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The car rental industry is the only large segment of the travel industry in which it is normal business practice to offer reservations while requiring absolutely no commitment from the customer. This situation has been discussed widely in recent years in this magazine, at the Car Rental Show and elsewhere. Until now, there has been a strong feeling that this needed to change, but most rental car companies took the position of waiting for leadership to emerge.

This situation is now changing, with significant progress underway being led by several car rental chains and online travel agencies. In this article, we will review the problems, the cost of the status quo, new developments and some lessons learned.

The Soft Costs
No-shows have measurable costs, such as Global Distribution System (GDS) reservation fees, an underutilized fleet and the cost to accommodate overbooked customers. (See the infobox below for a financial analysis of the hard costs.) But the soft costs may have an even greater impact.

Soft costs include customer dissatisfaction when vehicles are not available, low employee morale and stress caused by overbooking, long lines, extra staff time needed to juggle reservations, opportunity costs regarding free upgrades to get the customer in the vehicle, costs to report no-shows to travel partners and overpaying commissions.
Often, the most expensive customer to win back is the one the rental operator lost at the counter — or had to hand off to a competing rental agency — because a car wasn’t available.

Barriers to Progress
No one benefits from the current situation, not the rental car companies, the online travel agencies (OTAs) or the customers.

Customers may book multiple reservations on one OTA, or even spread redundant bookings across multiple OTAs. It is not unusual to find a renter with a similar booking on Orbitz, and the private brand’s website. In such a chaotic environment, the OTA doesn’t have any assurance it  is paid the commissions it may have earned.

And ironically, customers are also hurt by the status quo. Overbooking results in confusion at the counter, delays opening contracts and unexpected vehicle classes, among other issues. Moreover, those hard and soft costs due to overbooking must ultimately be passed on to the consumer.[PAGEBREAK]

With the status quo hurting everyone, why has it been so hard to change this situation? There is enormous inertia in the travel industry, particularly regarding OTAs, in which hotel, airline and tour bookings receive higher priority than car rentals just because of the volume of business in those sectors.

While all parties may recognize these problems, as long as the problems hit all parties more or less equally, there is no competitive disadvantage to motivate a change. On the other hand, most people realize change is necessary and inevitable, and the companies that lead the way may gain a competitive advantage.

Something has to change — and fortunately the change has begun.

The First Step: Opaque Reservations
In other geographic markets, in particular Europe, prepaid car rental reservations have been common for many years. In North America, until recently, prepaid reservations were limited mostly to opaque transactions on systems such as Priceline and Hotwire. Those systems limit opaque bookings to a small number of the largest chains, so this is not helpful to smaller chains or independents.

Nonetheless, this began the process of conditioning customers to expect to pay at the time of booking. With such limited penetration, these opaque prepaid bookings create a considerable amount of confusion for customers. For example, we often find customers who booked on Priceline’s transparent retail site or elsewhere thinking they had prepaid their rental when, in fact, there had been no collection. This confusion will not be eliminated until virtually all rentals have a prepayment or deposit.

Beyond Opaque Transactions
Several car rental chains have begun to offer a “prepay and save” option on their company-branded websites. Alamo offers a 10% discount for fully prepaid bookings at participating locations with a small fee for cancellations or no-shows. Hertz offers a variable discount with larger penalties for cancellations or no-shows. Budget has a similar program but requires customers to apply online for any refunds. Refunds are not automatic and are only offered for six months.

ACE recently added prepayment options that cover the most popular car classes. In addition to a refundable deposit program — with refunds processed immediately and automatically — ACE also introduced a substantially discounted offer with no refund privileges, although changes are free.

All these programs represent progress, albeit small steps. However, advances have been limited to the company-branded websites through which it is possible to make a comprehensive disclosure and to conduct the payment card transaction seamlessly. Until the major OTAs can be brought into this solution, these will remain confusing, disconnected, niche solutions.

Breaking into the Mainstream
ACE has taken its first step in the North American market to conquer this OTA challenge. ACE and, a division of Expedia, recently partnered to offer fully guaranteed reservations, the first instance of guaranteed, non-opaque, retail car rental bookings by any major OTA targeting North American travelers. With this change, all ACE reservations require at least a one-day deposit with liberal refund/change privileges. In addition, the two companies provide a discounted offer on a fully prepaid basis.

