Times are hard for car rental companies. No one knows that better than Robert Barton, chief operating officer for U-Save Car & Truck Rental and president of the American Car Rental Association, a trade group. Times are also hard for car rental customers, who are encountering new fees, surcharges and higher prices. I asked Barton to explain what’s happening, and what the industry plans to do.
Q: What’s wrong with the car rental business?
Barton: Credit is non-existent. Many companies want to buy new cars this year but do not have the financing to do so. The three main sources of lending — asset-backed securities, commercial paper market, and traditional lease and bank funding — have all dried up.
One company had 76,000 cars on order in February 2008. In February 2009 the number of cars on order dropped to 7,000. The money the federal government has given to help the Big Three has not helped the car rental industry, the dealers, or the consumers buy cars.
Q: How is the fate of the rental business tied to that of the car manufacturers?
Barton: When the manufacturers face the challenges they currently face, and discounting of pricing takes place, used vehicles lose their value.
If a car rental company has been depreciating a vehicle for a year — based upon a set schedule — and then the manufacturers discount the value of the product, the used vehicle values take a hit, and the rental company is upside down. That means they have the vehicle on their books for less than what it is worth.
Demand for used vehicles has fallen as dealers don’t have the credit to buy. This means rental companies are over-fleeted – there are more cars available than the demand for cars, and pricing drops. In other words, a perfect storm.
Q: Given all that, what is the industry doing right?
Barton: We’re right-sizing our fleets. We are buying vehicles based upon our own abilities and needs, and not necessarily on what Detroit incentivizes us to purchase.
Fleets are shrinking which will allow us to better manage the acquisition and disposal process, as well as manage capacity and pricing to demand. We are also not relying on Detroit, and are mixing our fleets with vehicles from foreign manufacturers. We’re adding, more fuel-efficient cars to our fleets, eliminated millions of dollars of overhead, and also going through a period of consolidation.
Q: When I talk with car rental company representatives, I’m told time and again that a rental car is a great bargain when compared with the company’s actual costs. Can you give me an idea — and maybe a few specific numbers — that illustrate how affordable a rental car is today, when compared with another travel product?
Barton: The best comparison is probably to the hotel industry. Whereas recent economic downturns have created reduced pricing in the hotel industry, pricing has been steadily going up for the last 20 years.
You can still rent a car today in many cities for the same rates you did 30 years ago. By comparison, I just did a little searching for mid-April online. A three-star hotel on the strip in Vegas, on the weekend, starts at $149 and goes to over $250. A car for that same time period is $33 a day which, by the way, is up from last month.
In San Diego cars are renting for as low as $23 a day — and this is for a less than one-year-old car. Last week in Orlando cars were renting for $9 a day — for late April.
Q: What about your costs?
Barton: To give you a basic understanding, a risk vehicle that is almost a year old, will cost a car rental company in excess of $400 a month. More likely, closer to $500 a month.
If you are doing a great job, you will run 83 percent utilization, meaning you will rent the car for 26 days, at even $25 a day.
Do the math.
But before you do, recognize that between commissions and reservation fees, the car rental company only gets about $19.50 per day. Now do the math, and remember this does not include rent, payroll, information technology, busing, and vehicle maintenance.
In the old days — 30 years ago — you could also rent a car for about $10 a day, but you paid for every mile you drove. Now they are free.
Q: I’ve heard from many car renters lately who have been surprised by new fees, such as fees for canceling their rental or energy surcharges. Why are we seeing more of these surcharges?
Barton: There was this big tea party in Boston a very long time ago. To this day the same slogan that was shouted then is on every license plate in Washington DC: “Taxation Without Representation.”
Bottom line, hit the tourists, not the constituents who vote the local official into office. Need a new football stadium? Rental car tax. A new baseball stadium for Spring Training.? Rental car tax. Drop in revenues will cause the city to miss its debt obligations? Rental car tax.
That’s three taxes, and I only used Phoenix as the example.
Q: But what about the new fees that don’t really have anything to do with the local taxes?
Barton: OK, let’s talk about cancellation and no-show fees. Why shouldn’t we charge them?
When is the last time you booked an airline ticket and did not have to pay for it at the time of reservation? If you changed that reservation, you were assessed a fee; if you canceled and re-booked, they kept your money “for future use.”
When you reserve a hotel room, you have to give them your credit card information. If you do not cancel by 6 p.m. — or whatever time they specify — you are charged for the first night. If you want to take advantage of their really low Internet rates, you pre-pay, and these are non-cancellable. What happens if you don’t show? You forfeit the first night.
