Why are Car Rental Rates Decreasing?

Travel is booming!  The economy has continued to show steady signs of improvement with unemployment figures decreasing and individual disposable income increasing.  More and more US citizens are deciding to spend that extra cash on experiences and travel.  Motivated by recent trends of minimalism, a millennial-like aversion to basic consumer goods like clothing and accessories and a hefty media push on home improvement, the travel industry has definitely been a benefactor.  Add in the rising belief that experiences bring a higher level of happiness than “things”, the notion has helped topple quite a few traditional retail outlets (like Sports Authority, Payless Shoe Store, Gander Mountain, HH Gregg and many more) along with the growing power of e-commerce.

But, e-commerce has always been a strong point of the car rental industry, and with a larger percentage of spend on travel, the overall expectation would be that car rental prices would continue increase.  However, this hasn’t been the case in some time (like most recently in April and March) and rental car industry experts and top brass at public companies like Avis and Hertz have provided their own reasoning for the decline while maintaining as much positivity as possible.  Much of the pricing stems from the wholesale and resale markets, which have lagged in recent years, causing many of the major car rental companies to hold onto fleet inventory longer than desired.  This, in turn, causes for a higher quantity of inventory, which drives down prices.  When the major car rental companies compete aggressively on price, all other companies have to follow in suit to attract business.

Ride Hailing Services

In addition to lagging resale prices and too much inventory, car rental companies are also facing the pinch from ride hailing services.  Uber, Lyft and others have provided an additional method of transportation to airport travelers, especially business travelers.  This segment of car rental has always been of high margin, providing a contracted rate and consistent (and known) travel frequency, while usually contributing only lightly to the depreciation and mileage of the rental vehicle.  With this segment shifting increasingly over to ride hailing options over car rental (and even taxis), rental car companies that traditionally relied on corporate car rental business are now more aggressively targeting leisure car rental travelers.  This all combines to create a cascading effect on supply in the market for available rental cars for leisure travelers, keeping the prices down and decreasing.

More Corporate Travel Declines

In addition to ride hailing services taking market share away dramatically from traditional car rental companies, the overall global business travel market is projecting upcoming losses in worldwide business travel.  In a recent blog post, the Global Business Travel Association’s COO, Mike McCormick states figures showing an overall travel industry loss of $1.3 billion in 2017 alone.  He cites recent travel bans and the large electronic carry on bans that the Trump administration has put into place as primary drivers of the uncertainty in the travel industry market.  As car rental providers adjust to this news and adjust their own forecasts, it will again shift more emphasis on reducing fleet size and marketing to leisure travelers.

Airport Rates Continue to Fall

The average rates, compared monthly Year over Year, have been decreasing the last 6 months and 9 out of the last 12 months, and have been on this track further into the past than that.  While much of this rate decrease is due to over fleeting and the soft resale market, some blame can be placed on increased revenue management automation.  This has been in place for a long time in the travel industry, starting with the airlines and then spreading to hotel and car rental, but recent trends have shown even more stratification along rate segments and products.  And, increased “shopping” activity by car rental companies have added additional load to GDS and OTA’s to serve up the rate information.

Silver Lining Ahead

Is there a silver lining ahead for car rental prices?  In the near term, probably not.  While travel volume continues to increase, the overall market is still over fleeted.  Recent earnings calls and reports have all pointed to an effort to right size the fleet as quickly as possible, but with all car rental companies attempting to do the same, the auction markets have been flooded.  It will take some time for car rental companies to adjust to the new normal of ride hailing competition and get to the correct fleet size.

Avis Budget Group   Hertz Global Holdings Inc  Uber Logo

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