Freewheeling Days Are Over : Car Rental Rates May Rise 40% as Industry Changes Course
Bobby Tucker believed that he had his Thanksgiving vacation trip to Los Angeles figured down to the last dime. That is, until he reached the long row of rental car counters near the baggage claim, where the cost-conscious Seattle University student discovered renting a mid-size car for a week would cost nearly $30 more than what he remembers paying last year.
The rate the Avis agent offered him--discounted for the holiday at $159 a week--sent Tucker scurrying over to the Hertz and then the Budget desks in hopes of a better deal.
But eventually he trudged back to Avis to sign for their Pontiac Grand Am.
“I’ll put it on my credit card and suffer later,” said Tucker, 29. “But I think rates have definitely gone up.”
He’s right. Rental car companies are in the midst of implementing the steepest rate hike the industry has seen in a decade. And in addition to costing up to 40% more to rent, industry executives say consumers can expect the cars to be older and in shorter supply than they have been in the last few years.
Avis has raised its daily rate for a mid-size car at LAX to $44 from $39 last year. In Florida, Dollar now charges $129 a week for an economy car that it used to rent for $69. Hertz boosted daily rates for a mid-size car at New York’s La Guardia airport from $45.99 in May to $63.99 today.
Behind all these changes is the unraveling of the tight--and by most accounts unhealthy--relationship forged between Detroit’s Big Three auto manufacturers and the rental car industry in recent years. Rental car executives say recent price hikes by the auto industry have resulted in an unprecedented increase in their costs.
“When you have a 20% increase in your costs and you’re a low-margin business to begin with, you don’t have a choice,” says David Sparks, vice president for sales and marketing at Budget. “It’s either raise rates or don’t do business anymore.”
As consumer demand for new cars dropped off in the late 1980s, General Motors Corp., Ford Motor Co. and Chrysler Corp. each bought large stakes in the major rental car companies, which they used as a guaranteed market for their vehicles. By offering discounts of up to $2,000 per car and promising to buy back entire rental fleets every four months, Detroit managed to keep its plants running during the recession.
But the strategy proved disastrously unprofitable. The auto industry, which posted record losses last year, could ill-afford such subsidies to the rental car business.
And the nearly new cars, auctioned off to dealers and sold on used car lots, put an even deeper dent in sales of new cars as customers snapped them up for thousands of dollars less than the almost identical ones straight from the factory.
Nor did Detroit’s losses translate into gains for the rental car industry. As the Big Three offered cash discounts for bulk vehicle purchases and easy credit through their finance subsidiaries, a new crop of smaller rental car agencies sprang up, eating into the market share of industry heavyweights Hertz, Avis, National and Budget. This sparked price wars, which put a tight squeeze on the industry’s profit margin.
While most have managed to eke out a profit, GM--which owns 81.5% of National Rental Car Systems--said last week that it would take a $300-million charge in the fourth quarter to reflect National’s operating losses since 1988.
Now, Detroit is changing gears. The auto makers have raised prices on vehicles sold to rental fleets.
They’ve told rental companies they must keep the cars at least six months. And in what may signal the beginning of a more dramatic shift in the balance between the auto industry and the rental car business, GM said last week that it wants to sell a large chunk of its stake in National.
While declining to discuss his company’s financial predicament, Geoff Corbett, National vice president for sales and marketing, says GM will not be alone in seeking to alter its ties to the rental fleets.
“In less than three years, none of (the Big Three) will be involved in rental car companies,” Corbett says. “I believe in some way, shape or form they’re going to extricate themselves from it.”
Ford President Philip Benton does not rule out following GM’s lead by selling off the company’s 49% stake in rental-industry leader Hertz Corp.
“If someone came along and offered us a good deal we’d certainly consider it. But frankly I think it’s going to be difficult for (GM)--or anyone--to find a buyer,” Benton said. “It’s a very unprofitable business these days.”
The Big Three say extricating themselves from the rental car cycle will improve their bottom lines. And with Detroit’s cash spigot drying up, car rental executives say an industry shakeout is on the way, which will result in improved profitability for the survivors.
Indeed, an industry consolidation has already begun. In April, Boston-based American International Rent a Car Corp. filed for bankruptcy. Chrysler Corp. earlier this year merged General with Dollar, which it owns in addition to Thrifty and Snappy.
The several thousand independent rental firms across the country are especially vulnerable to the auto industry’s tightened financing policies. Chrysler Credit Corp. has recently stopped lending to rental companies other than its own, and GM’s credit arm appears poised to do the same.
“Our industry definitely needs a cleaning out,” said James Collins, president of Avis, which ranks No. 2 in the market. “I think we’ll see a lot of these fly-by-night operations that compete on price alone fold up, and that would be good for the industry.”
But for the consumer, a shakeout and the forces that cause it are likely to mean higher costs and less convenience as rental car companies look for ways to cut their own costs and increase revenue to cover the millions in discounts and subsidies they are used to receiving from the auto industry.
Leisure travelers are likely to feel the pinch first, while business travelers will face their own rate hikes as corporate accounts are renegotiated in the coming year. Gary Paxton, president of Los Angeles-based Dollar Rent-a-Car, says the rate increases will likely result in a slightly smaller market: “Every time you raise the price levels a few consumers drop out.”
For businesses and vacationers who have already cut back on travel because of high air fares and a sluggish economy, the higher costs of renting a car may be the last straw as they weigh whether or not to take their next trip.
But Paxton and others say their rates have risen a scant 2.6% over the decade, artificially depressed by the cutthroat price wars made possible by Big Three discounts.
Before this most recent round of rate hikes, industry figures show, consumers paid about $30 a day for an average rental--about $6 less than they did a decade ago.
Most industry executives are optimistic about the outlook for the market, insisting that consumers will realize that renting a $15,000 car for $40 a day is still a great deal. And besides, they note, in many cases, consumers have no choice.
As the Avis agent handing over Bobby Tucker’s rental agreement put it: “They complain, but they still rent.”
A New World of Renting
Scrambling to absorb price hikes imposed by Detroit’s Big Three auto makers earlier this year, rental car companies are looking for ways to raise revenue and cut costs. Here are some of the changes consumers can expect to find when they next approach a rental car counter:
* Cars will have up to 20,000 miles on the odometer, compared to an average of 10,000 to 15,000 over the last few years. Rental companies now keep cars in their fleets for up to nine months, compared to just three or four last year.
* Unlimited mileage may no longer be offered. National is considering a 10- to 25-cent-per-mile charge for more than 120 miles, and others may follow suit.
* Customers may be turned down based on their driving record. All the major car rental companies are experimenting with computer programs that can access a prospective customer’s driving record from the state government records. California law prohibits such access, but Hertz says it is working with state officials to implement a similar program here.
* Subcompact and compact cars may not be available. Some rental car companies are increasing the portion of mid-size and luxury cars--which rent for 5% to 10% more than the smaller models--in their fleets.
* In peak periods, it may be hard to rent a car without a reservation. When rental companies could sell back their cars to auto manufacturers every four months, they could afford to stock extra cars in their fleets during peak rental periods in certain areas. Now that they are required to keep cars at least six months, they are less likely to do that.
* Customers may be charged a $10 fee for the option of letting another person drive the car.
