For the first time in years, the major rental car companies last month succeeded in increasing published rates across the board. Many industry insiders contend the hikes will stick or even increase as rental firms and industry insiders anticipate tighter fleet supply and higher vehicle costs from auto manufacturers. The nearly unanimous move among car rental suppliers puts further pressure on buyers heading to iron out contracts.
"Virtually every one of the car rental companies put price increases in place three or four weeks ago," said Ron Nelson, president and CFO of Budget and Avis parent Cendant Corp., during a Morgan Stanley investors conference on June 29. "For the first time in a long time they have held, and they were broad-scale. It was all companies across virtually all markets."
A Hertz spokesperson said the company early this month increased published rates by about 5 percent. Published reports stated that Cendant's Avis and Budget brands increased daily rates by $5 and weekly rates by $20, but Cendant Car Rental Group would neither confirm nor deny the extent of the rate increase. Meanwhile, Dollar Thrifty Automotive Group said early last month both its Dollar Rent A Car and Thrifty Car Rental brands raised published rates between 5 percent and 10 percent, varying by market.
"A price increase in this period is a fairly regular phenomenon," said Richard Broome, Hertz vice president of corporate affairs. "The big issue is whether prices, which typically adjust downward after the summer peak, will reflect the significantly increased fleet costs that car rental companies are experiencing."
Although Hertz contends its own rate increases are seasonal and only slated to stick through the summer months, buyers and analysts expect the increases throughout the market to linger as all signs point to less supply and higher costs from manufacturers.
Cendant's Nelson, among others, agreed the first round of increases "is largely in response to what we believe will be increasing fleet costs." Nelson added: "Hopefully, what this awakens among car rental companies is that you can increase prices without impacting volume and that there may be an opportunity to increase prices further."
Ford Motor Co.—a major supplier to rental car firms and current owner of Hertz—in its 2004 annual report said it has lessened its focus on supplying rental car companies. "In the last few years, we have implemented a strategy of de-emphasizing less profitable sales to daily rental car companies, which typically are associated with a large amount of discounting, and placing greater emphasis on our share of the retail market," the report said.
Neil Abrams, president of Purchase, N.Y.-based Abrams Consulting Group, said fleet expenses represent 40 percent to 50 percent of rental car companies' expenses. "Fleet cost does have a significant impact on the bottom line," Abrams said. "In looking to maintain their margins, they're giving a heads-up that they're going to give rate increases. It's not like they're going from $40 a day to $70 a day. Even $1 a day on average represents tens of millions of dollars in the industry."
Yet, one travel manager said such nominal increases could detract from his bottom line.
"We spend millions of dollars in car rentals per year," he said. "Even a dollar increase is huge. That's a million dollars. If my costs go up a million dollars, I don't have a job."
Given strong revenues and vehicle utilization rates, rental car business rebounded last year and the market shifted to favor suppliers. As such, the published rate increases exacerbate an already-tough negotiating climate
(BTN, May 30).The increases directly impact published rates, but many also expect rental companies will try to raise corporate negotiated rates as well. "That's why they call it negotiations: It's one thing to say we need another $5 a day, it's another thing to get another $5 a day," Abrams said.
Hewlett-Packard global airline and car supplier manager Kevin Iwamoto said: "For the customers who have significant volume and have demonstrated the ability to shift share to alternate suppliers and the willingness to do that, there are still some leveraging opportunities. For the masses—which is the majority of the business—there's not much they can do."
Although "the masses" would include small and midmarket companies, especially those without negotiated rates, Budget last month, as it was raising general rates, began offering small and midmarket companies discounts and monthly $2-per-rental-day rebates on car rental purchases, following a month-long pilot with customers.
Chuck Fallon, executive vice president of revenue generation for Cendant Car Rental Group, said the Budget Business program is available to companies that rent at least five vehicles per year. Fallon said that many adopters would have unmanaged travel programs in which spend less than $50,000 annually on car rentals—a threshold that could yield more favorable negotiated rates.
"That doesn't mean they couldn't use the program," Fallon said, "but those larger companies typically have a different program structure."
Although rate discounts would vary by program, Fallon said they would undercut Budget's lowest qualifying rates on all car classes, regardless of booking tool.
Small and midmarket firms spent moderately more per car rental last year than they did in 2003, according to figures from BTN's Midmarket Report. Of 320 respondents, 30 percent said that rental car firms were more receptive to negotiating within the prior six months and 16 percent said that they were less receptive.