Ken Halloran could hardly believe his ears. While planning a mid-September jaunt to Fort Myers, Fla., the retiree from Fort Mitchell, Ky., reserved a midsize sedan from National Car Rental System Inc. He gulped at the rate: $148 a week, or nearly triple what Halloran says he paid for the same type of car last year.
Better get used to it. Car-rental customers already are paying more to drive older cars with higher mileage. And by the busy holiday travel season, rates may zoom as much as 40% more in some areas. That's because Detroit's Big Three auto makers, who were clobbered by huge losses last year, are cutting discounts on the cars they sell rental companies. Motown also will buy back rental cars only after six to nine months, vs. as little as four months last year. The Big Three want to avoid flooding the market with huge numbers of almost-new rental cars and cannibalizing their new car sales as they did in 1991.
PASSING IT ON. The changes leave the car-rental industry, which has been hard hit for years by cutthroat pricing, with a huge bill to pass on to consumers. Frank A. Olson, chairman of industry leader Hertz Corp., which has annual U.S. car-rental revenues of about $1.5 billion, figures that the higher prices he is payng for new models will add about $75 million annually to his costs. "This is the most significant cost increase in the history of the car-rental industry," Olson contends.
To compensate, Hertz raised rental rates 8% to 10%, on average, this summer. With rivals following suit, rates in most cities have started to climb. In New York City, for instance, Hertz and National have upped their daily airport rate for a midsize car from $45.99 and $54.90 respectively, in March, to $61.99 and $60.90 as of mid-September (table). And Hertz plans an additional 15% average increase in coming months. Hertz executives fret, though, that new price wars could erupt. That likely would precipitate big losses and a shakeout among rental companies. "If prices don't go up, there's going to be a bloodbath in the industry," says Craig R. Koch, a Hertz executive vice-president.
The Big Four rental companies seem solid enough. Their size aside, they each have connections to an auto maker who has an interest in seeing them survive. Ford Motor Co. owns 49% of Hertz and has ties to Budget Rent A Car Corp., which vies with Avis for the No. 2 spot. General Motors Corp. has stakes in Avis and No. 4 National. Smaller outfits, such as Thrifty, Dollar, and Snappy, also have a corporate big brother: They're owned by Chrysler Corp. But plenty of the roughly 4,000 independent rental outfits around the country, many of them local or regional players, may not survive. In April, tight credit and the higher cost of new cars forced Boston's American International Rent A Car Corp. to file for Chapter 11 bankruptcy protection.
How did the industry come to such a pass? Analysts think that during the recent auto sales slump, the financially strapped Big Three, led by GM, decided it was cheaper to sell rental cars at a loss than to lay off workers. That's because closing and reopening plants is expensive, partly because the auto makers' current union contracts obligate them to pay many workers even if they're not working. The Big Three also feared that shutdowns might crimp their market share.
DARWINISM. As the slump deepended, Detroit took discounting to the level of "insanity," Hertz's Olson says. In addition to selling new models to rental outfits at just over dealer cost, he adds, Motown paid cash incentives of $400 to $1,400 for each one delivered. Then, the Big Three bought back the cars on a fixed-depreciation schedule that barely allowed their value to fall during the four months the rental-car Systems Inc. in Los Angeles, "we were making money buying and selling cars, and losing money renting them."
Motown's discounting altered the economics of the industry in other ways. Some upstart rental companies used the bounty from flipping new cars to slash prices and pour money into national advertising campaigns. The smaller companies ate into the combined market share of Hertz, Avis, Budget, and National, reducing it from 76.6% in 1988, to 61% these days, according to Automotive Fleet, a trade magazine. "We should have had a shakeout in our industry like the one in the airline industry, with the fittest surviving," gripes Olson. "Instead, almost everybody has survived."
Probably not for long. Smaller rental companies' ad budgets are drying up. And tighter credit is plaguing others, as the auto makers get stingier with rental-fleet financing. Chrysler, for example, says that since July 1, it has curtailed financing to rental companies other than the ones it owns. "The smaller rental-car companies are being shut out from credit," complains John J. Prior, American International's senior vice-president. "What are they going to do? Go to a bank? Banks aren't lending."
`FREE RIDE.' Witness American International's swift fall. The company says its revenues grew 20% annually the past three years. Then last year, Chrysler Credit Corp. began curbing American International's credit after it became worried about the company's financial health, says a Chrysler Credit spokesperson. American Intenational tried to borrow from GM's credit arm instead, but was turned down, says Prior.
The pressures are still mounting, even on rental companies with close ties to the Big Three. For instance, with Motown paring back its fleet sales, Value Rent A Car Inc. says that it sometimes runs short of Ford Escorts and Geo Metros. "There's a very great shortage of smaller cars," says Jeffrey G. Davis, Value's senior vice-president for marketing. That forces rental companies to rent bigger cars at econocar rates. And at Avis and National, GM has cut cooperative advertising allowances, which promoted the rental of specific GM models. The upshot, says Davis, is that the car companies "are saying to the rental agencies that they are going to have to become profitable on their own."
Will consumers balk at higher prices? Rental companies argue that their rates have been artifically depressed for years by rate wars and by Big Three discounting. After inflation, they note, the average per-day rate the industry gets for a car - now about $30 is $6 to $7 below a decade ago. "Consumers had a free ride for a long time in car rental," says Donald M. Himelfarb, president of Thrifty Rent-A-Car System Inc. But that may be cold comfort to travelers who seem sure to get socked with rising rental rates this winter.