Two major car rental companies, known best for their airport locations, are accelerating growth at a brisk pace into the $8 billion-a-year suburban off-airport market. The Hertz Corp. and Cendant Rental Car Group, parent of the Avis and Budget brands, have stepped up efforts to gain marketshare in the lucrative suburban market long dominated by Enterprise Rent-a-Car.
Enterprise, which has a stronghold in the off-airport replacement market, has been making gains in the corporate travel market, heating up the already heavy competition among such other established players as Alamo Rent A Car and Thrifty Car Rental
(BTN, Aug. 2).Hewlett-Packard global air and car supplier manager Kevin Iwamoto said the foray of traditional airport car rental companies into the suburban market means only good things for corporate travel buyers. "It gives the corporate buyer more options at a local location without having to go to the airport and pay extraneous fees. This is an attempt to try to provide more services to corporate clients, but the car rental companies also get the best of both worlds. They can be there for their corporate customers and have a viable local client base."
Iwamoto added that the drastic dropoff in leisure and business travel after the 2001 terrorist attacks was likely a factor that led airport car rental companies to look at other streams of revenue. "When you're in a low-margin industry, that's a serious wakeup call," Iwamoto said. "This gives mainstream car rental companies an opportunity to diversify their profit portfolios."
Brian Kennedy, Hertz executive vice president of marketing and sales, said Hertz is directing substantial time, effort and money into expanding its suburban locations. By year-end, Hertz will have opened about 300 new off-airport locations and, like Enterprise, will offer free pickup and drop-off service.
"We had a goal for the end of the year to have 1,300 off-airport locations in the U.S.," Kennedy said. "We're growing about 25 percent a year, and we'll probably accelerate that in 2005. It's pretty ambitious and very aggressive."
While the Hertz approach is swift and aggressive, Cendant is making its move into suburban markets in a slower, but no less deliberate approach. Avis will open 65 new sites this year, according to Mike Collins, executive vice president of U.S. operations. Budget has opened up about 25 suburban locations this year. Cendant now has approximately 1,400 off-airport locations.
"By comparison, this is extremely modest, but it fits with the approach we've had for a number of years. I start with the point of view that there is no rental car company that has a comparable share of on-airport and off-airport business," Collins said.
He noted that since 1999, when the company embarked on its suburban expansion, Avis has increased its off-airport locations by about 75 locations each year. "It's very modest growth, but it certainly fits with our slow but steady growth strategy that we embarked on several years ago," Collins said.
According to Hertz's Kennedy, the move into the suburban market is not necessarily an effort to challenge other car rental companies in the sector, but rather a prudent business practice that has been ongoing since 1997.
"We were looking for a way to grow our top-line revenue and our profit. One area we were not participating in was the off-airport suburban locations. It's a very large market and even a small percentage of that means huge revenue for us," Kennedy said. "Any company in today's world that wants to grow its base and have a solid business model going forward needs to look for top-line revenue growth and a diverse set of customers. You don't want to just concentrate on airports or leisure. You want to derive your sources of income from as many revenue streams as you can."
Kennedy said opening up suburban locations is an involved process that takes planning and substantial resources. He said identifying locations, allocating fleet, hiring new employees and training them sufficiently is a daunting task when opening locations on a large scale.
"It's not like opening up a location at an airport and the people just arrive," Kennedy said. "It's a ramp-up thing and when you first open up, you're not making money. In some ways, it's like starting a whole new business. These are big investments."
Kennedy said Hertz started its suburban offerings in California, the country's biggest market. Now, he said, the company most rapidly is opening locations in the Midatlantic and Southeast, followed by the Northeast and Midwest. By year-end, Kennedy said, Hertz will consider its suburban coverage as nationwide, and the company will go back and add more geographic coverage density. "By that time, it will just be fill in," he said.
