Car Rates Will Depend on Many Variables
<B> Car Rates Will Depend on Many Variables</B>
By Lynn Woods
As they sit down to renegotiate their contracts with car-rental suppliers, corporate travel managers will have a new tool to aid them in their decisions--car-rental quarterly earnings statements.
"Since everyone's public, travel managers can look at the quarterly results of the car-rental companies in assessing who they want to do business with," said John Johnson, executive vice president of sales at Hertz. The numbers affect not only pricing, but also service, he added. "They should ask themselves when looking to switch suppliers, 'Does brand X have the strength to service my needs?' If there are no profits, they may have to think about it."
Perhaps even more significant is the influence of all those publicly-traded shares on pricing. Higher rates have a direct correlation to rising stock prices--just look at the precipitous drop in price per share that car rental stocks took earlier this year after Hertz lowered prices in response to competitive pricing from National Car Rental. That puts pressure on the new breed of entrepreneurs to look for opportunities to raise prices.
Analysts are divided as to how successful the car rental companies actually will be in implementing significantly higher negotiated rates. "In the spring, the car rental companies were unbelievably aggressive. In every case, they were coming up with $2 or more increases," said Tom Wilkinson, president of Travel Management Group in Alexandria, Va. However, he added, "travel managers who were not successful in getting them to back off and went to an RFP ended up with zero increase, or even a rate reduction of $1."
Another key factor in determining whether there's an increase--and how much--is one's current corporate rate. Rolfe Shellenberger of Runzheimer International said that corporations are experiencing rate increases of "10-15 percent minimum" if their current daily rate is less than $40. "If you've been paying $41, the rate won't get raised, but if you're at $37, it will. Forty dollars will become the market floor except in some cities in Florida, California and Arizona, where it might be less," he predicted, noting that 75 percent of companies already have reached this threshold and are paying rates in the low and mid $40s range.
Car rental executives were adamant that they have been successful at raising rates, and that the trend will continue. At Avis and Budget Rent a Car, corporate rates reportedly crept up an average 5 percent in the past year, and executives said that amount will remain constant through 1999.
Financial analysts, however, noted a softening of prices in the first half of 1998, compared to the steady increases throughout 1997. "Car rental competitors weren't pricing as high, since market share continues to be an issue," said Dean Gianoukos, an equity car rental analyst at J.P. Morgan Securities. According to statistics compiled by J.P. Morgan, National gained 1.2 percentage points in market share year-to-year in April, while Hertz gained 0.1 percentage points, making up for a previous slight loss. The other companies were flat, with the exception of Dollar Thrifty Automotive, which lost 0.37 percent.
Statistics compiled by J.P. Morgan indicated that corporate rates were up 3-4 percent in the second quarter of 1998, for an overall average of 2.1 percent for the industry when leisure rates are included. That compares to an overall increase of 4-5 percent in corporate pricing in 1997.
Car rental analyst Neil Abrams noted, "I generally see the trend continuing in small steps. But I see lapses caused by low demand in some markets, resulting in special promotions or fallbacks."
Still, no one doubts that profitability in the $16.4 billion car-rental industry continues to flourish with the wave of public offerings that began with Avis' purchase by HFS (now Cendant) two years ago. According to J.P. Morgan, the industry experienced an astounding 40 percent earnings growth in 1997. Car-rental earnings per share were expected to be 25 percent in 1998 and are forecast at 15-20 percent in 1999.
Gianoukos said car rental firms have fewer fixed costs than the airlines--25 percent, compared with 75 percent for the carriers--and therefore are better equipped to weather downturns. Fleet costs are currently growing at the rate of only 1 percent, while 80 percent of price increases go directly to the bottom line--a clear explanation of why higher rates please stockholders.
Industry executives, however, claim prices are still lagging as the result of years of flat rates and high costs. "Between 1992 and 1995 our fleet costs increased by more than 100 percent, and rates didn't go up correspondingly. We still have some catching up to do," said Johnson.
"Margins in the car-rental business are not where they should be in the public domain," agreed Abrams. "If you look at the pretax margins at Hertz, they're only 6 percent for the first half of the year."
Despite this apparent determination to raise rates, the car-rental industry is competitive as ever. "RFPs have produced tremendous results this year," said Wilkinson. "The majors are very aggressive in taking away each other's established accounts."
