June 20, 2008 at 8:00 AM ET
I hope you're sitting down while you read this. One of America's largest rental car companies is about to eliminate one of the vacation industry's most notorious hidden fees. And I'm about to lavish it with praise.
Hertz last week announced it would stop charging car renters an arm and a leg for gasoline when they return rental cars with half-full tanks. You know the drill: When you rent the car, you’re given a Russian-Roulette kind of choice: 1) paying up front for gas, thereby paying for more than you will use; 2) agreeing to fill the tank yourself and running the risk that you will be too late to do it; or 3) paying for the rental firm to refill the car after you drop it off. Those after-rent gas prices have been ludicrously high for years, generally about double the street price for a gallon of gas. Currently, Hertz refuel prices are about $8 per gallon in many locations, making travelers liable for surprise fill-up charges of $100 or more.
But beginning July 1, that will change at Hertz. Renters will instead pay fair market value for gas plus a $6.99 fee for the refueling service. That will end one of biggest hassles that travelers face -- the desperate search for a gas station near the airport while trying to leave enough time to check in and clear airport security checkpoints.
Hurray for Hertz, which as the world's largest consumer rental firm has the power to steer the industry in the right direction. Consumers should consider renting from the firm, even if its rates are slightly higher, because they won't be on the hook for the refueling "gotcha" any longer. That’s a valuable feature. It will be interesting to see if the company actually benefits from doing the right thing. I hope so.
The move is not entirely born of largesse. Earlier this month, the Maryland state attorney general forced all rental car firms in the state to substantially lower their refueling penalties. In Maryland, rental firms must now limit their refueling price to about 140 percent of the prevailing market price. The agreement lowered the per-gallon gas charge at most firms from $8 down to a little less than $6.
"As a result of these agreements, Maryland will have among the lowest, if not the lowest, rental vehicle refueling charges in the nation," Attorney General Douglas F. Gansler said while making the announcement. It's good to see that state enforcement agencies can recognize eggregious practices and force change. It's too bad Maryland or some other state didn't take the same tack a few decades ago, but better late than never.
Skyrocketing fuel prices helped draw attention to rental car companies' crazed pricing practices. When gas was $1.40, $2.80 refueling prices didn't seem quite so bad, but $8-per-gallon prices are indefensible.
“Car rental companies realize that motorists have had it with gas prices, and they are running out of patience,” said Catherine Rossi, spokeswoman for the American Automobile Association’s Mid-Atlantic office. “We are pleased that the Maryland attorney general’s office addressed this with the car rental companies and we hope other attorneys general will follow suit.”
Hertz deal even better
But Hertz has gone farther than Maryland required, offering a better price and extending the deal to the rest of the country. The firm claims its new pricing plan has nothing to do with the threat of legal action in Maryland. Even if that's a fib, I don't care. Hertz has seen the light. Now let's see if other rental car firms are forced to play nice. So far, Hertz's top competitors haven't extended their new, low refueling prices outside of Maryland.
"We’re taking a close look at it, but do not have a decision to announce at this time," said John Barrows, vice president of communications at Avis Budget Group.
Here's a case where the light hand of government intervention could really help a market function properly. Let's say Avis, Budget, and other competitors stick to their guns and continue with crazy refueling prices. Hertz will obviously lose money on this deal, and be put at a competitive disadvantage. It will likely raise prices slightly to cover the revenue lost through the new policy. That means consumers who search for rental cars at travel sites like Expedia or Orbitz might be tricked into renting a car at a slightly lower up-front price, but one that comes with the risk of a high penalty fee at the end of the rental. As a result Hertz’s competitors will rank higher in search engines that sort by price. That's unfair to Hertz, when its ultimate rental price might be cheaper.
It would be better for Hertz, and I would argue better for the entire industry, to have state attorneys general from all around the country, or the Federal Trade Commission, step in and say, "$8 gas prices are obviously unfair, and this practice must end." Enforcement of a simple rule that's already in many state lawbooks, which says that penalty charges must be aligned with actual costs incurred by the company, would suffice. And it would create a level playing field.
Perhaps that will happen on its own. Perhaps consumers will react so positively to Hertz's new policy that other car renters will have to imitate it. We'll have to wait and see.
Red Tape Wrestling Tips
*It's important to note that it will still be cheaper for you in most cases to fill the tank yourself than to let Hertz do it for you. Hertz's fair pricing simply provides a nice insurance policy if you are running late to the airport. One other note from Hertz's announcement: The firm is also offering small discounts to those who buy their gas up front when renting a car -- 15 cents per gallon off prevailing market price. That deal sounds tempting, and it might be convenient for business travelers, but those who pre-pay for a full tank usually lose because renters cannot return the car with an empty tank. Whatever's left in the tank is free gas for the rental car firm.
*Other rental car companies are also offering pre-paid gas discounts too. In some cases, these discounts might make sense -- those with large SUVs planning on car vacations might be better off renting a small car with this cheaper rental car gas. An excellent comparison chart can be seen at SmartMoney.com.
*In the meantime, Hertz and other rental car companies are capitalizing on consumers' fixation with gas prices and offering various "free gas" deals. At Hertz, for example, renters booking a minimum of three days can get a free tank of gas at some locations. Look for similar deals from other renters.