This partnership is beneficial for both companies. ACE is able to virtually eliminate the no-show factor with its customers that are from, allowing it to better manage its fleet, while is able to deliver its customers exclusive, lower rates and is assured commission earnings for practically every booking.[PAGEBREAK]

A major key to success with this program is a full and clear disclosure to the customers that informs them of the terms of rental. Both companies paid close attention to the development of these disclosures. The resulting system is highly effective and can serve as a template for other car rental chains and other OTAs.

A Drop in Reservations?
How has this affected business? It would be reasonable to assume that asking customers for a deeper commitment would result in fewer reservations. We have seen this is not the case.

The Honored Bookings chart below shows the weekly bookings on reservation channels that moved to a guaranteed basis. The bars represent the volume of honored rentals. The chart begins in the busy summer season and extends through the slower fall period to the end of the year.

The Honored Bookings chart shows the weekly bookings on reservation channels that have moved to a guaranteed basis, first by requiring a credit card and by implementing a refundable deposit policy and prepay (no refund) option. ACE saw no significant reduction resulting from the increased guarantee level.

The Honored Bookings chart shows the weekly bookings on reservation channels that have moved to a guaranteed basis, first by requiring a credit card and by implementing a refundable deposit policy and prepay (no refund) option. ACE saw no significant reduction resulting from the increased guarantee level.

During the summer, about two-thirds of the bookings required no guarantee at all (blue bars) and the other one-third required the customer to enter a payment card (yellow bars); however, there were no penalties for cancellations or no-shows. In September — a historically slow period — we introduced a one-day deposit (orange bars) refundable with 48-hour cancellation.

After a brief adjustment period, the “orange” business stabilized at a level we would expect for that season. We see no significant reduction resulting from the increased guarantee level. The gray bars show the introduction in November of the discounted, fully prepaid, nonrefundable reservations ACE introduced. That represents mostly incremental business — an increase of about 20%.

On the portion of business represented in this chart, we virtually eliminated no-shows and increased the total volume of business for that time of year.

Hard Numbers
The move to guaranteed reservations comes face to face with 50 years of customer experience renting vehicles in North America. No matter how clearly the offer terms are presented, many customers will simply not take them seriously. After all, car rental reservations have always been conducted on the honor system.

With this history, we were concerned that taking leadership on guaranteed reservations could take a company known for high customer satisfaction and create a major satisfaction problem.[PAGEBREAK]

We now have about six months of real-world data operating in this new mode. The Bookings Outcomes chart below summarizes the results ACE saw, looking at the typical outcomes for 10,000 bookings. We are now conducting about 20% of our online business with guaranteed reservations. Over time, we expect guaranteed reservations to be used in the majority of online reservations, but at this point, 80% of the customers are unaffected.

Of the guaranteed reservations, 95% were honored with no issues. Only about 5% resulted in “abandoned” deposits or prepayments, either through a no-show or cancellation after the refund deadline. This is only 100 out of the initial 10,000 reservations. And most of the customers who abandoned their deposit understood the risk they took when booking the reservation. Only about 15 customers in every 10,000 voiced complaints about the online collections for which they seek redress.

Preserving Customer Satisfaction
Nonetheless, some of those 15 customers out of the 10,000 were very unhappy, even if the fault was entirely theirs. In most cases, we were able to work out a satisfactory accommodation for the customer. In a certain set of cases, such as verified medical hardships or verified flight cancellations, we provided refunds to preserve goodwill if there was no other accommodation acceptable to the customer.

That leaves us with a very small number of complaints — about three for every 10,000 bookings — that we believe the customer was simply not entitled redress. In those cases, we deny the refund and the customer typically attempts a chargeback. We expect to win at least two-thirds of the chargebacks.

Considering all these factors, for every 10,000 reservations, one ends up very unhappy about the financial transaction. While we hate to see even one unhappy customer, we know that we are able to provide better service and a better value to the other customers because guaranteed reservations give us a more reliable basis for planning the daily operation.

Lessons Learned
In brief, there were no insurmountable problems in this project. Most customers readily accept the new way of doing business. Some customers actually voiced a preference for the prepaid reservations because they feel more confident they will be well-served when they arrive at the counter.

This project was a major development because there were so many unknowns and because this was our first implementation of real-time payment card transactions. Overall, ACE’s conclusion is that we should have done this years ago.

Director of Business Development for ACE Rent A Car Craig Parmerlee oversees ACE’s network of affiliates, develops channel partner relations, leads online marketing and directs the development of ACE proprietary reservation technologies.