Gas tops $4 a gallon. The economy teeters on recession. Americans are flying and driving less while millions more Chinese can now afford cars. The hallowed SUV, that particularly American institution, is now the wallflower on car sales lots. The subcompact car—the rattletrap you once whizzed by on the highway with a smirk on your face—is the belle of the ball. The auto industry is in the midst of a painful yet lightning-fast transformation the likes of which we’ve never seen in its 100-plus year history.
Hey car rental, are you feeling it?
ARN went into the field to find out from you what’s going on. We asked licensees, independents and the majors, in local markets and on airports, from mom and pops to the corporate stores: How are you dealing with the new economy and the demand shift to smaller cars?
Let’s Get Small
“This economy is slowing us down. You’d think with fewer people flying, they’d drive, but fewer people are driving too,” says Jim Westmar, who works for an Avis licensee in Toledo, Ohio.
“There’s a downturn in business as well as a shift in demand to smaller cars,” says Steve Badilla, CFO of Budget Rental and Sales, a licensee serving Las Vegas. Badilla has seen small car reservations grow by 15 percent this year over last. “The Las Vegas market has been hit a little harder. The burst of the housing bubble was bigger here; gaming is down, occupancy is down and deplaning passengers were down 7 percent in June.”
“Everybody is asking for smaller cars, like 9 out of 10 customers,” says Josh Ali of Fox Rent A Car in Seattle, serving Sea-Tac Airport.
“With $3 gas we really didn’t see a lot of people having a problem with it, but when gas hit $4 that was definitely the tipping point,” says Chris Payne, spokesperson for Dollar Thrifty Group.
“This year we noticed the demand shift,” says Eileen Kelly of U-Save in Ames, Iowa. “We’re just trying to get as many into the compact cars as we can.”
“We’re located on car rental row here. I just looked out at everyone’s lots and we’re all in the same boat,” says Ben Cord, an Avis independent operator in Palo Alto, Calif.
Cord refers to the fact that sometimes there are not enough smaller cars to satisfy this shift in demand.
Your Free “Upgrade”
Customers once booked economy cars looking forward to a bump in car class at the counter. Yet, “The days of people being excited about free upgrades are pretty much over,” says Cord.
Most upgrades are from a compact or economy to a midsize, and operators say the customer is for the most part satisfied. “But the tone starts to change when we give them an SUV,” Badilla says. “They’re not as happy as they used to be.”
These “extreme” upgrades are rare, but they happen. “A customer had a reservation for a compact car; we were out, and I tried to give him an upgrade to a Toyota Tundra,” says Ayub Dhar, an Avis operator in Ridgecrest, Calif. “He was mad and wondering how he would tell the boss about the gas bill. But that upgrade is out of the norm.”
Ayub ended up not charging the customer for one day to make him happy. “It’s just something you have to do,” he says.
“It’s happened where someone doesn’t want that full-size and wants to walk next door,” says Cord. “Chances are the competition doesn’t have it and it’s a higher rate. We try not to have situations like that, but usually they end up coming back.”
Creative Customer Service
A little creativity in customer service goes a long way in these situations.
“When things are tight, I’ve offered to check my competition and make a reservation from my office to their office online and take the customer over there,” says Sharon Faulkner, a Thrifty licensee serving the Albany, N.Y., area. “I’ll even pay the difference if their rate is higher. But I’ll advise them that there’s a good chance they’ll get a bigger car over there too.”
Faulkner has taken part in a Dollar Thrifty initiative called “wild card” reservations. In exchange for a better rate, the customer agrees to a mid-size four door car or larger, at the discretion of the car rental agency. This allows her to better manage her mix of vehicles.
Faulkner says sometimes 20-25 percent of her reservations are wild card. “They’re not complaining because they paid a little less,” she says.
John McLelland of Discount Car and Truck Rentals in Winnipeg, Canada, says he gives customers a break on the refueling charge at $.99 a liter for up to $25.
Badilla tried a promotion this summer in which walk-up customers could get an SUV with a free tank of gas. Badilla says most of the time they did not use the full tank anyway.
Utility Still Needed
Though fuel economy may be on the top of renters’ minds, the rental experience still boils down to the utility value of the vehicle.
Carolann Malley, a Hertz independent agent in Lebanon, N.J., says her reservations for SUVs and minivans remain at a healthy 25-30 percent of total rentals, and 20 percent for full-size cars. Enterprise says “Requests for SUVs and minivans as a percentage of overall rentals remain virtually unchanged from a year ago.” (See sidebar.)
Local market operations seem to be somewhat less vulnerable to small car demand, as a vehicle’s utility value comes more into play than just a ride from A to B.
“We do have a good amount of SUVs and minivans,” says Diana from Alaska Car Rental in Ketchikan, Alaska. “We get a lot of fishermen who need to transport tackle boxes and fishing gear. But there are definitely people who say they need an economical car, and we hear it over the phone for sure.”
High gas prices are forcing customers to more precisely fit the type of car—big or small—to its function.
