What Are Challenges to Green Rental Cars?

In 2007, ARN published an article titled “The Greening of the Auto Rental Industry,” which took a look at the business of renting environmentally friendly vehicles from the perspective of the independent operator.

Five years later, we catch up with the players in that story, visit with new ones and take stock of the present market for green rentals at non-major car rental companies.

Then and Now

In 2007, EV Rental Cars laid claim to being the first car rental company in the U.S. to rent only environmentally friendly vehicles to the public.

Started in 1997 in Los Angeles, the company offered the first generation of electric vehicles (EVs) for rent such as General Motors’ EV1, the Toyota RAV4 EV and the Ford Ranger EV along with the first hybrid models. EV Rental Cars’ parent company, EV Transportation Inc., went public while having the backing of high-profile industry veteran Bill Plamondon as its chairman and CEO. The company built a fleet of more than 400 cars serving six locations in California and one in Phoenix, Ariz. before closing its doors suddenly in 2009.

San Francisco-based Bandago Van Rentals, specializing in van rentals to touring musical acts, is alive and well. Bandago gained publicity in 2007 by claiming to be the first auto rental agency to be completely carbon neutral by purchasing carbon credits to offset the carbon output of it’s fleet and offices.

“Our green initiatives have been well received, and we continue to make positive changes,” says Bandago Owner Sharky Laguana. “They don’t really translate into direct measurable revenue, but they are the right thing to do. While some of the initial efforts might have been a little ahead of their time, the ones who do it now, and do it right, will likely reap rewards in the future from that positive association with their customers.”

On the car sharing front, Flexcar was absorbed by Zipcar a month after the green article was published. Zipcar has grown to be the world’s largest car sharing company and has started an EV pilot program in Chicago and a municipal EV fleet sharing program in Houston. Zipcar rents green models such as Honda Fit EV, Toyota Prius Plug-in Hybrid and Chevrolet Volt.

Zipcar went public in 2011 but has yet to make a profit — at least as of its 2012 second quarter earnings report.

On the Hawaiian island of Maui, Bio-Beetle keeps chugging along using biodiesel made from salvaged vegetable oil from local restaurants. The company, which opened in 2003, rents VW Jetta and Beetle diesel models, and renters can use the same local station to fill up. The website is still folksy and rental quotes are still given manually.

Loyal repeat customers make up much of the business, which hasn’t grown appreciably. “If you’d have asked me 10 years ago if we’d only have 17 cars today, I’d have thought you’d be crazy,” says owner Shaun Stenshol.

Biodiesel is cheaper in Maui than regular diesel. Yet an expiring federal tax credit of $1 per gallon at the end of this year might not be extended, which keeps a question mark on biodiesel fuel prices.

With an environmental focus, Stenshol says it’s hard to compete with a $75-a-week economy car special from one of the majors. A weekly rate of $199 for a biodiesel Jetta is as low as he’s willing to go. However, a year ago he moved from set rates to scaling prices for his green machines based on the competition and then added a reasonable premium. That translated to a smaller rate disparity margin than the majors, which has kept more cars on rent.

Today, Stenshol is catching the wave of EVs and has gotten pragmatic about aligning business decisions with government initiatives and manufacturer deals.

The state of Hawaii, a leader in green initiatives, now requires parking lots with 100 or more parking spaces to have at least one EV charging station. While implementation is slow, charge ports are coming online at hotels and retailers. DC Fast Chargers — which can fully charge an EV in as little as 30 minutes — have arrived, including ones at the entrance to Mt. Haleakala and the famed Road to Hana.

Stenshol took advantage of favorable lease deals to acquire a Nissan Leaf and Chevy Volt. In deference to the new trend, Stenshol has officially renamed the company Bio-Beetle Eco Rental Cars.

With a new focus, Stenshol is upbeat about the future: “Overall [the business] is moving in a good direction because it’s not just biodiesel now; we’re about offering the greenest cars available.”[PAGEBREAK]

Banking on Hybrids

VERC Car Rental, serving eastern Massachusetts through six neighborhood locations, recently purchased 200 Toyota hybrids (150 Priuses and 50 Camry hybrids), which constitute close to 60% of the fleet.

The large hybrid buy was motivated first by a desire to get noticed by the local renting public. “We’re battling Enterprise and Hertz every day,” says owner Jack Vercollone. “We wanted something to make us stand out in our marketplace.”

Reason two was an eye toward resale. “We’ve done pretty well with our hybrids in the past,” Vercollone says. “If you hit the [used car] market just right, especially on the East Coast when gas has gone over $4 a gallon, that’s a great time to sell these.”

