Driving for Business, Rental Fleets Go Green

To keep customers coming despite high gas and airline costs, rental car companies are offering more fuel-efficient cars

Vacation travelers worried about high gas prices will find a lot more import brands at the car rental counter this summer. Toyota (TM), Mazda (MZDAF), Hyundai, Kia, and others for the most part get better gas mileage than big, domestic cars and SUVs.

A very limited number of gasoline-electric hybrids are also available at airport locations for travelers who are really determined to save on gas. Hertz (HTZ), for instance, bought 3,400 Toyota Prius models to add to its so-called "Green Collection" of cars that get an EPA-estimated 28 mpg on the highway or better.

Enterprise Rent-a-Car, which also owns the Alamo and National brands, says that in its total fleet of 1.1 million vehicles, it has about 4,000 hybrids; about 73,000 flex-fuel vehicles that can run on 85% ethanol; and almost 450,000 vehicles that get at least 28 mpg. The Avis Budget Group (CAR) also offers hybrids and other fuel-efficient vehicles.

A Chrysler Electric Runabout

Many tourist destinations have local businesses that rent so-called NEVs, or neighborhood electric vehicles. Especially at beach destinations where traffic is restricted, the low-speed, battery-powered NEVs can be a practical way to get around. By law, NEVs can't exceed 25 mph. They've been sighted in Tybee Island and Jekyll Island off the Georgia coast; Key West, Fla.; Maui; and many overseas destinations in the Caribbean and Europe.

"No need to worry about expensive gas," says the Sunshine Key West Rentals Web site. Like a lot of similar operations around the country, Sunshine Rentals offers NEVs built by Global Electric Motors, a Chrysler subsidiary based in Fargo, N.D. GEM sells about 4,000 NEVs annually.

As gas prices passed $3 per gallon and then $4, domestic automakers in the last 90 days saw a disastrous acceleration in the trend away from big pickups and SUVs, and toward small cars and crossovers. Rental fleets are experiencing somewhat higher demand for fuel-efficient vehicles, but it's not nearly as pronounced as in the new-car market, the rental companies said.

So far, vacationers who need room for passengers and luggage are not switching to smaller vehicles in large numbers, said Laura Bryant, a spokeswoman for privately held National Rent-a-Car, based in St. Louis. "Our customers are definitely sensitive to [gas prices], but they're not renting fewer full-size cars and SUVs. They need room on vacation for luggage," she said in a phone interview.

Coping with Economic Pressures

Joe Nothwang, Hertz executive vice-president, made a similar remark in a May 28 conference call with industry analysts. "People rent cars because of the specific functionality of the vehicle they're going to rent. If you've got two couples going to Hilton Head to play golf, a Ford Focus just isn't going to hack it, so they go with the sport-utility," he said.

Nor are the rental companies experiencing a sharp drop in demand overall, unlike the Detroit Three automakers. Despite expensive gas, a troubled U.S. economy, and worries that business and vacation travel could suffer, revenues were up in the first quarter for the two big, publicly traded rental companies, Hertz and the Avis Budget Group.

However, both companies suffered a net loss for the quarter, due to competitive pricing pressure, and higher expenses including higher interest rates. Hertz, based in Park Ridge, N.J., had a net loss of $57.8 million in the first quarter, vs. a net loss of $62.6 million in the year-ago quarter. Avis Budget, based in Parsippany, N.J., had a net loss of $12 million in the first quarter, vs. a net profit of $13 million in the year-ago quarter. Rental companies are restructuring to consolidate their operations, diversify their businesses, and lessen their exposure to any one sector.

Enterprise, the dominant brand in off-airport rentals, bought Alamo and National last year to increase its airport business. Conversely, Hertz, presently concentrated in airport locations, is working to strengthen its off-airport locations. Off-airport locations rent cars to businesses and to people whose insurance covers a rental car while a damaged car is repaired.

To improve margins, they're also pushing hard on extras like optional insurance and GPS navigation. Hertz said its use of GPS units is growing at an average of about 20% per year, to around 84,000 units in 2008. Rival companies offer similar systems.

