A 16-mpg rental car: That's an upgrade?

Small gas sippers are in short supply, and their rates may soar.

July 14, 2008|Ken Bensinger | Times Staff Writer

David Sikorski went to a Hertz in Austin, Texas, last month to rent a car for a business trip to Dallas. He'd booked a fuel-efficient mid-size sedan, hoping to keep expenses down on the 400-mile round trip.

What he got was a 16-mile-per-gallon Ford Explorer sport utility vehicle.

"I walked right back in and asked for something smaller," said the Austin computer data specialist, who eventually was given a Hyundai. "They claimed it was an upgrade, but I sure don't want an upgrade if it means driving an SUV."

With gasoline costing more than $4 a gallon, consumer demand for smaller rental cars is soaring. According to travel agency holding company Sabre, which owns Travelocity, bookings of compact and economy cars were up 10.2% and 14.3%, respectively, in April and May compared with 2007, while rentals in the mid-size, luxury and minivan categories declined by 1.5%, 24% and 15.3%.

But thanks to a major shift in the cozy relationship among U.S. carmakers and companies such as Hertz, Avis and Thrifty in recent years -- and, as a result, the way rental agencies acquire their fleets -- the availability of fuel-efficient rentals has become extremely tight.

Simply put, not enough of the nation's roughly 1.85 million rental cars are gas-savers to satisfy demand, an imbalance rental agencies cannot quickly remedy. As a result, car rental companies are struggling financially, and long-held pricing models that put more luxurious vehicles ahead of crank-window econoboxes are being turned on their head.

"Just six months ago, anybody would have taken a Chevy Trailblazer SUV in lieu of a four-cylinder Cobalt. Not now," said Mike Kane, owner of rental car advisor Vehicle Replacement Consulting Group. "That's a big deal. That's 25 years of history changing."

The changes have had a devastating effect on the industry. Although rental volume and revenue have risen in the last year, the three large publicly traded car rental companies have seen their stock plummet. Shares in premium-brand Hertz Global Holdings have declined 74%, while mid-range Avis Budget Group fell 82% and value-brand Dollar Thrifty Automotive Group dived 83%.

Troubles in Detroit

The woes of the car rental business are linked to those of the carmaking business.

For decades, rental companies had symbiotic relationships with General Motors Corp., Ford Motor Co. and Chrysler. The carmakers, burdened with overproduction, used rental companies as a safety valve, selling them hundreds of thousands of cars a year at deep discounts. To ensure further purchases, the carmakers bought the used cars back at guaranteed prices.

For the rental companies, buying such "program cars" was a sweet deal, allowing them to predict exactly what their acquisition and depreciation costs would be and to replace their fleets frequently, often every six months.

But in recent years, the Big Three have been cutting production as their share of the U.S. market declined, a process accelerated by a major new labor agreement last year. With fewer cars rolling off the assembly line, Detroit felt disinclined to sell them to rental companies at a discount -- and even less enthusiastic about buying them back.

Suddenly, car rental companies found themselves in the business of buying and selling cars. Not only are they paying as much as 40% more for some of their vehicles than before, industry consultant Neil Abrams said, but they also are forced to sell them in an uncertain market.

"It's a real change in the fleet dynamic," said the Purchase, N.Y.-based expert.

This new way of doing business puts dramatic pressures on most rental companies. (Enterprise Rent-a-Car Co., the privately held owner of National Car Rental and Alamo Rent a Car, relies less heavily on program cars and is a notable exception.) Hertz, for example, recently said it would open a retail used-car network nationwide, hoping to squeeze as much as $200 more out of each resale, according to a report from Goldman Sachs.

But the rising price of gas has radically changed used-car pricing. In May, according to Manheim Consulting, prices for used small cars rose 6% compared with the year-earlier period, while used SUVs and light trucks declined by 21%.

The rental companies now face the prospect of selling many of their bigger, gas-guzzling vehicles for far less than they expected, and with small cars representing only about a fifth of the current fleet mix, the financial implications could be grave. In the first quarter, for example, depreciation costs on used cars at Dollar Thrifty increased by 31% over the same period in 2007.

"If your mix is weighted to things like SUVs, that's not an advantageous situation," said Don Regan, executive vice president of business intelligence and fleet services at Dollar Thrifty. Part of his strategy has been to keep cars in service for an average of 14 months, compared with a previous average of nine months, a holding pattern reflected industrywide.

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