Rental Car Hell Cools Down
When you walk up to the car rental counter and they ask you what kind of car you want, what do you say? My response is usually, “What do you have?” The choices are generally a Rogue's Gallery of cars that no one would buy for themselves. For example, if you are offered the choice between a Chevy Aveo or a Honda Fit – for the same price – I think 99% would pick the Honda.
Consumers have spoken and the rental car companies have listened. For the first time ever, import brands compose more than 50% of the rental fleets in the US. The rental fleets are where, for decades, Ford, GM and Chrysler dumped excess inventory of substandard cars. It was a way to pump up volume to keep factories humming, if not adding much to the bottom line.
This year is the most tumultuous year in the auto industry since WWII. The idea that GM would be bankrupt was absolutely absurd even 30 years ago. While not in the same dilemma as the auto industry, the rental car business model has changed over the past two decades. For most of the history of the rental car business, the big names were captives of the auto manufacturers. GM controlled Avis and Budget, Ford had Hertz and Chrysler had Dollar Thrifty. Only Enterprise was (and still is) independent, privately held by one family.
Now, all the rental car companies have separated from the car manufacturers. Most still have contracts with the Detroit three; but they are no longer exclusive. All have adopted the Enterprise business model of buying a wide variety of models from different manufacturers. In fact, there may even be a car you want to try driving when given a choice.
The top import brands in the rental fleets are: Toyota, Nissan, Kia and Hyundai.
Consumer demand helped shape the purchases for the rental fleets, but other market factors also had strong influence. First and foremost, the Detroit Three have dramatically reduced production and stopped giving the steep discounts and buyback agreements that were common. Most people don't realize that cars sold into the rental fleets didn't carry the same manufacture's warranty standard to the retail market. This cut the upfront purchase costs, but poor quality and hard driving cost the rental companies more in repairs. Then when it came time to dump the cars, the residual values were in the toilet.
The new business model depends much more on the Asian brands for inventory. The cars are kept longer in the fleets, so the fleet buyers are looking for more durable and reliable products. Residuals are also a key factor in fleet purchases. For example, over the past three years (2006 – 2008), Automotive Lease Guide reports that residuals were up 12% for Hyundai and 8% for Kia. When dealing with a fleet of thousands of cars, small upticks in residuals make a significant contribution to the bottom line.
On the manufacturer side of the equation, there is an important balance between over exposure in rental fleets and the possibility for “conquest” sales. In a recent Common Sense column in the Wall Street Journal, non-Californian SmartMoney.com journalist James R. Stewart talked about a trip to the Midwest where the rental-car agent offered him a Toyota Prius and he took it.
How do I know he isn't from California? Easy, he had seen the Prius at an auto show and was “unimpressed by the bland interior and odd design.” If he lived in LA, he'd of seen hundreds of them everywhere he went, not just at an auto show, and he'd know at least half a dozen people where were shiny, happy, sanctimoniously annoying Prius owners.
He was impressed that his 6'4” frame and luggage were easily swallowed by the Prius and, by the time he drove the 150 miles to his mother's home, he was a Prius convert! So this non-car guy drove a rental Prius and Toyota gets another customer – or at least a potential customer.
Hyundai and Kia have similar hopes. A recent LA Times article article cites the case of Maryland man who liked his rental Hyundai Sonata so much that he hated to give it back and ended up buying one. It was the man's first contact with the Hyundai brand and he liked the car enough to buy one. That doesn't happen with a Dodge Avenger.
A friend of mine who travels often prefers a Hyundai Accent or Elantra to something like a Chevy Aveo or Cobalt. He just likes the way it drives better. He doesn't want to buy one; however, his opinion of the brand is more favorable and he's more likely to recommend one to someone interested. On the other side, another friend recently was stuck with a Chrysler Sebring sedan while his BMW 335i was in the shop. He hated it.
Another interesting insight about the rental car business came from Mark Norman, president and chief operating officer of Zipcar, the car sharing company. Zipcar has a fleet of over 6,000 cars and not one is from GM or Chrysler and only 5% are Fords (probably the Ford Escape Hybrid and the new Fusion Hybrid). They buy what their customers prefer. Can anyone say MINI Cooper?
Next time you rent a car, you may may have better choices. I'd take a Nissan Altima or Toyota Camry over a Chrysler Sebring or Dodge Avenger any day; however, I might also be tempted to try the new Ford Fusion or Hyundai Sonata. I'd even take a Prius if I was going to do lots of in-city driving and the price wasn't too high.
Always check the rental car websites for the latest deals in the cities you visit. Rates seem to change daily, if not more often. You might also get a reduced rate or upgrade if they don't have the car you want when you arrive. There are more bargains as both business and pleasure travel is down significantly. And customers finally have better choices for rental cars.