When Toyota came to VERC with availability and decent pricing, the deal was made.

For the VERC customer, the desire for a hybrid rental is based more on fuel savings than on saving the environment. “Some people brag about it,” Vercollone says. “One renter was pretty proud of the fact that he went all the way to Maine on $20 in gas.”

Vercollone says that four or five years ago, a number of customers would not even take a hybrid rental if offered one. Today, “We do have customers requesting hybrids,” he says; however, “we haven’t gotten to the point that we’re a magnet for people that have to have a hybrid [rental]. Maybe that will happen when gas prices rise another 50 cents.”

VERC does not charge a rate premium for its hybrids, but its major car competitors in the area do. Vercollone contends that most of his customers would not opt for a hybrid if they had to pay $10 more per day. Larry Sullivan, VERC’s CFO, noticed that when pump prices spiked in the spring his competitors were able to boost their hybrid rates. Sullivan doesn’t know what the exact fuel price tipping point would be to raise hybrid rates over and above its normal fleet, but that will be an option, he says.

Absent a rate premium, keeping holding costs in check is where the rubber meets the road. Vercollone and Sullivan say the capitalized costs for their hybrids are about 10% higher for the Camry hybrid and 20% or more for the Prius compared to a midsize, regular gasoline model. That makes VERC’s market timing for de-fleeting all the more important.

In general, Vercollone admits that the company is in the midst of figuring all this out. “We recognize that it’s a risk; we recognize we’re early into the game, and we’re hopeful,” he says.

An All Green Fleet

MPG Car Rental was launched in January 2011, billing itself as “the premier all-green car rental company in Los Angeles.” The company rents a wide range of hybrids, including luxury, crossover and SUV hybrid models as well as the plug-in hybrid Chevy Volt, Toyota Prius Plug-in Hybrid and Volkswagen Jetta TDI. Traditional gasoline-powered models are not offered.

Paul Hernandez, MPG’s manager, credits the company’s success more to its customer service than its green rental fleet. Hernandez contends that MPG is the only car rental company in Los Angeles that has all five-star reviews on Yelp, which has become a key driver of referrals. The company’s fleet has more than doubled since opening, growing from 25 cars to 65 today.

“We sell primarily the service,” Hernandez says. “Because we are a small company, [customers] don’t have to deal with some regional manager or corporate guy. If you have any problem, call my cell phone and I’ll take care of it.”

MPG has aligned itself with Heal the Bay and The Surfrider Foundation, and also accompanies a local dealer group’s “Green Team” to local events. But in general, the company’s marketing is minimal, depending mostly on positive word of mouth. (Read about some of its daily deal promotion strategies on page 16).

Hernandez says the company’s retail clients are interested in supporting the green movement and reducing their carbon footprint, though he admits that another large source of renters — from body and repair shops — “just want a cheap ride and a good experience.”

For those renters, the environmental angle is an added value. “Besides getting great service, they are getting into newer vehicles that are green cars,” he says. “It makes you look good as a company.”

Dollars and Sense

MPG is owned and was started by Steve Vahidi, who also owns California Rent-A-Car. Though there are benefits to being the offshoot of a parent company as opposed to a new start up, in this case, trading fleet isn’t one of them. “When we’re sold out, we can’t borrow a car that isn’t ‘green,’” Hernandez says.

It’s also not possible to fleet up on typical rental models with great fleet pricing. The Toyota Prius C, at $20,000, is the cheapest model MPG has in its fleet.

However, even with higher capitalized costs for hybrids, MPG manages to keep rental rates reasonable. Most of the fleet rents for $40 to $60 a day, though a Chevy Volt could go for $600 a week. MPG makes up the difference with volume and utilization, which runs 85% to 90%. Ancillary sales items such as navigation, baby seats and Wi-Fi help too.

For the renter, as fuel prices creep higher, the numbers add up favorably. “People realize that driving a Prius to Vegas for the weekend will save a lot of money,” Hernandez says, adding that a renter can get a third-generation Prius for $50 a day and spend $30 on fuel. MPG has a mileage cap of 150 miles a day.

But high fuel prices have been a double-edged sword. MPG remarkets its vehicles at 30,000-40,000 miles and gets a good return at auction, especially when gas prices are high. However, when pump prices are high, dealers aren’t dealing on new hybrids, Hernandez says.

The company is considering buying pure-electric models such as the Nissan Leaf, but Hernandez is worried about having to deal with the customer service issue of a stranded renter with a depleted battery. Renting a natural-gas powered Honda Civic GX could be an option, but the lack of public fueling stations negates that option, Hernandez says. “We’re learning as we go.”

Read more articles from Auto Rental News' November/December issue here.