Aug. 28, 2012 at 6:59 PM ET
And then there were three.
With this week’s news that Hertz, the nation’s second-largest rental car company, is buying Dollar Thrifty, the fourth largest player in the industry, there’s good news and not-so-good news for travelers who rent cars.
“The good news is that pricing shouldn’t change much,” said longtime industry analyst Neil Abrams. “The not-so-good good news is that you have three companies controlling 95 percent of a $23 billion domestic market.”
How those two scenarios play out, of course, depends on whether the Federal Trade Commission approves the merger — most observers believe it will — and how the remaining companies manage the size of their various fleets.
In the meantime, the move can also be seen as the latest step in a natural progression for an industry that’s been dealing with changing business models and evolving customer demographics for decades.
“This is an industry that until recently was a 'pawn' for other industries both upstream and downstream from it,” said George Hoffer, adjunct professor of economics at the University of Richmond.
By “pawn,” Hoffer is referring to the fact that in the late 1980s, car manufacturers started buying rental car companies — Ford once owned Hertz, while GM was a big investor in Avis — to create a ready-made (downstream) market for their cars. Several years later, the nation’s biggest car retailer, AutoNation, bought National and Alamo to ensure a steady (upstream) supply of what Hoffer calls “creampuff used cars.”
According to Hoffer, both efforts failed, although the effects can still be seen today. For one thing, once the Big Three automakers got out of the rental business, it opened the door for the influx of Hyundais, Nissans and Toyotas now available on rental car lots across the country.
At the other end of the spectrum, says Abrams, the rental car companies are currently making good money selling off their vehicles as they replace their fleets.
“They’re making so much money on the back end when disposing of older vehicles that there’s less pressure to make top dollar on (rental rates),” he said.
At the same time, the industry is recognizing that consumer demographics are changing and offering renters more options. Following the lead of industry leader Zipcar, both Enterprise and Hertz have launched car-sharing programs — WeCar and Hertz on Demand, respectively — that allow renters to access cars, mostly in urban areas, for an hour or two instead of by the day or week.
Car-sharing is still a niche market but it’s poised for big growth. According to a soon-to-be-published report from Frost & Sullivan, membership in car-sharing programs in North America is expected to jump from 860,000 in 2011 to 9 million by 2020. An earlier report from the company estimates that revenues will climb to $3 billion in 2016, up from $700 million in 2010.
Much of the growth can be attributed to urban dwellers, college students and others who only need a car occasionally, usually for travel around town. And at rates that average $5 to $10 per hour, car-sharing is probably a poor choice for longer trips and multi-day rentals.
But, according to Philip Gott, senior director with IHS Automotive, car-sharing is poised to expand beyond its college student/young urban professional fan base, especially as big players like Hertz and Enterprise expand their offerings beyond college campuses and city/suburban locations.
Consider a scenario, says Gott, in which you fly into a city, pick up a car at the airport but then park it for the duration of your stay: “If you can pick it up at the airport and get rid of it at the hotel, you might only have it for an hour at the beginning of your trip and an hour at the end instead of renting it for five days."
“The question isn’t if car-sharing is going to take off,” he told NBC News. “It’s when and how fast it’ll become mainstream.”
Rob Lovitt is a longtime travel writer who still believes the journey is as important as the destination. Follow him at Twitter.
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