Car rental suppliers in recent weeks have undercut non-negotiated rates from even last year to compete with low-cost car rental suppliers that have been pushing rates downward in response to flatlined demand.
In conducting research to be published later this month in the annual Corporate Travel Index, Business Travel News found that January-February car rental rates posted on the Apollo global distribution system for 100 U.S. business destinations averaged nearly $20 cheaper this year than last year.
"There have been price reductions" in response to competition from lower-cost rental companies, said Hertz spokesperson Rich Broome. "We saw the likelihood that rates were going to slip below 2002 levels. We're in a period of upward cost pressure and we're seeing downward price pressure."
Some senior corporate travel buyers already have seen their own rates come down, and other buyers are expecting rates to remain flat this year.
While seasonal factors and war jitters may have influenced the immediate trend in non-negotiated rates, the year threatens to mimic the depressed demand economists saw in 2002. For the time being, previously optimistic suppliers caught unaware have found themselves with an overfleet of vehicles. If rentals do not improve in the upcoming weeks, car rental firms could correct that situation by returning the vehicles to the manufacturers.
Meanwhile, the rate confidence from buyers leaves suppliers with little hope for a 2003 revenue fix from the corporate sector. "I think buyers can hold 2002 rates, because suppliers are still reeling from people not traveling," said Nan Vanee, manager of airline and ground transportation for Stamford, Conn.-based Xerox Corp., which is scheduled to renegotiate its car rental contract in August but may do so sooner. "If rates are running lower, then hopefully you've got some flexibility with the company. We're just looking for no increase."
"No increase is the posture we took with hotels and it's the posture we'll take with car rental," said Clive Armitage, Wilmington, Del.-based director of travel, meetings and fleet purchasing for London-based AstraZeneca. "We'll look at market conditions."
As recently as December, car rental rates remained flat outside of the traditional holiday spike. Jim Howell, president of Boston-based economic forecasting consultancy The Howell Group, which in the past gathered car rental data for the now-defunct Travel Business Roundtable Index, said daily rental rates have held firmer during this travel downturn than during the recession of 1990-1991. But that recession also did not see the same corporate budget pressures recently imposed on travel programs, Howell said.
Despite their ability to rein in or expand their fleets like no other business travel segment, with help from manufacturer partners, the industry has been fretting about rate stagnancy during the past several years. Hertz, which instigated a failed price increase late last year, also is concerned about what Broome called "serious" tax and fee proposals stemming from state and municipal budget deficits that the rental companies will be forced to add to the traveler's final bill. The industry also expects increases in fuel and property rental costs.
"There's no question in my mind that in the whole of transportation the margin has been severely squeezed," Howell said. "Margins will always be under stress during periods of cyclical downturns, and any business you're able to retain is because you cut margins."
Thus far, 2003 demand has not matched projections that were buoyed by optimism in healthier local market rentals and tight fleet controls. Even if market conditions lay favorable groundwork for upcoming negotiations, travel managers still remain nervous about what they called encroaching surcharges: The aforementioned state and local taxes and a new daily surcharge handed down to Hertz and, soon, Avis customers, for each rental earning frequent flyer miles. Hertz quietly instituted the charge last fall, while Avis made the decision last month but has not yet detailed the charge or the expected start date.
AstraZeneca will not cover the cost for travelers, Armitage said, adding that car rental companies should consider extracting themselves from frequent flyer programs rather than passing the cost on to corporations.