The major U.S. rental car firms for years have tried to
extract price increases from corporate customers, to no avail. This year,
however, conditions seem about right for them to finally succeed as rental
volumes grow, fleet costs rise, supply stays in line with demand and
consolidation re-orders the industry.
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Encouraged by the fundamentals, Avis Budget CEO Ronald
Nelson in May plainly voiced a tougher stance with corporate clients, saying
the company may no longer trade reduced prices in exchange for corporate market
share and client retention.
"When commercial accounts come up for bid, we are going
to ask ourselves, 'Why we are being invited to submit a proposal?' Clearly when
the answer is an issue with a competitor's service, that's a situation that may
be a good opportunity for us," he said. "But in situations where we
feel a proposal is unlikely to yield profitable business, we'll be taking a
pass." Nelson added that the company will "have some spine and ask
for a rate increase that delivers a profitable account."
This is a profound shift, considering the industry long has
trumpeted its ability to keep corporate clients from shifting their business to
competitors.
"For years they have touted 99 percent retention of
corporate clients," MKM Partners travel and leisure analyst Christopher
Agnew said of the largest firms, also including Hertz and Enterprise. In the
rental business, there is a growing realization among the major suppliers that "pricing
is far more important" than retention, according to Agnew, and that the
corporate sales forces "probably give up too easily when they can actually
push back on customers. There is a certain friction in transitioning your car
rental supplier, so the rental companies probably have more leverage than they
think."
While Agnew noted that leisure pricing in the fourth quarter
of 2012 began an upward swing and in 2013 has continued to grow "strongly,"
corporate price hikes may have only just begun. The publicly traded rental
firms reported roughly flat commercial pricing in the first quarter of 2013
compared with a year earlier, which is an improvement from year-over-year
declines of the recent past, Agnew said. "It should continue to improve,"
he said.
The full impact, however, could take time to reflect in
earnings. "Even if today every new contract is positive, it takes a while
to flow through," Agnew said.
To shift away from a commercial model motivated only by
market share, Avis Budget has "adjusted the incentive plans for our
commercial sales force, with profitability now playing a greater role in their
bonus calculations," Nelson explained. "Thus far, we think the change
is paying off. Of the more than 100 accounts we renewed in the month of March,
60 percent did so at the same or higher rates, a significant improvement from
prior periods."
Hertz CEO Mark Frissora late last year told Business Travel News that the company's
acquisition of Dollar Thrifty will help the industry get the right price for
the right product. While that acquisition adds roughly 12 percentage points to
the rental firm's U.S. on-airport market share, Frissora said the real impact
on the corporate market is the addition of a lower-tier brand in the company's
portfolio. That should help Hertz and its competitors price products more
appropriately.
"We've had no price increases from corporate clients
for over five years," Frissora said in December. "In fact, price is
down. Part of that is driven by the fact that other publicly and privately held
rental car companies put their fighter brands on the corporate rate card. We've
already had this cancer, if you will, of lower-priced brands, lower service
levels to corporate customers." While Frissora did not adopt the same
public stance as Avis regarding commercial contracting, in April during Hertz's
first-quarter earnings call he said that "conditions are still positive
for pricing in 2013."
Then there is Enterprise, owner of its namesake brand as
well as Alamo and National. When it comes to the commercial business, "we
haven't changed our strategy," said Enterprise vice president of business
rental Brad Carr. "Our strategy is to continue to grow our share with
commercial customers. Now, certainly everybody is having the same fleet cost
increases that impact our bottom lines, and so we'd all love to continue to see
rates increase."
That's not to say the company is standing still on pricing.
Regarding six leisure rate increases led by Avis Budget in the first quarter of
this year, Nelson said Enterprise was "a more consistent fast follower,"
but that Hertz also matched most of the increases.
"It's funny, everyone has this perception that
Enterprise is a spoiler, which I think is very unfair," said Agnew. "If
you go back to where this perception was born, in 2007 and 2008, you had a
company that had 6 or 7 percent market share on-airport, but wanted to grow and
had a lower cost structure than all their competitors. So, it wasn't that they
were a spoiler, they were deliberately trying to grow market share and taking
advantage of their cost structure."
The industry's renewed focus on pricing stems in part from
rising costs, and all three major suppliers specifically pointed to fleets.
Meanwhile, one significant revenue source, the used car market, has softened
although it remains robust, Agnew said. Those "weaker used car residuals
are helping boost" rental rates, he said.
"Historically, used car prices are still strong when
looked at over the past 10 years," said Carr. "They were just at
record levels these past few years. We certainly anticipated those would level
off at some point."
Meanwhile, Agnew noted that newfound strength and momentum
in pricing bodes well for industry profitability this year. Calling pricing "the
biggest and fastest driver, with the most flow-through from the top line to the
bottom line," Agnew said the "profit outlook is encouraging."
Transforming The
Business
While Hertz's acquisition of Dollar Thrifty was the major
M&A play last year, Avis Budget's March 2013 purchase of car-sharing firm Zipcar
underscores the transformational technologies influencing the rental business.
All three major players now have their hands in car-sharing,
but perhaps more significant to corporate renters, these firms have begun to
incorporate sharing technologies into the core rental business.
For example, Hertz this summer will launch 24/7, a suite of
new rental services and technology inspired in part by business models
previously associated with car-sharing.
Enterprise recently rebranded several smaller car-sharing
firms under the "Carsharing by Enterprise" brand, and also is using
the technology in the core business to create "a total transportation and
total rental proposition to customers," said Carr.
Nelson said Avis Budget already has begun equipping its
rental fleet "with Zipcar's technology, and should have more than 1,000
cars outfitted by the summer. This will allow us to deploy Avis vehicles that
are underutilized on the weekend to fulfill previously unmet demand at Zipcar.
We also plan to begin testing one-way rentals in the summer, a benefit Zipcar
doesn't currently offer their members."
"The car rental business is pretty much unchanged since
the '80s," said Agnew. "This virtual car technology provides so many
transformational opportunities for the business." From a cost perspective,
the technology "pays for itself" by enabling rental firms to remotely
measure gas usage, monitor vehicle damage, track vehicle locations to better
manage fleet and even reduce counter staff at rental locations.
There also are additional revenue opportunities, including
new customer touch points at which rental car suppliers can upsell, according
Agnew. "You can also expand your locations and your network," he
said, "which then introduces potential, additional revenue streams such as
hourly rentals and one way rentals."
This report
originally appeared in the May 27, 2013, edition of Business Travel News.