Car Surcharges Gain Acceptance

<FONT SIZE="+3"><B>Car Surcharges Gain Acceptance</B>

By Lynn Woods

Although analysts are still divided over the staying power of the year-old, one-day surcharge on car rentals, recent actions by vendors confirm that the charge is here to stay.

Eight months after announcing a one-day rental surcharge on some of its corporate accounts, industry leader Hertz Corp. has implemented the charge on 60 percent of its accounts and plans to levy it on virtually all of its corporate customers, said Hertz vice president of sales John Johnson.

Hertz's small accounts have been paying the charge as of the beginning of the year, but as contracts come up for renewal, "they're all going to it," he said.

Johnson said the charge is being levied "anywhere in the U.S." on cars rented for one day on Tuesday or Wednesday, although some accounts have opted for the charge on one-day rentals regardless of day of the week. The amount is typically $3 to $5, although it could go higher, he said.

The unofficial alternative to not paying the charge is "more troublesome to the accounts," Johnson said: submitting to a two-day rental requirement on peak days. "The whole industry has been doing this for a couple of years during peak demand times," he noted.

Avis Inc., the number-two player, is following in Hertz's footsteps. Executive vice president James Collins said the across-the-board charge probably will be limited to Tuesday and Wednesday.

Other major car rental companies haven't shied away from implementing the charge, although they are exercising more caution. National Car Rental is levying it only "in cases where it's competitive," according to spokesman David Schoeneck. Budget Rent A Car is experimenting with a one-day surcharge that is targeted mostly to its smaller accounts, said president William Plamondon. Last November, the company began testing two types of one-day surcharges: one pegged to Tuesday or Wednesday rentals, which Budget has since dropped, and the other on cars rented on any day of the week.

But Plamondon said the issue of one-day rentals was fundamentally a bidding rather than a pricing issue: A company that has a lot of Tuesday or Wednesday one-day rentals was just as likely to pay a higher flat rate than submit to the surcharge. "The industry has got to be smarter at bidding or pricing of its corporate accounts, as opposed to only looking at volume," he said. "The big difference is what goes into the flat rate."

Alamo Rent A Car is negotiating a one- and two-day surcharge with individual accounts. "With some accounts, the charge depends on the day of the week or city," said Roger Ballou, Alamo's vice chairman and chief marketing officer. He characterized it as a "flexible pricing tool."

Neither Thrifty Car Rental nor Dollar Rent A Car have implemented the charge, nor do they plan to.

One corporation that recently got hit with the one-day rental surcharge on its renegotiated contract with Hertz is National Starch and Chemical, based in Bridgewater, N.J. "We believe the car rental companies have a legitimate case on the peak demand situation," said travel and fleet manager Tom Barrett. If the $3 charge ensures that one-day renters will get the car they reserved, it's worth it, he said. "It's employee productivity that's driving us," he said. "You want a reasonable rate with the best-quality car service."

National Starch also took a modest rate increase, but Barrett said he was nonetheless "pleased" with the agreement. "On balance, our rates are pretty competitive," he said.

But corporate travel managers who have not yet been assessed the charge were less than sanguine about the prospect. "We need to have as simple a price structure as possible," said Joyce Bembry, manager of global business travel at Du Pont de Nemours & Co., Wilmington, Del.

In fact, the company avoids paying the city surcharges its preferred vendor levies in certain cities by having its employees use another rental company in those locations, Bembry said.

Steve Davis, supervisor of travel services at Dayton-Hudson Corp. in Minneapolis, which spends $3 million annually on car rentals, said he was concerned about implementation of the one-day surcharge when his company's contract with National comes up for renewal in 1998. Between 10 and 12 percent of his company's domestic rentals are for one day, so a $3 to $5 charge would be onerous. Davis said it might be more advantageous to increase rates across the board rather than pay the surcharge.

Indeed, Tom Wilkinson, president of the Travel Management Group, a consultancy based in Alexandria, Va., said most corporate travel managers he deals with would prefer to "have the increase factored into the overall rate rather than have travelers contract it at the desk, which is the way it's usually communicated." Employees typically don't read the bulletins travel managers post about such new charges, so paying the fee could be an unpleasant surprise, he noted.

But Warren Lieberman, senior associate at Decision Focus, a corporate travel management consultant firm in Mountain View, Calif., said the charge might be accepted provided there's a silver lining, as is the case with non-refundable airfares in the airline industry. "American Airlines tried several times to institute non-refundable fares prior to 1985 or 1986, when they finally came in," he said. The reason they ultimately were accepted is that consumers received the benefit of a discounted price. In the same way, one-day surcharges might become standard if they carried the guarantee of a car.

Indeed, availability of cars in peak demand markets has become an issue with many companies. According to Runzheimer's 1996 Annual Car Rental Negotiations Review, 59 percent of the respondents surveyed listed guaranteed car availability as a factor in choosing a rental vendor.

National and Budget both have a handful of accounts with guaranteed availability clauses in their contracts, although Plamondon said that at Budget there's a cost attached to it.

Consultant Neil Abrams, president of Neil Abrams Associates in Purchase, N.Y., said there's a deeper reason why the surcharge will stick: Rental companies still are compelled to increase their profits. "Flexible pricing that supports yield management strategy is direly needed in this business," he said. "Car rental companies are moving in that direction, but it's not yet where it needs to be to support a reasonable profit margin."

