Cendant Car Rental Group—parent of the Avis and Budget brands—is in the process of notifying corporate customers of a 7 percent to 8 percent increase in corporate rental car rates. The move to raise corporate rates comes on the heels of a published rack rate hike and amid ongoing pricing pressure from auto manufacturers.
Cendant this month enacted published rate increases of $5 for daily and $20 for weekly Avis and Budget rentals, beginning Sept. 10. While the company at the time asserted that the published rate increases "do not directly impact our contracted rate," Chuck Fallon, the company's executive vice president of revenue generation, said, "we have to discuss the issue across the board."
"It's going to be 7 percent to 8 percent on corporate contracts," a Cendant Car Rental Group spokesperson told BTN last week. "We're starting the process of notifying customers in writing and in person over the next couple weeks."
"The fleet increases are the reason for these increases across our business," Fallon said early this month. "As a result, because of the sizable corporate contracted business in our portfolio, it is something that we have to address and have begun to. It's something that we can't leave off the table, because our cost base has gone up across the board and the published rate increase only impacts a portion of our business."
Cendant, like its competitors in the rental car space, this summer raised published rack rates to contend with rising fleet costs. Fallon said manufacturers are raising such costs by 15 percent to 20 percent—depending on manufacturer and vehicle type—for 2006 model year vehicles. 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.
Given the rise in costs, most of major rental car companies, including Hertz Corp., Cendant Car Rental Group and Dollar Thrifty Automotive Group, this summer increased published rates
(BTN, July 18). Although some companies said the hikes were seasonal, Avis and Budget opted to sustain the rate jumps on a long-term basis—as well as bring them to the corporate side. As of press time, the other major rental car companies would not comment on the prospect of corporate rate increases. Yet, insiders expect the Cendant rates to hold and others to match.
Concerns about higher fleet expenses and even tighter fleet supply were echoed by Dollar Thrifty Automotive Group CEO Gary Paxton, whose Dollar and Thrifty brands raised rack rates this summer, varying by market, between 5 percent and 10 percent.
"We expect vehicle manufacturers will reduce vehicle sales to the rental car industry for the 2006 model year and will increase industry vehicle costs," Paxton said during the company's quarterly financial analysts' conference call this month. "These cost increases would begin to impact the industry in the fourth quarter of this year, with a more significant impact in 2006."
Cendant Corp. president and CFO Ron Nelson discussed fleet costs and their impact on pricing at length with investors late last month during the company's second-quarter earnings conference call. Nelson also warned that this year and next could bring even further pressure on rental car prices.
"It has been widely reported, announced by General Motors last week and included in the Hertz IPO prospectus, the OEMs (original equipment manufacturers) are dramatically reducing many of the incentive programs that they previously offered to rental car companies," Cendant's Nelson said on July 26. "Several weeks ago, we implemented daily rental price increases at both Avis and Budget to offset the OEM cost escalation and, to be sure, additional rental price increases will be necessary over the course of the 2006 model year in order to offset the higher average price of the vehicles in our fleet."
Nelson said another opportunity for further rate increases would come sometime within the next three months, when rental car companies begin to tighten fleets in anticipation of sluggish demand during the winter months of the fourth quarter.
"The price increase that seemed to be adopted by the industry last month was on the order of 4 percent to 5 percent," Nelson said. "We probably need another 1 percent to 2 percent over the back half of the year to offset the fleet cost increases and then over the course of next year, on average, it probably needs to be up 5 percent from where we sit today or an incremental 4 percent."
Yet, Cendant's Nelson was quick to mention that an across-the-board rate increase for corporate clients may not be as easy to push through.
"We do have some flexibility in some cases to increase corporate pricing and we're looking very carefully at that," he said, "but you really do have to balance the competitive dynamic of moving corporate prices."
"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.
Meanwhile, Cendant also recently changed its policy on age requirements, lowering the minimum age to rent a car to 21 from 25. Fallon said most corporate contracts already have a clause to allow drivers under 25.
"If you're an employee of a contracted company and you're traveling on business, we would rent to those under 25 in those programs," Fallon said. "The provision is more geared toward an unaffiliated business traveler."