firms are facing tough times as deteriorating business travel demand and rising fleet costs are dragging down financial performance. To survive difficult conditions, major U.S. rental companies are laying off workers, shrinking fleets and hoping to raise prices. The challenging environment for vendors may provide negotiating leverage for buyers.
"We are in the midst of one of the toughest conditions I have faced in my 30-plus years in business," said Avis Budget Group chairman and CEO Ronald Nelson, speaking this month during a conference call with analysts. "We are facing the perfect storm for our industry." He cited the slowing global economy, an uncertain future for automobile manufacturers that "has complicated fleet management and financing," a "soft used-car market" hindering disposal of existing fleets and a tight credit environment.
"On the volume side," Nelson noted, "fourth-quarter reservations are down in the mid-to-high single digits, with commercial volumes driving this trend."
At Hertz Global Holdings, "conditions continue to deteriorate," said chairman and CEO Mark Frissora during a call last week with analysts. The company divulged that headcount has "been reduced by 7,100 full-time employees" since August 2006, including "programs we initiated in September to reduce headcount by almost 1,400 employees."
"It is not catastrophic ... yet, and I underscore yet, and hopefully it won't be," said Neil Abrams of Abrams Consulting, regarding corporate travel volumes. "It could be off as much as mid single digits."
Dollar Thrifty Automotive Group may be an exception. Economic downturns "actually turn out to be good times for us in the corporate travel area," said Dollar Thrifty executive director of sales Cathy Funderburk. "It is an ironic thing, but our corporate business year to date is up over 13 percent." October numbers, she said, "were the highest we have had all year."
Funderburk pointed to Dollar's and Thrifty's price points, adding that "there used to be a lot of cachet in renting from the premium car rental companies--our competitors with the big brand names. People are now almost embarrassed to buy premium products."
"The pattern is trading down," said Abrams. "It is a behavioral issue more than a volume issue. Maybe there is a Hertz account that has a secondary supplier of Budget, so maybe Budget is getting more of that business."
Meanwhile, car rental suppliers generally will be pushing for more price hikes, following the leisure-oriented increases initiated in recent weeks, according to executives at Avis Budget, Dollar Thrifty and Hertz.
"Presumably at some point in time we're all going to act rationally and increase prices," said Nelson. "There's been three or four price increases over the course of the last month. Hertz led one, we led two and National and Alamo led a third. The adoption rates have actually been pretty good with the Enterprise group being much more aggressive than they have been in the past."
A spokeswoman for privately held Enterprise Rent-A-Car, parent of the Enterprise, National and Alamobrands, did not respond to a request for comment. The firm recently announced the first mass layoff in its 51-year history.
CWT Solutions Group managing director of ground transportation consulting Dave Kilduff noted that while contract rates are not impacted by such pricing actions, many accounts use a fair amount of non-contracted rates and "will feel that increase. If those stick, you could see that creep into corporate pricing." CWT previously forecast that corporate car rental costs would be flat in 2009, meaning some accounts may see rate reductions while others see modest increases.
Other observers suggested weak corporate demand could help to put some buyers in the driver's seat. "The car rental companies are out there pushing for rate increases quite aggressively, but what I find is that when the corporate client pushes back, there is significant opportunity for them because the marketplace is so competitive," said Bill Knepper, senior director of business development for BCD Travel's Advito consultancy.
According to Avis Budget's Nelson, "The pricing elasticity associated with our core product offering is such that an increase of 5 percent or 10 percent or more in pricing for car rental is unlikely to have any meaningful impact on the demand for our product."
The National Business Travel Association recently predictedcorporate car rental rates "may remain flat or increase by up to 1 percent in 2009, while standard rates may reach a 3 percent increase."
Travel management firm Egencia suggested the 2009 car rental negotiating environment would be "slightly favorable to buyers due to factors including expected demand declines because of the overall economy." Egencia added that such "favorability could be offset by capacity reductions and industry consolidation among car rental suppliers."
In October, Advito for 2009 predicted "rental car rates to increase slightly by 3 percent to 4 percent, as rental car companies lift rates and add service fees." Also in October, American Express forecast North American rate changes to range from a 2 percent reduction to 3 percent increase. CWT in August predicted flat rates for next year.
Though Avis Budget Group and Hertz each described accelerated declines in corporate bookings, they both pointed to recent successes in the business travel market.
"In the [third] quarter, we won more accounts than we lost as measured by revenue," said Nelson. "In October alone, we signed $15 million of new commercial business." He explained that Avis Budget realigned sales teams "to better serve and penetrate key market segments, with a renewed emphasis on midmarket accounts, small businesses, and travel partnerships and associations." Avis Budget senior vice president of commercial sales Robert Lambert told Management.travelthat the company is "doing some new and different things strategically" on the corporate sales front, but wouldn't provide specifics.
Hertz also claimed a net addition of 30 commercial accounts in the third quarter while it retained "99 percent of customers whose contracts were negotiated" during that time, according to CFO Elyse Douglas.
At Dollar Thrifty, "our sales groups have been working for the past six weeks contacting every single account we have on our books to make sure everyone is happy," said Funderburk. "This is a time to communicate more with our customers." She also explained that new software installed last year helps "target who we talk to and when we talk to them," and has proved helpful in prospecting for new accounts.
As for existing accounts, Funderburk said "a handful" of larger ones have asked to skip the request for proposals process and simply extend deals. "That's something that until this year hadn't cropped up that often," she said.
Initially setting contracts for multiple years rather than annually has pros and cons. "This is a great time for pushing multi-year agreements because they are in such a buyer's market at this point in time," said Advito's Knepper. Suppliers, too, are favoring longer-term deals, he added, as annual contract renewals "put a strain on their reduced staff."
CWT's Kilduff disagreed somewhat. "There are salespeople who have lost their jobs," he said, and rental firms "certainly want to lock in the client," but they may not want to lock them in at low rates. "They have no idea what 2010 and 2011 will bring as far as costs," he said. Nevertheless, he suggested that if buyers are interested in longer-term deals "this would be the time to do it. And if you have some reasonable requests, this may be the time, in lieu of locking in longer term."
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