The corporate segment in particular is problematic for the car rental industry, said Jon LeSage, executive editor of <I>Auto Rental News</I> in Redondo Beach, Calif. "You've got a contract where a corporation is getting a midsize car for $25 compared to $37 on the retail side," he said. "You're not getting the collision-damage waiver and the customer probably is not upgrading to something bigger. It's almost like a government or local replacement rental. All you can do is hope you're getting a longer rental."

In yet another effort to recoup their costs, rental companies also are increasing the amount or the number of city surcharges levied on their corporate accounts. Although city surcharges were introduced in the mid-1980s, they continue to be a thorn in corporate travel managers' sides, especially since they are in addition to steep county- and/or state-imposed surcharges.

Hertz said it levies surcharges in about 25 markets, a decrease from the "50 to 70 markets" that had surcharges six to seven years ago. However, Johnson said the amount of the surcharges had increased, and now range from $3 to $8 a day.

But corporate travel consultants said they've noticed an increase not only in the amount of the charges themselves, but in the number of surcharged cities car rental companies present to their customers. Wilkinson said he's recently seen lists of surcharges for 25 or more cities. "Nobody complains about a surcharge for Manhattan," he said. "But when you start getting into second-tier cities, people raise eyebrows."

One corporate travel manager said she recently rejected a proposed contract from Hertz because of the numerous city surcharges. Not only were there fees for 11 cities, but the entire state of Texas (her home base) had a surcharge. Figuring in the state surcharge and $3 one-day surcharge, the negotiated rate-even in a small city like Lubbock-came to $44, well above the $37 daily rate the company currently pays with National. "When you put a surcharge on a whole state, you've got to be kidding," the travel manager said.

Johnson defended the charges as a key element in his company's efforts to recoup its high costs in those locations. Like New York and Illinois, two other states in which Hertz levies surcharges, Texas has a lot of peak-day corporate rentals, he said. "Our highest corporate rate in those markets, including the city surcharge, would be $55 a day. Fifty-five dollars on a car used from four to eight days a month doesn't pay for the car. To break even, it should be $100 a day."

To further put the issue in perspective, Johnson compared pricing in his industry with that of the hotel industry. "Ten to 15 years ago, corporate car rental and hotel rates went in lockstep," he said. Today, car rental rates are one-quarter to one-half of their counterparts in the hotel industry, even though the costs in both businesses have risen in a similar fashion, he said.

Drawing a parallel with the hotel industry's early-checkout fees, Johnson said it was conceivable that in the future, companies seeking to avoid surcharges by renting a car for four days but returning it after one day would pay a penalty.

Alamo, on the other hand, has reduced the number of cities with surcharges and simplified them to just a few different amounts, Ballou said.

Fortunately, city surcharges are fairly easy to negotiate out of a contract. "We've been successful in negotiating city surcharges to minimum levels," said Harold Seligman, CEO of Management Alternatives, a corporate travel consultancy in Stamford, Conn. "Every time we renew a contract, the car rental companies add $1 or $2, and we negotiate them down."

In addition to length of rental and regional differences in operating costs, another factor that can influence the price corporations pay for their car rental is no-shows-renters who make a reservation and then fail to pick up the car. Abrams estimated that anywhere from 20 to 40 percent of all rentals at the nation's major airport locations result in no-shows.

Abrams speculated that the entry of a hotel company-HFS Inc., which just completed its acquisition of Avis and is rumored to be talking to Alamo (see story, Page 2)-into the car rental arena could result in the reintroduction of some type of guaranteed reservations program, beyond the scope of the cancellation fees many car rental firms already impose on specialty vehicles.

Budget, in particular, is looking closely at the issue in terms of its corporate accounts. For clients that incur a significant number of no-shows, "we have to get a higher rate, introduce a fee or look at how we can reduce them," Plamondon said.

Complicating matters for corporate travel managers are base-rate increases, which became significant in 1995. Wilkinson said corporate rates are inching into the mid-30s range and even into the low 40s if insurance is included. Of companies surveyed by Runzheimer, 17 percent pay a flat rate ranging between $40 and $42. The average negotiated rate in 1996 is $38, compared to $35 in 1995.

These increases are forcing corporate travel managers to look harder at ways of increasing their leverage. Both Barrett and Davis said they would consider mileage caps in the face of future rate increases. The car rental companies' ability to track all rental transactions makes this a particularly palatable option because these reports enable travel managers to quickly assess whether a mileage cap would save money. To their credit, the major car rental firms "have some of the best management reports in the travel industry," Wilkinson said.

The other significant way corporations can keep their costs down is to seek insurance coverage from avenues other than the car rental company, such as self-insurance or through a credit card. Wilkinson said doing this generally saves from $1 to $2 a day.

The focus on a wider array of pricing variables not only requires more maneuverability on the corporate travel manager's part, it also necessitates a change in the mindset that simpler is better. "Corporations do favor simplicity, but simplicity costs money," Lieberman said.

Besides, argued Hertz's Johnson, car rental pricing isn't all that complicated compared with other sectors of the travel industry. "Corporate accounts publish hotel directories of rates that are 50 pages thick," he said. "The most complicated car rental program you could dream up fits on one page.