Rate Hikes Unlikely To Offset Car Rental Cos.' Costs

Car rental companies, fueled by growing volume and demand, intend to impose modest rate hikes for 2005, but competition and corporate clients' internal cost-containment pressures likely will prevent vendors from getting much more of an increase than a few percentage points.

American Express' global forecast for 2005 car rental costs in North America projects rates to remain flat or see a modest gain of up to 2 percent. The report said average daily car rental costs, which include all charges incurred including mileage, gas tax and insurance, this year decreased as a result of two years of industry weakness.

The report said the industry is in the midst of a turnaround, in contrast to the reduction of business travel for the past two years, as volumes improve, corporate travel gradually gains momentum and a weak dollar and promotional airfares attract international travelers. As a result, some rental car companies enjoy increased profits. The report said if the economy holds steady or improves, 2005 would be "a much improved year for car rental companies."

"Competition has been pretty fierce this summer," said Chris Payne, spokesperson for the Dollar Thrifty Automotive Group. "Fortunately, volume has been tremendous."

Payne said Dollar Thrifty endured rate decreases over the past year in the "single-digit percentage points," but rates could increase anytime if the car rental company feels the market would tolerate them and if volume were not adversely affected.

While increased volume helped offset lower rates, Payne said the cost of doing business constantly increases as rates stay flat or decrease. "Nobody wants to work twice as hard and get paid less for it," he said. "We would like to see rates increase commensurate with other rates in the travel sector. We would be happy if rates increased 5 percent, but we would go after whatever we could get. Rates fluctuate on an hourly basis."

Payne said a rate increase is something DTAG has long looked to implement, but such a move only would happen if customers would tolerate it. "Our pricing always is contingent on our competition," he said. "We would love to see a rate increase, and we would take it now if we could get it. A lot of times rate increases don't stick."

While Hertz Corp. would reveal no specific figures, company officials said rates have increased modestly and would continue to do so into 2005. "Overall corporate rate pricing has increased during the past 12 months, and we expect costs will continue to rise over the next several months," said Paula Stifter, manager of corporate affairs for the company. However, she said corporate pricing in 2004 rivals that of 1988, further indicating fierce pricing competition in the industry.

Neil Abrams, president of the Purchase, N.Y.-based Abrams Consulting Group, which closely monitors the car rental industry, said some companies implemented major hikes, though temporarily, in 2004. "They were up significantly, sometimes 25 percent," he said. "They are now starting to fall off some."

Abrams said there has been a steady buildup of business in the car rental sector, with volume approaching that of 2000, when the industry thrived. The terrorist attacks of 2001 sent the industry into a tailspin, from which it only now begins to recover. "The good news is that travelers are boarding planes, and that is important to the car rental industry," he said. "Travel budgets, though, still are under extreme scrutiny, and I do not see significant rate increases over the next year."

While Abrams said daily rates increased slightly since this spring, they did not rise enough to be deemed a trend. "It is going up, but not in a steady rate trend," according to Abrams. "Pricing is a fluid process, and there still are companies that charge $10 per day on the weekends. It is not a predictable entity."

Fleet-related spending comprises nearly 50 percent of a rental car company's overall cost, accounting for billions of dollars.

"They are currently looking at 2005 models that will be more expensive, as will the money they borrow to purchase them," the American Express report indicated. Additionally, auto manufacturers tried to limit the number of vehicles car rental companies use for a fixed amount of time, then return. As such, car rental firms need to purchase more vehicles, thereby increasing the cost of doing business and lengthening the tenure of cars in their fleets.

David Kilduff, head of car rental procurement for Eclipse Advisors and a former Hertz vice president of corporate sales, said car companies need to recover fleet costs in some way to stay profitable and viable. "This is an industry in which there is very little profitability and rates have not really gone up over a number of years," he said. "There will be an attempt to recoup those costs and get pricing up. Whether it will materialize is another thing." One reason for a price increase not to materialize, he said, is the need of car rental companies to keep volumes high to stay profitable. With so many companies aggressively pursuing business, pricing can make the difference. "It always seems that somebody out there decides to be competitive for marketshare," he said. "It's really difficult to predict."

Regardless, Kilduff said car rental companies will try to raise rates. "It will not be a double-digit percentage increase. If they got 5 percent over the next year, I think they would be lucky, but they will certainly attempt it," he said. "The bottom line is prices have to go up to pay for their costs. Going to the airport and getting cars is not cheaper. You only can become so efficient. Something has to give."

Abrams said the key for corporate travel buyers is to analyze closely their existing contracts with car rental companies and be sure to negotiate rates when renewing their contracts or when shopping around for a new provider. While daily published rates may increase for the public, rental car companies are hungry for corporate business and that can result in lower rates in a negotiated contract. "You've got to break the contract down into pieces and negotiate the total transaction price," he said. "You have to understand what exactly is included in the rate and look at insurance costs, liability add-ons and surcharges."

Kilduff said increased rates for corporate customers take time to make an impact on the bottom line. "You have to wait a year or sometimes two to affect corporate pricing, so it is a long, hard process to raise your corporate base. You have to wait for the contracts to come up," he said.

Once prices increase, Kilduff said, buyers naturally will consider alternative providers, providing lucrative opportunities to lesser-known, lower-cost companies. "As prices start to go up, people tend to start adding second carriers and testing companies that do not charge as much, like regionals," he said. "They start to look at alternative levels of service. They don't always find it, but they try."

The American Express report echoed the sentiments of most analysts and car companies themselves. "One thing is for sure," the report said. "As long as there is competition, pricing in the industry will have little to do with the car rental company's cost of doing business."