“A lot of people want to leave their gas guzzlers at home and rent a more economical vehicle that’s better on gas for longer trips,” says Kelly of U-Save.
Conversely, “If you’re a mother with three little kids, a small car isn’t good for you anyway; you can’t put three car seats in it,” says Karen of Lulloffs Car Rental in Manitowoc, Wis.
In this economy, sometimes customers are booking for savings and not paying enough heed to utility.
“People have been booking smaller and getting to the counter and saying this isn’t going to work. That’s been happening a lot,” says Payne. “A lot of that is due to Internet bookings. Some people are just so price-focused and not thinking through what they really need.”
Van business—minivans, 12-passenger and 15-passenger vans—is still good business because of their functionality.
“People don’t want to own minivans but when they drive them they think they’re great,” says Ron Westley, a U-Save licensee in Akron, Ohio, who put two more minivans in his fleet this summer. “Crossovers don’t have much room—I would hate to travel in one of those for 11 hours. I think minivans as rentals will grow.”
Both Westley and Kelly noted that families are sharing vacation expenses by renting a 12- or 15-passenger van together.
Customer Service = Customer Education
Some customers that are put off by being given a larger car don’t know—and need to be educated on—the fact that today’s larger cars achieve very good fuel economy.
“We have to educate the public that there’s not much of a difference. I don’t see the education going on, I just see the hype about gas prices,” says Gary Lewis, a Salt Lake City–based Thrifty licensee.
“I’ll pull up the screen and show them that from the subcompact to the midsize you’re looking at maybe four miles per gallon difference in savings,” Cord says. “You have to translate to the customer that they’re getting more comfort but not paying more.”
When thinking about large car gas mileage, customers may bring to mind their own older car, which does not have the fuel-saving technology of the newer cars, says Faulkner.
“Most of my vehicles are pretty fuel efficient, even the Chrysler minivan,” Faulkner says. “The Dodge Avenger and Chrysler Sebring come in four-cylinder models. They’ve got big trunks and they’re good-sized cars with good gas mileage.”
Faulkner keeps each new car sticker and will show customers each vehicle’s city and highway EPA rating.
To allay customers’ anxieties over getting upgraded to a less fuel-efficient vehicle, Dollar Thrifty Group created a fuel cost comparison chart for counter reps to show customers. The chart shows the fuel cost difference between all its models for driving 100 miles at $4.00, $4.50 and $5.00 a gallon.
Guaranteeing the Rate, Not the Car
What may be getting lost in the customer service equation is the fact that the vast majority of car rentals guarantee the rate, not the car.
Faulkner makes a point to educate customers on this. “Until we start to guarantee your reservation and I have your money in advance whether you show or don’t show, I can’t guarantee what you’re looking for,” she says. “It doesn’t mean that we don’t try our absolute best—who wants an unhappy customer?”
Faulkner’s no-show factor over the summer has been 25 percent, about six percent higher than normal. She says the winter may be worse.
“Until we start taking a deposit like the hotel industry, customers will have to suffer some of the consequences,” she says.
The Pace of Change
As fuel prices go up and the Detroit Three reduce rental fleet sales, operators are responding by changing their fleet mix by size, make and model, to varying degrees and at varying speeds.
Cord of Avis in Palo Alto is now running Volkswagen Rabbits and Jettas. “People really love those,” Cord says.
In anticipation of the gas crunch, last year Ayub of Avis in Ridgecrest, Calif., switched his Toyota Camrys from six-cylinder to four-cylinder. He also bought Toyota Corollas and four-cylinder Honda Accords.
Ayub says Toyota has worked hard to facilitate financing the cars and getting them into his fleet. He says his customers rave about the Corolla. Ayub’s location serves a military base in the California desert. Many rent to go to Los Angeles, a 160-mile drive.
Though hybrids get the media attention and have increased in rental fleets, they still represent a small percentage. Some operators have got their hands on hybrids, but many are buying them retail. The math on them still doesn’t add up.
“The client expects to rent a hybrid at a little car price,” says McLelland. “But the capitalized cost [of a hybrid] is 25 percent more. The customer doesn’t care that we’ve made that investment. They save a few bucks on gas but they’re not going to put it toward their rental cost.”
A soft resale market and higher prices for compact cars are driving up depreciation costs across the board. Car rental operators, from the majors on down, are holding onto vehicles longer to compensate.
“It’s made a difference in how often we replace,” says Karen of Lulloffs. “We’re holding on to the vehicles a little longer. We’ve not been able to raise the rates, not in this town, not for five years.”
Westley says he’s buying late-model cars at auction from the majors with as much as 65,000 miles on them, which makes controlling rental miles more important than ever. He recently instituted a cap of 250 miles a day. “I think you’ll find more and more people doing that,” he says. “We got burnt; we had a church group take one of our vans to California. They put 6600 miles on it in 10 days.”
With the cap, Westley was able to lower his rates. “The average person does 150 miles a day,” he says. “It’s very hard for someone to go over 250.”