Cendant has been busy integrating Budget Car Rental into the Cendant family, streamlining operations, combining fleets and centralizing the operating platform. Cendant acquired Budget in 2003, "and we've had other priorities in expanding our on-airport segment," Collins said. "We will certainly be accelerating our growth rate in 2005 now that we've completed our systems conversion with Budget. We think it's appropriate for us to have a stronger marketshare off-airport than we have at the present time."
According to Collins, Cendant's off-airport locations are split nearly evenly between Avis and Budget. In those locations, one-third of Budget's business is comprised of corporate or insurance replacement customers, while Avis stakes two-thirds of its suburban business to the same clientele.
Collins said Cendant simply is opening locations where there are people, corporations and the most vehicle registrations. The company recently has opened locations in the Midwest, Northeast and south-central parts of the country. "We have a pretty good network. We have almost 1,400 off-airport locations. When our corporate accounts ask us to open up local stores, we're very responsive to that," Cendant's Collins said. "In the near future, our focus will be more in California, Texas, the Midatlantic and Florida."
As Cendant continues to expand its suburban locations, Collins said some will be corporate-owned locations and some will be operated under agreements with independent agency operators.
"Our business off-airport is serving our contracted commercial accounts and leisure customers without contracts," Collins said. "We have the same array of vehicles. We're very much interested in one-way business and have great programs to support it. On the corporate accounts, we have an excellent relationship locally with them, and all the benefit programs apply off-airport. And we do provide pickup and delivery service—that's the price of entry."
Although Enterprise controls the vast majority of the off-airport market, Hertz's Kennedy said competition is a good thing for customers. "Anytime you have a single company that tends to dominate marketshare in a segment, anytime someone comes along and provides a competitive alternative, they are well received by the buyers," he said. "We've had a lot of support from the people who control the replacement part of the business in the United States. They like to see competition."
HP's Iwamoto agreed that having more choices ultimately benefits the customer, but also helps to buffer car rental companies in economic downtimes. "It leads to better pricing," he said, "and that market sector is not subject to the cyclical ups and downs of the business travel and leisure market."
With $8 billion in revenue in the suburban sector, Kennedy said, there is plenty of room to get a piece of the pie, no matter how small.
"We're coming from a place where we have maybe 1 percent or 2 percent. The opportunity for growth here is very good," Kennedy said. "The replacement part of the business is business that is to some degree recession proof. People get into accidents regardless of what's going on with the economy. You're bound to be reasonably successful. We don't have to dominate this segment to grow rapidly."
Kennedy added that corporate clients have become comfortable with Hertz's airport service, and the loyalty carries over into the suburban market when corporations have rental car needs away from major hubs.
"They can get the convenience of having locations nearby their offices or where they live for use in their business travel and get all the benefits they'd have normally got from their contracts. In many cases, they'll actually get a lower rate," Kennedy said. "We'll move cars from wherever we need to move them to accommodate and service the customer who has a reservation. They can be sure there will be a vehicle there. We operate with the same commitment to quality as the on-airport side."
Iwamoto noted that the ability to rent from off-airport locations creates both accessibility and cost benefits to buyers who have travelers in suburban markets. Avoiding airport surcharges and the taxes associated with airport rentals makes renting locally attractive, Iwamoto said. "There's a convenience factor and an expense factor, and they go hand in hand," he said. "Now the traveler doesn't have to go all the way to an airport to get a car."
Collins said an added benefit for existing corporate clients is that Cendant provides the same tracking and information services for off-airport rentals that they enjoy with airport rentals.
"Our commitment to the off-airport side is very deep and is a very big business for us. As the major on-airport rental car companies are looking to develop more aggressively, that is a significant trend in the industry," Collins said. "Some of the off-airport companies have enjoyed unique status, and I think there's a change in the industry. You'll see a very different off-airport segment in a few years."
Iwamoto said the responsiveness of traditional car rental companies to their large corporate clients in terms of opening locations to serve them is a benefit for all involved. With such a large revenue pool to dip into, there's enough business to go around. "The market is huge," he said. "I think it could afford to have two or three mainstream competitors."