Car Rental Cos. Rev Up For Price Increases
<B>Car Rental Cos. Rev Up For Price Increases</B>
By Lynn Woods
The major car rental companies will be pushing aggressively for price increases in upcoming negotiations, despite having unbundled and passed back certain costs, such as airport concession fees, over the past few years.
Notwithstanding a vast improvement in profitability for the healthiest car rental firms, executives said the industry continues to struggle with fleet-cost increases.
"Fleet costs are going up more than a couple of percentage points," said John Johnson, vice president of sales at The Hertz Corp. "The extras aren't helping much. Back in the early 1990s, costs increased 100 percent. Pricing never got close; it's got to catch up with those increases."
Johnson and other executives said the industry still is recovering from the period a decade ago when the automobile manufacturers began spinning off the car rental firms, which they had acquired as convenient depositories of unsold cars, and began phasing out their subsidies for the car rental fleet purchasing programs. Because some of the fleet-purchasing agreements were long term, the car rental industry continues to digest the changes. Subsequent rate increases--of which the most dramatic was in 1997, when prices rose 5 percent to 10 percent--haven't been sufficient to make up the difference.
Hertz and Avis Group Inc. blame their money-losing competitors for the lagging prices. "You can't have success in this industry with low-ball pricing," said Tom Byrnes, senior vice president of sales at Avis. "Every couple of years, there are price wars, and at the end of the year, everyone receives 6 percent to 8 percent less. Our industry is only as good as our dumbest competitors."
In the end, Byrnes added, lowering prices to gain market share doesn't work anyway because of the service demands of corporate clients. A pattern has been established, he said, in which "we lose business because a customer goes for the lowest price, and six months later we have the business back. If you're not bringing in the revenue, then you can't provide the service."
Byrnes and Johnson said the pattern can't continue forever, eventually the money-losers simply will not survive. Both executives are predicting that industry consolidation could occur within the next year or so.
Byrnes predicted that prices would increase 3 percent to 4 percent in the first quarter of this year and pick up more in the "back half of 2001."
In fact, Alamo Rent-A-Car Inc. and National Car Rental, followed quickly by Hertz and Budget Rent a Car Corp., earlier this month all raised rates on non-contracted business in the United States by $3 per day and $20 per week, effective March 1.
For its part, Budget, part of Budget Group Inc., which has consistently lost money, has gained a 2 percent airport market share over the past two years, according to vice president of sales Randy Hoy. Hoy said that within the past couple of months, Budget has signed several contracts with Fortune 500 corporations, and attributed that success to the company's initiatives in standardizing and upgrading service and implementing express rental and loyalty program products.
In the latest of a series of management shifts, Budget appointed James Sheridan, former manager of national accounts at Avis, as vice president of sales operations. Sheridan will oversee sales strategy, pricing and other aspects of account management for Budget's portfolio of Fortune 1000 accounts. Overall, however, Budget's "salesforce numbers are down compared with last year," Hoy said. Budget has built online capabilities to interface with small-business customers in particular, "who don't want face-to-face contact."
As part of an overall strategy to improve its business in Europe by converting corporate locations to franchisees, Budget recently announced the sale of its corporate locations in Manchester and Birmingham, England, to a franchisee.
Meanwhile, such value-oriented companies as Alamo, Thrifty Car Rental and Dollar Rent A Car are seeing more interest from larger companies. To increase its appeal to large corporations, Alamo has expanded the number of kiosks for its automated Quicksilver express rental service.
"Last year, our business went through the roof with the corporate market," said Bob Thunnel, vice president of corporate and travel industry sales at Thrifty, noting that the company's corporate business "was well in excess of 10 percent." He attributed the interest to Thrifty's expansion into airport locations. In the latest enhancement to its express service, Thrifty is speeding up the return process by equipping staff in the lot with handheld units.