Shellenberger noted that there's little consistency in the way the car rental companies cut their deals with corporations. "They'll cut a deal where there's no surcharge in a certain city, but another company will pay it." Shellenberger's advice? Shop around, particularly in cities where your company has a heavy volume.
"The rate difference between suppliers in individual cities is significant," he said. "You might want to have Hertz in one city and Avis in another."
Travel managers also should be aware that "the contract itself is not reflective of market prices. Any Thursday noon you can rent a car from Hertz or Avis for substantially less than the best contracts I've seen," Shellenberger said.
They therefore might want to consider negotiating for a variable rate for different days of the week--or even for different lengths of rentals. "A big part of the cost to car-rental companies is handling of the car. Five one-day rentals have five service charges and therefore cost more than one five-day rental. If you have a lot of rentals that are more than two days, you should begin to work on a variable rate, or have two rates," Shellenberger added.
As a way to make up the higher cost of short-term midweek rentals, the car rental companies have been levying a midweek surcharge, usually ranging from $3 to $5, for the past three years. "It's a fixture of our contracts," said Johnson. "We have also increased the amount of our city surcharges in half-a-dozen locations."
Still, the car rental companies are not uniform in their approach to surcharges. Budget, for example, is charging the midweek fee "selectively, depending on volume," said executive vice president of sales Charles Perenian, adding that "in the last six months, city surcharges have leveled off."
One relatively new charge is the airport concession fee, introduced by car rental companies 18 months ago. Usually amounting to 10 percent and taking the form of a tax-like add-on, this new cost can significantly increase the cost of a car rental. The fees, which first appeared in Florida, have become ubiquitous. While New York, California, and Illinois have outlawed the charge, Avis, for example, is charging them at 80 airports in 22 states. J.P. Morgan estimated the fees will bring in more than $30 million in 1998.
While car rental executives initially exempted corporate accounts from airport concession fees, some companies nonetheless are paying it--or may be in the near future. Budget, for example, is levying the fee "on a selective basis, depending on the account and rate," said Perenian.
Avis executives said the company was currently "reviewing what we might do about the fee."
Of less concern to travel managers--but not, perhaps, to their travelers--is the cutback in frequent-flyer miles Hertz and Avis are instituting. By Oct. 1, all of Hertz's frequent flyer program partners will have converted from the standard 250 miles per rental to a new revenue-based formula of one mile per $1 spent (or two miles per $1 spent for leisure travelers). Avis is taking a slightly different tactic: this fall, it will award a flat 50 miles per rental day in all programs.
Wilkinson said the scaling back of more lucrative mileage-earning programs has led to compliance problems. "With some accounts in Detroit, folks have stopped using the preferred supplier," he said.
As always, corporate travel managers might be able to leverage their car rental costs by cutting back on insurance claims or moving to self-insurance. They also might shift to smaller vehicles as the standard car in their policies, or seek refueling options, either by negotiating a special rate with the car-rental vendor or instructing travelers to use the prepurchased fuel option.
A more novel cost-saving idea that companies are beginning to look at is direct booking options that eliminate computer reservation system fees (see story, page 1).
A major stumbling block to booking car rentals through an on-line automated link with the car rental firm's system--bypassing the CRS and possibly the travel agent--is how to reconcile that transaction with the traveler's air ticket itinerary. "Corporations still want to have the passenger name record," said Johnson. "The problem needs to be solved before direct booking will happen."
Unlike some of his competitors, Johnson pooh-poohed the possible savings. "The CRS charge is a relatively small percentage of the rate," he said. Of more concern to Hertz is the loss of control caused by more and more companies booking cars through third-party online booking systems. Johnson said Hertz currently has staff members working with these new booking vendors to ensure the car rental part of the transaction is in no way neglected. "We want to make sure that their offering is the same quality as if the car was booked directly from Hertz," he said.
Corporations with data-warehousing capabilities also are looking at direct settlement of car-rental bookings as a possible cost-saving option, according to Wilkinson. While direct booking might take the agency out of the process, direct settlement would bypass the corporate-card vendor and have payment go directly to the car rental company.
"Because companies typically have only one or two car rental suppliers, getting a direct feed from the vendor is easier" than with other segments, said Wilkinson. The savings could be equal to 2 percent of a company's car-rental volume, he estimated.