If a customer needs unlimited miles, he’ll let them go to the competition. It hasn’t hurt business; he put two more minivans in service this summer.
Those that are selling economy cars and compacts are enjoying the market buoyancy in that segment. “I got more for my Ford Focuses and Chevy Cobalts than I paid for them a year ago,” Westley says. “The bad thing is we’re low on cars.”
But the soft resale market for SUVs is making it difficult to right-size fleets as quickly as might be needed.
One operator had a Lincoln Navigator in fleet that was hardly rented in four months. “We took it to auction. The vehicle was worth almost $25,000; we got $14,000 for it,” he says. “It’s not a good scene for big vehicles.”
“We are holding SUVs longer. That’s not by choice,” Lewis says, though he’s not eager to shift his mix substantially. “No one predicted $4 gas, and you can’t change your fleet mix overnight,” says Lewis. “I wouldn’t do it anyway because you wouldn’t make any money. There are only so many small cars you want to run because your margin on them is small.”
Lewis says his time and mileage is down from last year because of the migration to compact bookings.
Operators say there is an adequate supply of small cars; it’s just a question of cost.
“You can get the compact cars. The problem is getting rid of the bigger cars,” says Badilla, who plans on holding his SUVs through the fall. “Those who bought at risk are going to have the most difficulty shifting down.”
Badilla says in a depressed resale market for SUVs it’s better to cycle out of them gradually to spread the loss over time. The hope too is that prices will stabilize in coming months, offering a better return.
The Fun of the Trip
The shift to smaller-sized vehicles is most likely permanent, as few expect oil prices dropping to the point where fuel economy is no longer a prime consideration. How-ever, the challenges facing satisfying customer demand are viewed as temporary.
“I’ve weathered storms for 38 years now, and I assume I’ll continue to weather storms,” says Faulkner.
Auto manufacturers are rushing to right- size their fleets. The larger vehicles with poor fuel economy will be cycled out of fleet in favor of vehicles that offer a sensible amount of space and reasonable fuel economy.
As fleet mix corrects itself, however, the independents are not trying to compete with the majors on price, because they can’t. The answer may lie in the ability of the operator to find opportunity in this new market.
Westley is putting together a brochure to get corporate business that shows the advantage of renting a car over flying. With the high cost of an airline ticket and the time and hassle involved with airports, renting a car for trips within a 300-mile radius makes sense, Westley says. “That’s what we have to do as a local operator,” he says.
Westley, whose smallest car is a Ford Focus, is also working on selling “the fun of the trip.”
He bought an off-lease 2003 BMW Z4 convertible with low miles, as well as a Mazda Miata. Both were always on rent, and the third person that rented the Miata bought it. Westley is looking into more luxury rentals such as BMW 3 Series and Mercedes C Series vehicles.
“Car rental is still all about the experience,” says Dan Collins of Payless in Kansas City, Kan.
Demand Shift: What do the numbers say?
Reserving a small car to save on fuel is on everyone’s minds, at least anecdotally. But when it comes to actual reservations, do the numbers play this story out?
Sabre provided ARN data (Figure 1) across all its booking channels going back to second quarter 2006. The figures show that Intermediate class represents the majority of bookings. Bookings have fallen from about 54 to 52.5 percent over two years.
Those numbers have been replaced by an increase in economy and compact rentals. Those classes have experienced a steady climb quarter over quarter, yet still only represent about 8 and 14 percent of bookings, respectively.
Full size bookings have only fluctuated within one percentage point over two years at a steady 16 percent of total bookings.
SUVs are represented in the Other and Premium categories. Though the Minivan, Other and Special (i.e. convertibles) categories have suffered the most precipitous declines, they still only represent less than four percent of total bookings.
The majority of these bookings are on airport, though off-airport rentals experienced a 9.6 percent increase year-over-year, Sabre reports.
ACE Rent A Car provided ARN with the percent change by class of online bookings, year-over-year, for 160 affiliated worldwide locations (Figure 2) representing independent car rental companies. The majority of these are on-airport bookings.
During the past year, the Standard category fell from 7 percent of the mix to 4 percent, a near 50 percent drop for that class of vehicle. Those customers mainly went to compact cars. Interestingly, the Economy class experienced no change at all.
Note that the Sabre and Ace data represent online reservations and do not necessarily reflect requested car class availability at the counter.
Enterprise Rent-A-Car provided this analysis of its requests in the last year:
“The full-size car continues to be our most requested vehicle, followed by economy, compact and intermediate classes. The most significant change from a year ago is that requests for economy cars have increased by virtually the same percentage as requests for compacts have decreased. Thus, there is little evidence to suggest that customers who formerly rented larger vehicle classes are suddenly downgrading to economy or compact vehicles. In fact, requests for SUVs and minivans as a percentage of overall rentals remain virtually unchanged from a year ago.”
Chris Brown is executive editor of Auto Rental News. He can be reached at email@example.com.
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