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The Car Rental Industry – An Overview

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"Once car rental gets in your blood, it stays. There are a lot of 'retreads' in the business people who go from company to company," declared one car rental executive.

Like many people in the car rental business who are not otherwise driven by some fascination with the automobile, Robert Coffey stumbled in but soon found himself caught up in the dynamics of the industry and has never left. Coffey had been working for Pan Am for five years when he became one of the casualties of the "blood bath of 1974" in which thousands of airline personnel lost their jobs. His boss at Pan Am, however, had a friend in top management at Avis Rent a Car System who offered him a position.

"I was complacent," Coffey related. "I thought the airline business so dynamic-a fleet of 150 airplanes going to hundreds of points all around the world. You knew where they were going. Then I realized that Avis had 65,000 cars in its fleet, and that customers may tell us they will return a car to one place and wind up in another. The whole prospect of keeping track became exciting.



"I found the car rental business one of phenomenal change the capacity of the product changes daily in each city. There are new cities to open, new marketing opportunities, new people to meet, and new places to go."

Coffey has been in the business since nearly two decades, moving from Avis to Alamo Rent a Car, most recently as vice president-market planning, "and it is more exciting every day".

Car rental does not have the glamour (or prestige) of the airlines many come to it after they cannot get jobs in the airlines. However, people fail to appreciate the dynamics and the challenge of the business and the fact that it offers much the same people contact, high technology, and excitement of airport activity as the airlines.

The car rental industry exploded in growth during the 1970s and into the 1980s when there was a frantic scramble for car companies to obtain coveted on-airport locations. The airport was where the real growth of the business was taking place as airline deregulation caused people to leave their personal cars home and take airplanes instead, leaving passengers with a need for rental cars at their destinations. The car rental industry doubled in size during the decade, averaging 10 percent growth a year and outpacing most other segments of the travel industry.

Car rental is nearly a $ 10-billion business, employing about 1500 to 200000 people. There are several thousand car rental companies in the United States (350 in southern Florida alone), the vast majority small "Mom and Pop" outlets, and together they operate at 20,000 locations. The 10 largest companies are Hertz, Park Ridge, NJ; Avis, Garden City, NY; Budget, Chicago; National, Minneapolis; Alamo, Ft. Lauderdale, FL; Dollar, Los Angeles; Thrifty, Tulsa; Value, Deerfield Beach, FL; General, Hollywood, FL; and American International, Boston. These companies account for more than 6,000 locations and control about 80 percent of the business.

Companies differ markedly in style, in their position in the market, in market niche, and to some degree in the kind of services they offer. Foremost Euro-Car, Inc., based in Van Nuys, CA, and Inherent Car Rental System of Los Angeles specialize in arranging lease/purchase deals for Americans in Europe. Other companies specialize in fly/drive programs in Europe. Some companies specialize in renting recreational vehicles. In some highly competitive leisure markets, the car company can become extremely creative. In Hawaii, the Budget franchise came up with a discount coupon book at restaurants and attractions as an additional inducement to customers. Still other companies, such as Carey International, specialize in car and driver arrangements.

Intense Competition

Like the hospitality industry, the car rental business has huge growth prospects and affords excellent advancement opportunities as well as the chance to take on tremendous responsibility early on in a career. But unlike the hospitality industry, where hotels take years to plan and construct and where capacity is fixed, car rental companies (like airlines) can shift their supply and adjust prices to meet demand virtually at will. This flexibility allows them to react quickly to competitive threats.

Consequently, the car rental business is one of the most intensely competitive of all travel businesses. Every detail is shrouded in secrecy executives do not divulge, for example, the number of cars in any one location because it would betray valuable information to the competition. Car rental is a commodity business where the car can be moved instantly to tap into demand.

Service and price rule here (as with the airlines), but the two key elements that contribute to the specialty of the car rental business can be summed up as fleet and finance. Fleet utilization is the name of the game in car rental, and this means logistics. Contributing to this dynamic is that a company may not have gauged demand correctly and can place too much of its fleet in a location.

"There is a substantial logistics problem in getting the fleet to the right place at the right time," a Hertz executive stated. For example, when Hertz faced a problem of moving cars out of Florida and back into the Northeast after peak season, it solved the problem through substantial price incentives Floridians were offered a car for a week plus two return air tickets to Florida for only $129.

Car rental companies are intimately linked with the airline business (80 percent of industry revenues come from airport locations). While some were helped, others were hurt when deregulation changed the airline pattern to a hub-and-spoke system. All car rental companies, however, are affected constantly by shifting demand for air services, which is often helped along by aggressive pricing by certain carriers.

Besides logistics and demand, fleet utilization also involves the kinds of cars rental companies offer. A car company has to anticipate the design, size, and fuel economy of cars that people will want to rent (if fuel is plentiful, people want to drive bigger, sportier, faster cars; if scarce, they shift to downsized vehicles). The company also must consider what cars people will want to buy 18 to 24 months later (rental companies have to sell off their used cars).

"There's so much to consider," asserted Coffey. "You even have to figure the impact of such things as teleconferencing [satellite transmissions that enable meetings participants to be in different locations and that will likely cut down on the amount of airline travel], or will people want cellular phones, and how the cost of airfares may or may not stimulate air travel."

Moreover, many car rental companies are also in the franchise business, which adds yet another dimension to business operations.

In their highly leveraged, capital intensive business, car rental companies borrow heavily each year to finance a new stock of cars. A point change in interest rates can mean $5 million to the bottom line of a major company like Avis. The intense competition among companies has also put pressure on pricing, which means equal pressure for raising productivity. 'If you're positioned properly and have read from the crystal ball correctly, you make money," an Avis executive quipped.

Largely due to the high rate of borrowing to finance the fleet and because car rental companies generally earn a high rate of return, the two largest in the field, Hertz and Avis, have been plums in takeovers by major conglomerates. Since Hertz was founded in 1918, it has had many owners including RCA and United Airlines. Avis had been owned by ITT, then was publicly owned, then was acquired by Norton Simon, which was bought by Es- mark, then was acquired by Beatrice, followed by Westray Capital, and, in 1987, by its employees in one of the nation's largest ESOPs (employee-sponsored ownership plans).

Major car rental companies have a second business equally important as the rental side-selling the used cars. The companies have to predict two to four years in advance what customers will want to rent as well as to buy frequently, the two wants are not the same.

Over the past few years, however, major car manufacturers including Ford, General Motors, Chrysler, and Volvo have stepped in to take substantial ownership interest in several of the major car rental companies. They have changed the complexion of the car rental industry by way of a buy-back arrangement that reduces the risk of disposing of used cars and makes it possible for renters to have new cars each year (a competitive edge). In exchange, the rental companies usually have to acquire car models of the manufacturers' choosing.

A relatively new company, General Rent A Car, based in Hollywood, FL, was financed by Chrysler (which also has interests in Thrifty, Dollar, and Snappy). Ford has a substantial interest in Budget and Hertz (with another 20 percent owned by Volvo). General Motors has stakes in Avis and National. Mitsubishi purchased a majority interest in Value Rent A Car (the first Japanese company to acquire a U.S. car rental company).
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