Mary Trenkle, executive director of national sales at Dollar, said that while Dollar hasn't signed secondary or tertiary agreements with large corporations, "all the majors book with us," including such giants as Deloitte & Touche and DaimlerChrysler.
Dollar is working on making its Fast Lane express rental product more consistent from location to location and is planning enhancements to the enrollment process to make it faster and easier.
Hertz, Avis and National also are refining their corporate services. Avis has introduced Avis Interactive, enabling accounts to obtain detailed data on their spend online (see story, page 10). Jim Wood, vice president of sales at National Car Rental, attributed National's recent introduction of refueling at local self-serve prices for Emerald Aisle members as a valued service that will help the company attract new accounts.
Hertz has added another tier to its Gold product, the exclusive "President's Circle" level. The firm also has made it easier for accounts to enroll online: In early January, the company began accepting electronic signatures, which means that customers can be assigned an activated #1 Club Gold membership number immediately upon signing up online.
One of the big shifts this year is Hertz's and Avis' return to private ownership, both of which are being reacquired by their parent companies (BTN, Jan. 29). However, both Johnson and Byrnes said the changes would not result in any shifts in operations.
Johnson said that Hertz's 100 percent ownership by Ford Motor Co. had prompted some accounts to wonder whether that meant a return to more favorable terms from the manufacturer in the car rental firm's purchase of its fleet. The answer is no: In the old days, the auto manufacturers subsidized the car rental companies' purchase of fleet because they needed a conduit for their excess inventory. Their contracts with the unions meant it was cheaper to keep the factories open rather than close them, Johnson said. The scenario is different today, in part, because the unions are less of a force. The auto companies "can now cut production and save money," he said.
Perhaps the biggest challenge for corporate accounts this year will be the tighter supply of rental cars, which is causing scarcities at certain locations during peak periods. The reason for the fleet decreases is twofold, according to Johnson: The slowdown in the economy has caused manufacturers to tighten up on production of cars, and fleet costs have risen, prompting some rental companies to tighten up on their fleet purchases.
Another factor is the mania for mergers and acquisitions. "As accounts become bigger, fleet availability can be a problem during peak travel demands," Johnson said.
Byrnes, who noted that Avis' fleet will grow by 4 percent this year, said one useful way the industry could better meet demand and "take costs out of our business" would be no-show fees. He estimated that no-shows constitute 20 percent to 25 percent of all rental transactions. The industry charges no-show fees for reservations of specialty vehicles in some markets, but when one company attempted to institute the fees fleetwide a few years ago, it didn't take. So far, the competitive nature of the car rental industry has prevented the practice from taking root.
Clearly, despite the gains the industry has made in the past few years, the pressure is still on to become more efficient. Trenkle said Dollar was stepping up its efforts to ensure that corporate accounts meet their volume commitments.
"If a company wants a lower rate by having the fee waived for Fast Lane, or for LDW or SDL insurance, or for under-age drivers, we will require them to bring us that $500,000 worth of business," she said. "We'll be better implementing the contract at the front end and meeting expectations in the third and fourth quarters."
Corporate accounts, of course, are under the same pressure as car rental companies to be more cost-efficient. Hertz's Johnson said some accounts were seeking to negotiate net rates, and there was more interest in getting rates that don't include insurance. Others "have used the suburban marketplace more because of congestion at the airport," he said. Renting a car from a suburban location near the hotel is also a way for renters to avoid the growing array of airport fees.
Another cost-saving measure more accounts are exploring are direct links. Hertz and National both participate in E-Travel's third-party direct connect product, ET-Link.
Executives at other rental companies said they were having discussions with third-party direct link providers, although the up-front investment is significant. "The cost of even trying to do the R&D wasn't within something we were ready to get behind," said Dollar's Trenkle.
All of the firms are seeing increases in their Web bookings. "It's growing exponentially," said Johnson. Overall, however, Internet bookings are still a small percentage of corporate transactions. At Avis, for example, approximately 7 percent of reservations are made through the Internet.