As both the airlines and car rental companies have consolidated over the last five years, the general media seems to want to make a connection between the two: “If airfares went up after airlines consolidated, why can’t consolidation in car rental produce the same rental rate increase?”
Anyone correctly prognosticating the ebb and flow of car rental rates should get a MacArthur Foundation Genius Grant in a new category for car rental. I’m no MacArthur Fellow, but I do know that using the airline industry’s model to predict the car rental industry isn’t apples to apples.
In general, what causes price increases? They’re a function of limiting competition or supply, or boosting demand.
Oligopolies limit competition, though a true oligopoly is a lot easier to achieve through the air than on the ground. Until Elon Musk’s Hyperloop comes to pass, the airlines are the only efficient way to cross an ocean or long distances. The world is a lot flatter when it comes to ground transportation; there are more travel options that overlap with car rental.
Airline competition becomes even more limited when arrival and departure times are factored. There might be 20 flights a day from, say, Los Angeles to Miami, but perhaps only four that arrive within the traveler’s preferred time window, and only two of them might be non-stops. Limited choice ensures the bottom won’t drop out on airfares.
Though the eight largest car rental brands are controlled by three companies, there is still plenty of competition between car rental companies when your plane lands. And there are smaller rental brands with enough visibility market to market — on-airport and off-airport — that can offer lower rates. Certainly, maintaining this competition was the FTC’s reasoning in forcing Hertz to spin off Advantage to acquire Dollar and Thrifty.
Air travel supply is dictated by available airline seats for a given route. This supply changes as flights on that route increase or decrease, along with changes in plane capacity — but the changes don’t happen frequently enough to tilt the balance of supply and demand too severely.
In air travel, commercial airplane manufacturers work in concert with two buyers: airlines and, to a much lesser extent, freight carriers. Planes are built and planned for service years in advance. There are a lot fewer of them in service (United currently operates 716 aircrafts). Their unit costs are infinitely higher (a new Boeing 777 goes for more than $300 million); those planes stay in service much longer (United’s average fleet age is 13.8 years). These factors would favor a conservative fleeting strategy over the long run.
And the plane suppliers are limited: Airbus and Boeing essentially form a duopoly. Their competition may be fierce, but with fewer units to sell, there is less of a tendency to drop prices to “move the metal,” which might force over fleeting.
Car rental, on the other hand, exists in an ecosystem that includes commercial, government, and rental fleets as well as retail car sales. Those sales number in the millions and vary greatly by manufacturer, segment, make, and model. Rental fleets turn over every six to 20 months.
Car rental runs more in concert with the flux of auto manufacturers’ supply. Automakers’ ability to correctly measure demand in an ecosystem controlled by the new and used retail markets is, to put it mildly, a moving target. Historically, at times, manufacturers have used car rental as a dumping ground for excess supply. Those days are gone. Nonetheless, I’d bet a Boeing exec never sat down in United’s offices with an awesome deal on 200 of anything. These deals are a fact of life in car rental, and they affect the supply and demand balance.
We can’t forget that in car rental the waters are muddied, famously, by the fact that the system of non-guaranteed reservations produces a no-show rate of 20% to 30%. Mitigating no-shows would allow tighter fleeting, higher utilization, and better pricing. Moving closer from the booking to pick-up date, a rental location’s fleet can change many times, which could drive prices up or down. In air travel, during this window, supply is only shrinking.
While many seemingly put an inordinate focus on pricing, the bottom line is, of course, profits. In regards to protecting profits, especially in the face of economic swings, car rental would seem to have a leg up in its ability to fleet up or downsize more quickly and efficiently than airlines could.
Where does all this leave us with car rental rates today? They’re improving. But let’s keep an eye on one very large elephant in the room — recalls. As of June 1, the federal recall law is in effect, mandating the grounding of all recalled rental units until they’re fixed. The numbers of recalls and units affected have not abated and are directly impacting car rental fleets right now, as the busiest season begins.
Remember July 2014? The abnormally high number of recalled rental units drove average car rental rates temporarily through the roof, though it wasn’t necessarily great for the bottom line.
Factors pushing a rate increase aren’t always good.
Originally posted on Business Fleet