Car Rental Agencies Using Add-Ons to Lift Returns

New York Times: June 24, 2008

While a lot of attention has been paid in recent weeks to the fees that struggling airlines are adding to ticket prices, car rental companies have been quietly doing the same thing.

Industry analysts say the cost of various optional, but heavily promoted, services like navigation units and fuel refilling are adding as much as 20 percent to the overall rental cost.

“Renting cars is not a high-margin business,” said Neil Abrams, owner of a consulting company that focuses on the rental car industry. “Items such as G.P.S., satellite radio and E-ZPass have taken on a significant force in the rental industry, and companies are being more aggressive offering a fuel purchase option. You really have to think ahead or you could easily end up with a fuel charge of $75 for half a tank.”

George Dunwoody found this out the hard way. As head of global travel for the corporate travel service provider Travelport, he said an expense report recently landed on his desk that surprised him. “We had somebody that rented a car for four hours and went a few miles,” he recalled. “The refuel charge was $74 on a $40 rental. It’s these fees that are killing us.” As a result, Mr. Dunwoody says he changed his corporate travel policy to prohibit employees from choosing the automatic refuel option.

“The creep in pricing is causing companies to take a closer look at their ground transportation,” said David Balfour, director for the ground transportation consulting arm of American Express Business Travel. “For years, car rental was kind of overlooked because it’s a smaller part — typically about 10 percent of air spend.”

Business travelers say front desk personnel at car rental counters are becoming more aggressive about pushing the option to prepay for gas at the beginning of the rental period. With this option, gas is offered at a fixed per-gallon rate, typically a bit below the current market price. “It looks like a good deal, but what they tell you in the fine print is that you fill up the whole tank at that rate, even if you bring it back half full,” said Candy Adams, owner of a trade show consultancy and a frequent business traveler.

For their part, car rental companies defend the offering as a convenience for travelers unfamiliar with the area and as a hedge against rising fuel prices. Not all companies charge for a full tank — customers at Enterprise, National and Alamo, for example, pay a refueling fee of up a 33 percent on each gallon.

Another dissenter is the Hertz Corporation, which will introduce a new system starting July 1. “One of our No. 1 complaints from customers was about our refueling policy,” a company spokeswoman, Paula Rivera, said. To address this, all corporate-owned Hertz rental locations in the United States will charge customers who return their cars without full tanks a $6.99 service fee and gas at the market rate, as determined by an indexing service.

According to industry experts, rental companies are embracing various high-margin extras because of a combination of challenges. The pain felt by the automotive industry in Detroit means car manufacturers have pulled back on the longstanding generous terms they used to offer rental companies.

“Car rental companies have experienced up to 20 percent increases in the cost of vehicles year over year, so they have to mitigate that,” said Chris Brown, managing editor of Auto Rental News, a trade publication for the car rental industry. “They have to look elsewhere to keep profits up.”

Michael J. Kane, president of the Vehicle Replacement Consulting Group, a car rental consulting firm, said the rental companies simply could not raise their base fares to cover the shortfall. “There’s a herd mentality, with everybody bunched together in terms of rate,” he said. “Without those add-ons to the daily rate, it’s difficult to make any money in the business.”

In addition to pushing prepaid fuel, car rental companies have caught onto the appeal of time-saving devices like toll fast-lane transmitters and G.P.S. devices among business travelers. For the leisure traveler, they also promote satellite radio and seat-back entertainment units. Rental company representatives and travelers say these extras are a kind of benign addiction: once people get used to them, they almost never go back.

“As customers use G.P.S. units they become almost necessary to be efficient,” said Rob Hibbard, a vice president at Enterprise Rent-A-Car, which has offered G.P.S. units as an add-on for about three years.

“The reason I started using G.P.S. was it came in the car,” said Matthew Hill, owner of a company that provides training for trade show staff. “Now I want the G.P.S.”

Banking on customers like Mr. Hill, some rental car companies run promotions offering G.P.S. or fast-toll technologies for a reduced price.

Joseph Scott, who is on the road a couple of times a month as an executive at a promotion marketing company, said he tried G.P.S. when it was offered as a promotion. Now, he says he pays the standard rate to have G.P.S. in his rentals.

The popularity of high-tech conveniences is not going to be a panacea, however. Both analysts and car rental executives predict that within the next few years, these extras will become as standard as air-conditioning or CD players, and they will no longer be able to command the premium they do today.

The Avis Budget Group is looking into the next optional perk: in-vehicle Wi-Fi capability. The units are available in 10 markets, and Avis is adding Boston, Orlando and Los Angeles this month.

Michael J. Kane is president of the auto-rental consulting company Vehicle Replacement Consultant Group, Inc., Southfield, Michigan. He has more than 20 years of experience in the auto-rental and leasing business.

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