Car Rental Trends: Tiered Pricing, Direct Booking

By Lynn Woods / June 09, 1996

<H1>Car Rental Trends: Tiered Pricing, Direct Booking</H1><H2>Abrams: Expects rental rates to increase</H2><H3>by Lynn Woods </H3>As the car rental industry tries to rebound after a tough 1995, travel managers have to respond to new vendor moves such as the imposition of surcharges, the shifting of insurance liability to the customer and the threat of higher rates. BTN car rental editor Lynn Woods recently touched on these issues with Neil Abrams, president of Purchase, N.Y.-based car rental consultancy Neil Abrams Associates.

BTN: The combined profits of the car rental companies have dropped since 1992. On the other hand, airlines and hotels are making money and the travel industry as a whole seems to be on the upswing. What are some of the factors that have prevented the car rental industry from reaping the benefits of an improved economy?

Abrams: The rental industry has been hit by external forces such as increases in interest rates. Every vehicle of the million-plus vehicles on the road is financed, so a 1 percent increase in interest rates has cost the industry millions and millions of dollars.

A lot of fault lies in the old purchase programs, which permitted a direct vehicle expense net of zero per month. The interest and depreciation on a small or midsized vehicle was maybe $250 a month in the early '90s. So over a four-month period, which was the minimum term in those days to stay in the fleet, $1,000 was your carrying cost. If you had a front-end incentive of $500 and a $500 rebate when you turn in the vehicle, that's $1,000. So your net cost was zero.

Not only did companies become lulled into operating at certain rate structures, but the traveling public got used to these rates too, to the extent that renting a high-end vehicle in major markets did not cost any more than the price of a moderate meal in a restaurant. I cautioned my clients years ago that this was fantasy land.

As the customers came back to the dealerships and the industry rebounded, there was a change in appreciation schedules, a change in the amount of time that you had to keep a vehicle in the fleet, more scrutiny of a vehicle to be eligible for repurchase, and elimination or deterioration of front- and back-end incentives. Combine tighter margins with skyrocketing insurance costs, and you have a serious problem: The rate structure does not support the real cost of doing business.

You do have to realize, though, that the figure for industry losses is skewed because two of the major companies, Budget and Alamo, collectively lost about $200 million. That offsets a lot of profit on the other end.

BTN: We've heard from the rental companies that there have been 35 percent increases in their fleet cost each year for the past three years. Now we're hearing they're only 3 to 7 percent. Do you think it's going to even out now that the cost is where it should be?

Abrams: Yes, increases are flattening out. The industry has been doing a better job in fleet and yield management and utilization, and there has been a lot of investment in technology and management systems to drive yield.

BTN: Do you see vendors changing their proportion of leisure versus business rentals?

Abrams: There is no longer room for specialists because the cost of vehicles is too high. What companies are doing is looking at markets that they have not traditionally been in. Avis recently acquired Agency-Rent-A-Car, which is basically a replacement business, and Hertz is piloting a couple of locations in its subsidiary company called Hire. The Alamos and the Dollars and Thriftys are looking at the small-business customer and at the local market-a change from being traditional airport operators. Companies need a broad appeal and a variety of fleet at different rates, and there has to be flexibility in dealing with large corporate accounts.

BTN: Some vendors have mentioned a trend in the corporate sector toward tiered pricing-moving from a flat rate to some kind of surcharge, like for one-day rentals. Will we see more of this?

Abrams: I've been calling for tailor-made programs for a long time. There is going to be rate customization because there is constant pressure on travel departments and corporate travelers to keep their expenses down. Nobody wants to pay more for what they used to have for less, so companies have to do more partnering.

BTN: What do travel managers need to bring to the table that they didn't have to in the past?

Abrams: Knowing your travel patterns and when rentals are being generated is very important. There are certain markets where unlimited mileage makes sense and other markets where mileage caps make sense. There are markets where one-day rental surcharges make sense. You must be able to do historical analysis on fleet utilization and travel patterns both from the vendor's side and the user's side and together come up with a package that works.

For instance, who's to say that every traveler must have a brand-new vehicle? If the company says, 'we don't care, give us a car that looks presentable and that is user friendly,' it's going to save them hundreds of thousands of dollars a year.

BTN: Some car rental executives, particularly Hertz, have complained about CRS costs and have mentioned alternative booking systems such as the Internet and direct booking, where the company would hook into their preferred vendor's reservations system.

Abrams: The profitability of a company in this industry is maybe 3 or 5 percent, so they have a compelling reason to reduce their reservation costs. I'm working with some technology companies that are beginning to explore ways to do a direct link between the customer and the supplier. Travel agencies have a vested interest in that too.

BTN: What about liability, another big cost? Will the trend continue for car rental companies to encourage their customers to self-insure or provide their own insurance?

Abrams: Until the laws change, there will be a constant drive to shift primary liability to the renter. There is such an imbalance in the system, with companies assuming liabilities regardless of negligence. In the state of New York, the total exposure of a customer is only $100. Unlike in the insurance industry, the auto rental industry is forced to rent to people who are the highest risks.

BTN: What is the future of airline affinity programs?

Abrams: They started out as a good marketing strategy, but that only works as long as you're the only company doing it. Now there are only two winners in this deal: the customer and the airline. They are both making out like bandits. So the car rental industry is forced to look at other ways to maximize profitability-fuel charges, insurance sales, cellular phones. For instance, 10 years ago it was unheard of that a customer would be charged for the airport access fee. I was charged one the other day.

BTN: Some companies have either kept their fleets the same size as last year or reduced them. Does this mean availability will be a problem in major markets?

Abrams: I don't think so. Over the past couple of years, a lot of companies have been overfleeted. These days you don't have the luxury of sitting with more metal than you need. I think companies will be a lot more cautious in their fleeting and in their projections. It's a lot easier to fleet up than to fleet down, because if you force a fleet down at the wrong time, you get hurt, and you get hurt badly.

BTN: Do you expect rates to increase this year?

Abrams: This industry has woken up to the realities of doing business. Revenues are up while fleets are down, which is good. That tells me rates are increasing in all the sectors, and that's a trend that will continue.

BTN: What does this mean for travel managers?

Abrams: They must be educated in what service is all about and what a company can do for them, such as supplying information on travel patterns and segmenting expenses by type of vehicle and type of customer. I think you will see more understanding, more partnering, more flexible contract programs that really make sense. I see a more fair rate structure evolving. I think we're working together better, and I'm very bullish.

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