So again I ask, why not?
Q: You bring up an interesting point about no-shows, which is a real problem in the car rental business.
Barton: Our industry runs about a 30 percent no-show factor. That means 30 percent of the customers on any given day do not show up. In other words, to get to that 83 percent utilization you need to take reservations to 113 percent, or oversell yourself.
Then, if the weather changes, and there are a bunch of flight cancellations and people do not want to return their cars, or want to drive somewhere on a one-way unplanned rental, guess what? You will not have a 30 percent no-show, and then everyone is at your counter screaming, “I had a reservation — find me a car!” It’s a no-win situation for us.
Q: How much are no-shows costing car rental companies?
Barton: If you run a fleet of 250,000 cars, and you run a 30 percent no-show, and you have actual hard costs of about $3 a reservation received — regardless if they show or not — and your typical rental is three days in length, that’s $2.25 million per month in hard costs. Not lost revenue. Hard costs for the no-shows.
Q: What’s the solution?
Barton: I would suggest we should be exactly like the hotel industry. You make a reservation, you provide your credit card, you do not show up within three hours of the reservation, you are charged one day. You cancel? No fee. It is fair, it is equitable, it makes good common sense, and it is more responsible for us and our customers.
Q: How about energy surcharges?
Barton: Energy surcharges relate to the transportation industry and delivery trucks having fuel surcharges, the airlines having fuel surcharges, and the car rental companies having surcharges for busing.
Personally, I don’t like it, but some members do charge it. I say simply charge a fair price for the product. If your costs are going up dramatically, so should your rates. Keep it simple.
Q: I think there are a lot of people reading this who will say, “It’s certainly your right to charge a fee, but they need to tell me about them.” What is a car rental company’s responsibility when it comes to disclosure?
Barton: Full disclosure is critical. Before the customer leaves the rental counter he should have a clear and concise understanding of the exact cost of the rental and any and all fees. If he does not, he should not sign the rental agreement and should not take the car.
The car rental company also has an obligation to clearly and concisely explain all fees and charges at the time of rental. Some may suggest this should be done at the time of reservation, and in some cases it can be. However, in some cases, it is simply not possible to disclose fees the airport authorities decide to charge one day to the next.
A simple solution, in my mind? Have pre-paid reservations, with a guaranteed fare. Most of the online travel agencies and company Web sites already show the total anticipated rental charges in their current pricing models.
Q: If a fee hasn’t been adequately disclosed, should a customer be expected to pay it?
Barton: Personally, I believe there is a joint responsibility here. It is the car rental companies’ responsibility to clearly explain all of the charges to the consumer, but it is also the responsibility of the consumer to read and understand what they are signing and what they are responsible for.
Q: A lot of your customers have drawn a distinction between reasonable fees and unreasonable ones. For example, many drivers feel that “energy” surcharges for an oil change are excessive, and should be included in the cost of a rental. Can you help us understand the car rental company’s perspective on these types of fees?
Barton: The position of the American Car Rental Association on this issue is that members set their own policies. My personal view is to charge a fair price for the product. If petroleum price increases affect your cost structure, raise your rates.
That being said, as I am sure you can imagine, I am adamantly opposed to the airlines’ à la carte method of pricing. What’s next from them, an overhead bin charge if your bag is longer than 19 inches and has to go in the bin horizontally as opposed to vertically?
Q: There’s been a lot of talk in the airline industry about ancillary revenues — money derived from the sale of optional extras like snacks or confirmed seat assignments. Is the car rental industry going that way, or are these new fees just a temporary way of ensuring these companies’ survival?
Barton: It goes both ways. If you wish to rent a GPS unit, that is an ancillary product that will always have an extra fee. Same with baby seats. When you get to things like supplemental liability insurance and collision damage waiver, these are services that, frankly, 90 percent of our renting customers do not understand, nor do they afford the car rental company the opportunity to explain.
In very simple terms, the renting customer needs to remember that the rental company will only provide the renter with the minimum statutory coverage as required by the state in which the vehicle is rented.
Q: I think the bottom line for customers — at least the ones I talk with — is that the price they’re quoted for a rental car is the price they should pay. Do you think that’s a fair expectation?
Barton: Communication is key. The best way to explain this is through an analogy. If you sign a lease for an apartment for 30 days, you will want a very clear understanding of what your responsibilities are, what the ramifications of your actions will be, and what is expected of you and the landlord.
It is the landlord’s job to clearly explain all of this to you, and by signing the lease you agree to all of those terms and conditions as documented. Renting a car is exactly the same thing.