Budget Planner: Tough Times Could Raise Ground Transportation Rates
Economic pressure on ground transportation companies and, particularly in the case of chauffeured transportation, rising insurance and fuel costs could cause rate increases of 3 percent to 4 percent in both sectors this year, according to industry watchers.
Non-negotiated car rental rates already have gone up, compared with 2002, according to statistics compiled by Abrams Travel Data Services. In late August, the average rate for a midsize vehicle in 10 major markets was $48, compared with $35 last year.
"Even while transactions are down, the car rental companies have been able to keep rates relatively high and maintain a fairly strong pricing structure," said Neil Abrams, president of Abrams International Consulting, based in Purchase, N.Y., attributing the phenomenon to tight fleets. However, some price cutting by National Car Rental may be in the near-term picture, Abrams said, reasoning that National may pursue a more aggressive strategy as a way to regain business it lost due to the bankruptcy of its parent company, ANC Car Rental, which recently was bought by a group of investors.
Annual rate statistics from two other organizations, American Express Travel Related Services and Runzheimer International, show slightly higher to flat rates for this year compared with 2002. For the second quarter of 2003, the average daily cost for a rental car—including all surcharges, taxes and fuel costs—was $63.92, a slight increase over the $63.39 paid in the second quarter of 2002, according to American Express. According to Runzheimer, the average national daily rate in 2003 was $67.70, up from $66.50 in 2002. However, the average negotiated rate paid by travel managers in the second quarter of 2003 was only $45—an amount that remains unchanged from a year ago, according to a Runzheimer survey.
However, the slight increase noted for the first half of the year could reflect overfleeting by the industry, a problem that since has been rectified, according to Stewart Brown, vice president of revenue management for Dollar Thrifty Automotive Group. Tighter fleets and "a moderate recovery out there in travel" will cause rates to be up over last year, Brown predicted.
Indeed, Curt Mattos, director of travel services at Charles Schwab & Co., based in San Francisco, reported that his company's primary car rental vendor had been "very flexible" during the negotiations for 2002-2003, and he expected that "they will still be flexible in 2003-2004." He credited his company's "strong partnership" with its primary supplier to the favorable rates, although he added that his company, which spends $850,000 to $1 million on car rental annually, did change its secondary supplier.
A travel manager at a large corporation in Dallas agreed that, in tough times, longstanding relationships with suppliers matter. The company—which has a $4 million to $5 million annual spend on car rental—has had a global agreement with Avis during the past five years, and the travel manager attributed the stable relationship to its 99 percent employee compliance for car rental. As an incentive, employees can go to the company Web site and obtain a coupon for a discounted leisure rate from Avis when they rent a car on vacation.
When the company renegotiated with Avis last November, the travel manager pushed hard to receive more competitive rates in European countries and more customer service feedback from Avis agents. His firm also was successful in getting some concession on surcharges in Europe. The company did not do this in the United States, although it did get some rate reductions, he added.
Having a satisfying agreement with a car rental supplier is not just about cost, however. Fast, reliable service also continues to be an important aspect. "We want travel to be a non-experience for our employees," the Dallas travel manager said, lambasting the "CFO suck-ups" who focus only on the bottom line.
However, Carol Ann Salcito, president of Norwalk, Conn.-based Management Alternatives Inc. said some companies were willing to switch suppliers for a better deal since "proposal pricing has gone up." She added, "One major company just recently went out to bid and moved its marketshare to another supplier. There's much more analysis going into car rental acceptance than ever. Everything's negotiable." With the supply of cars fairly tight, she noted that the strategy works only if the market happens to be one in which the car rental company has excess fleet and is seeking more marketshare. On the contrary, if a car rental firm cannot make a large enough profit from an account, "It may put in a bid for a higher increase than the company will tolerate and forfeit the business," Salcito said.
Rolfe Shellenberger, president of Management & Marketing Consultancy in Palm Desert, Calif., said companies should consider longer term rentals to cut down on their car rental costs. "Anyone who rents cars with an average rental of three days or more has a better chance of getting a better rate," Shellenberger said. "A one-day rental is not a good deal for the car rental companies," since the cost of selling and maintaining the car is virtually the same as it would be for a higher-price, multi-day rental. He added that Hertz was losing share to competitors due to its significantly higher pricing and that, in some markets, Avis came in better than National. However, Michael Lynch, a managing partner at Eclipse Advisors in Philadelphia, gave a different view: "I've had people tell me both Hertz and National are being aggressive, and I've seen Avis a little less aggressive," he said, adding that, like Salcito, he had found "buyers are willing to switch suppliers for more of a price point."
One issue that increasingly is worrying some travel managers is car rental surcharges. According to Thomas Barrett, global strategic sourcing director of American Standard Cos. in Piscataway, N.J., "Car rental rates based on contract performance and negotiations have been competitive with modest price increases." However, "the risk we face is the add-ons," he added. Surcharges in some local markets can result in "virtually a double-digit increase in net expenses."
To save on costs, Barrett said his company had excluded the earning of frequent flyer miles on car rentals to avoid the mileage surcharge, and it also was attempting to consolidate more of its volume with one supplier. In some locations, it is encouraging travelers to take an airport shuttle service rather than a rental car. "Our budgets will remain fixed and firm to meet reduced demand," he said.
In the realm of chauffeured transportation, Tom Mazza, executive director of the National Limousine Association, said prices most definitely will increase in the latter half of 2003. The reason is the rising cost of fuel and persistently flat rates during the past couple of years, which mean that an increase is overdue, he said. Plus, many of the weaker suppliers have fallen by the wayside due to the difficult economy—Mazza said 15 percent of the members of NLA had gone out of business—making the survivors stronger and, hence, more able to push through price increases.
Executives at two of the Big Five networks, however, said that soft demand in the corporate sector was hampering their ability to raise prices. Devin Murphy, president and CEO at Carey International, said that maintaining "a lean cost structure" was key to his company remaining price competitive. Carey offers a 10 percent to 20 percent discount and special flat city rates to accounts doing more than $500,000 worth of business. For corporate contracts to work, "At the end of the day, you need fulfillment," he said, and that is the problem: "While managers are trying to impose policies, a lot of companies are not successful at it. We give them the most favorable pricing, but the phones are not ringing like we thought they would. We still have to build those relationships."
Russell Cooke, president of BostonCoach Corp. in Everett, Mass., said there are a number of factors his company looks at when negotiating with corporate accounts, all of which can affect the price. One is the percentage of volume that is dedicated—such as roadshow work—versus more expensive point-to-point service. Another is whether a company mandates use of BostonCoach, versus simply naming it as a preferred supplier. Whether the location is an owned company facility, versus affiliate, and the type of booking channel used by the account—"If it's automated, it can save us money," Cooke said—are two other factors. BostonCoach is educating its accounts on ways to save, such as eliminating wait times on a pick up and consolidating its business. While the type of deal it negotiates varies by client, one pricing model BostonCoach is trying to promote more is rebates. Under this model, the ability to earn a rebate after delivering a certain percentage of volume creates an incentive for accounts to consolidate their business with BostonCoach.