Corp. Car Rental Pricing Under Added Pressure As Vendors Go Public

Corporate travel managers should budget for an increase in car rental costs in the coming fiscal year, although shrewd negotiators still can manage to keep those increases in line with what they've already been experiencing.

In the past decade, travel buyers, particularly those who have large rental volumes, have been able to stave off significant increases in car rental rates, said Neil Abrams, president of Purchase, N.Y.-based Abrams Consulting Group. Rental car companies were willing to acquiesce to the companies so as not to rock the boat with their business relationships, he said.

Now, however, car rental companies are facing pressure from increasing fleet costs caused by the struggling automobile industry, which is trying to improve its bottom line by deemphasizing agreements with car rental companies. The car rental suppliers, in turn, will have to find a way to maintain their profit margins, which already are fairly thin.

"Rental companies are going to be hard-pressed to maintain the rates at anything near where they are," Abrams said. "There will not be a lot of choices for the rental companies but to push for significant but reasonable increases—not 30 or 40 percent, but certainly in the 10 percent range."

This will become even more imperative as the major car rental suppliers transition to public companies. Both Hertz Global Holdings and Vanguard Car Rental Group, parent of the National Car Rental and Alamo Rent A Car brands, have filed for initial public offerings, and Cendant Corp., parent of the Avis and Budget brands, spun off its other business segments and began trading as the Avis Budget Group on the New York Stock Exchange last week. The Dollar Thrifty Rental Group already is a publicly traded company.

"Their P&Ls will be naked and transparent to the investment community," Abrams said. "The investment community has little tolerance for companies that don't show strong margins and well-defined directions and growth strategies."

There are still some unknowns as to how fleet costs will affect car rental companies, he said. Even if car manufacturers want to focus more on retail sales, if the retail side does not live up to expectations, the cars still will have to be sold.

Even so, travel managers going into car rental negotiations already are starting to see the impact from their rental suppliers, said Mike Lynch, who manages the travel procurement practice for King of Prussia, Penn.-based ICG Commerce. "We're seeing first-pass increases of 10 percent to 12 percent," he said. "There's even been as high as a 20 percent increase on first pass."

What ultimately will happen to budgets, however, will be decided at the negotiating table. Buyers have some factors on their side: Suppliers not as entrenched with corporate agreements, such as Dollar Thrifty and Enterprise, more actively are courting corporate customers, which could keep some increases in check.

While companies renting outside of corporate agreements remain at the mercy of rate increases that largely have been able to stick, actual negotiated rates have yet to rise to their anticipated levels, said Rose Stratford, senior vice president of industry relations for BCD Travel. "We haven't seen the rate increase that we expected, in the 10 to 13 percent range," she said. "We have been seeing about a 4 to 7 percent rate increase year over year, which is no different than what we have seen in the past."

Those numbers also fall in line with the latest from the American Express Business Travel Monitor, which follows charges on American Express corporate cards. It reported a 4 percent rise in average daily car rental cost to $67.26 for the second quarter of 2006 compared with 2005.

Budget planners also should be wary of increases in fees outside of the negotiated base rates. Whether it's loss-damage waivers or charges associated with loyalty programs, these fees stack up on top of the base rates, particularly as car rental companies unbundled more of such fees, Stratford said. Many of these fees, however, are negotiable, ICG's Lynch said.

Such is not the case with the myriad taxes often associated with car rental. The industry has become a frequent target for municipal and state taxes (BTN, July 17), and even though the rental companies and such organizations as the National Business Travel Association have bonded to fight the proposals, they still need to be a component of the travel budget, said Kevin Iwamoto, a former NBTA president who is responsible for car supply management. "You've got to be able to factor it in," Iwamoto said. "Most surveys show there's an additional 26 percent on average."

Overall, car rental pricing always will be limited by competition with ground transportation companies, particularly when it comes to airport transfers, Iwamoto said. If car rental rates ever come too close to the cost of someone being driven in a sedan, that would make an easy decision for the company to alter its policy, he said.

Yet, even if car rental companies are able to push through a stronger corporate rate increase, Abrams said costs still would be a bargain. "If you look at all the other travel-related decisions, it's still a great deal," he said. "It was an extraordinary deal two years ago, but now the corporate customers are being asked to ante up."