Fleet News

Just how low can car rental prices go..?

The recent entrance of new players into the rental market advertising low costs, and trumpeting their intention of shaking up the established big names has created a flurry of publicity.

Despite numerous attempts by the major operators to differentiate themselves through quality of service, the daily rental rate is still absolutely crucial in attracting and retaining customers, irrespective of whether they are travelling for business or pleasure. So is it really possible for a new entrant to achieve acceptable profits while offering very low prices, and are the existing players bloated and complacent?

The major 'drivers' of bottom line performance in any rental company are (not necessarily in order) revenue per day, utilisation, fleet costs, and overheads such as office expenses. Let's look at each of these items.

For at least the past decade, and probably longer, rental rates have failed to keep pace with either inflation or the cost pressures which are specific to the industry. In their efforts to grow and/or protect market share the major operators have continually used pricing as a weapon.

Pricing is not so fluid that some companies no longer produce retail tariffs. Corporate customers have been able to use their buying power in this cut-throat environment to drive down prices, and retail buyers have also found themselves on the receiving end of some very attractive offers, especially over weekend periods when utilisation rates are lower. The current era of low inflation, and pressure on manufacturers to reduce new car prices in certain markets, now makes it difficult for the rental industry to present a compelling case to raise prices. So, by historic standards, daily rates are poor and this situation is unlikely to improve.

Turning to utilisation, the advent of new technology has enabled rental companies to improve fleet control and utilisation. However, most of the benefits in this area have already been harvested and it is likely that any further gains will be marginal. In any event, there are limits beyond which it is not sensible to go - achieving 100% may not be clever if it means that you do not have a car available for the customer without a reservation.

Moving on to fleet costs, for rental companies these consist mostly of depreciation and funding charges. Interest rates have certainly fallen, but the benefit has been far outstripped by relentless pressure on depreciation costs.

This has been brought about largely by deteriorating residual values resulting from the over-supply and disorderly marketing of new vehicles. Lower residual values have not been matched by bigger discounts from suppliers and this has led to a widening depreciation gap. A more recent phenomenon is the steep rise in pre-sale refurbishment costs as trade buyers use the excess of used cars to demand high preparation standards.

That just leaves office overheads to consider. Here again, technology has already delivered efficiencies and there is every reason to expect that the internet will produce further savings, particularly in the reservations area. Staff costs have risen at least in line with inflation, and will probably continue to do so unless unemployment rises. Delivery and collection also generates large staffing costs.

Rental rates are under pressure, utilisation is already high, fleet costs are unlikely to reduce, staff costs will not come down. New technology should deliver savings. How, then, can the 'new kids on the block' afford to offer prices which undercut market rates by such a big margin?

First, as start-up companies, they have no personnel or IT 'baggage' and can take full advantage of lean overhead structures and new technology.

Second, they may have negotiated unusually low fleet holding costs by persuading manufacturers that having dot.com in the trading name is a panacea to the problems facing existing operators.

Third, and most important, in order to attain critical mass they have to either expand the market or take conquest business. History shows that the quickest way of delivering volume is by offering very low prices. In the longer term, it may be difficult to sustain the aggressive pricing strategy needed to launch a new company. So should Fleet News Europe readers take advantage of the attractive prices these dot.com rental companies are promoting? That has to be your decision, but before using them you should check carefully for such items as excess mileage, and late return charges. Competition is healthy for any industry, and the dot.com rental companies will certainly keep the big boys on their toes. Who knows, if the new arrivals do succeed we may well see the established big operators setting up their own low cost operations in the same way that British Airways launched Go!

  • David Willsher, can be contacted on +32 2345 7992. (August 2000)
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