Domestic Air Travel Declining

Fundamentally, air travel has continued to grow slightly, even though the rate of growth has slowed to almost zero, according to Global Insight in Waltham, Mass. U.S. domestic air travel will increase 0.3% to just over 2 billion trips in 2008, vs. just under 2 billion trips in 2007. That includes a slightly higher increase in leisure travel, and a slight decline of less than 1% in business travel, Global Insight said.

Inbound foreign tourists are also helping to offset the domestic trend. That's especially true of European tourists taking advantage of the weak dollar. Inbound travel to the U.S. increased 11% in 2007, according to Hertz. Global Insight said international arrivals should increase about 4.4% in 2008, to around 59.2 million.

More ominously, Global Insight expects overall domestic air travel to decline slightly in 2009, by around 0.4%, including the first decline in leisure travel since 2003. Hertz says leisure air travelers account for about 44% of its rental car revenues; business travelers, 33%; off-airport locations, 23%. In addition, Hertz also has a major subsidiary that rents out heavy equipment.

Mark Frissora, Hertz chairman and chief executive, said in the May 28 conference call that the relationship between air travel (which the rental companies measure in "enplanements") and the rental business is not as close as people assume.

"If enplanements are down, that's not positive for our business, but it's not the impact you would think it would be. If enplanements go down 6%, our business doesn't go down 6%. No way it correlates like that," he said. He guessed that a 6% downturn in air travel would result in 2% lower revenues for Hertz, limited to its on-airport locations. "It's important to make that note. On-airport. So our on-airport business is not the total business model," Frissora said.

Detroit Sales to Rental Fleets Down

One factor that has changed is rental fleets have a higher proportion of imports than ever, a trend that predates $4 gasoline. To boost margins, the Detroit Three have cut back on unprofitable sales to rental fleets, in favor of more profitable sales to retail customers. That also helps explain why automakers are allocating few hybrids to fleets—retail demand is so strong.

Even with the cuts, the Detroit Three still sell an awful lot of cars to fleets. For instance, in the first quarter of 2008, General Motors (GM) cut car sales to fleets to 33.5% of the total, from 36.8% in the year-ago quarter. That's still one-third of the total, while the mix of fleet sales for import brands like Toyota historically has been much less than 10%.

In addition, the drop in cars at GM was offset by an increase in fleet sales for GM trucks, from 25.5% to 26.7%. Besides daily rentals, the fleet numbers include sales to commercial buyers such as construction companies; plus local, state, and federal government fleets. The automakers don't usually provide a detailed breakout, but GM and its Detroit competitors say that within the fleet totals, sales to daily rental fleets are off the most.

Import brands have filled the void. In the past, rental companies were closely tied to the Detroit Three. For instance, Ford (F) was a major investor in Hertz in the late 1980s and 1990s, but spun it off in 1997, when Hertz went public. In 2001, Ford bought it back. In 2005, Hertz went private again, when it was bought out by three private equity groups. It went public yet again, in 2006.

Vacationers Still Want SUVs

Naturally, Hertz used to buy most of its cars from Ford. As of Mar. 31, Hertz, in the last 12 months, bought only 26% of its vehicles from Ford. For the same period in 2004, that number was 44%. In the same time frame, Toyota's share of Hertz purchases grew from 7% to 12%.

The Avis Budget Group says it expects to buy 78% of its fleet from the Detroit Three this year, vs. 91% in 2004.

Ironically, even though the rental companies are buying fewer Detroit Three vehicles, they could be in a better relative bargaining position with the Detroit Three than before the gas crisis, because the rental companies still want bigger vehicles, including SUVs, which the Detroit Three are desperate to sell.

So far, people are sticking to their vacation plans and don't seem that worried about putting gas in a big rental car, said Frissora of Hertz.

"Typically a rental car is only about 10% of your vacation-time travel budget, and then within that, the gasoline part is only another 10% to 15%, so believe it or not, it's not a big number of your total vacation budget. So people just don't seem to care as much. We've seen that statistically, analytically, we've studied it. It's not a good thing, but it's not the dramatic swing that you would think it would be," he said.

That could change if the economy gets much worse or if gas goes even higher.