163-Price Increases in a Recession
Our recession continues, but not every industry suffers in this recession. One industry that is not suffering today is the auto rental market. The average rental rate, at an airport, for a compact car in 2009 was up over 50% from that of 2008. This, while demand in 2009 fell 20%. What accounts for this surprising result of a price rise despite a fall-off in demand? Capacity reduction. (See “Audio Tip #116: The Withdrawal of Capacity to Raise Prices” on StrategyStreet.com.)
The industry reduced its fleet size by an average of 25% in 2009. And capacity is down by 50% compared to a few years ago. This capacity reduction has given the industry power to raise its prices because the industry is running at a high rate of its fleet utilization. (See “Audio Tip #101: When is Price Likely to go up in a Market?” on StrategyStreet.com.)
The industry learned to reduce its capacity in order to get pricing power in 2001. The 9/11 attack led to a steep decline in business and leisure travel. In response to that, most major auto rental companies reduced their fleet numbers. Fleet sizes dropped 20% to 25% in the industry. This gave the industry pricing power despite the fall-off in demand. For example, Hertz raised its daily rates an average of 10% and weekly rates an average of 26% during this period.
Of course, the risk is always that low-cost/low-priced competitors do not go along with the industry-wide reduction in capacity.
Not all of the industry reduced its capacity in 2009. For example, off-airport auto rental locations, many of which are the home of low-cost/low-priced auto rental competitors, saw weekly rates rise by 12% in 2009 compared to 2008. Obviously, the capacity reduction was not as great in that market. Something similar happened in 2001 when Enterprise Rent-A-Car, a low-cost competitor, announced that it would not follow the industry leader’s plans to reduce capacity.
If the industry leaders reduce capacity but low-cost competitors do not follow, the low-cost competitors will gain share (see “Audio Tip #136: Should we put our Product on Allocation” on StrategyStreet.com). Enterprise Rent-A-Car is now the largest auto rental firm in the U.S. Southwest Airlines continues to gain share against legacy airlines, who have reduced their capacity by more than has Southwest.
There was a great deal of turmoil in the automobile rental market over the last decade or so. First, came the emergence of many forms of alternative mobility solutions, including bicycle and scooter rentals, ride hailing, ride sharing and car sharing services. The ride hailing segment has been the big winner here with the combination of Uber and Lyft controlling virtually all of the market. Uber’s market share was 69% with Lyft at 31%. There was turmoil as the industry Standard Leaders acquired many of the low-cost Price Leader competitors. The Avis Budget group bought Payless rental car in 2013 and Zipcar the same year. The Hertz Corporation bought Thrifty and Dollar rental car in 2012.
By 2021, Enterprise, which also owns Alamo and National, had become the dominant leader in US auto rentals, in both cars in service and US revenue. The Avis Budget group was a distant 2nd followed by Hertz at number 3. These 3 competitors controlled the large majority of the rental car market. The number 4 competitor in the industry had less than 10% of the revenues of number 3, Hertz.
Covid caused all the industry leaders to reduce drastically their auto inventories due to Covid. Hertz, in particular, was devastated due to its high debt levels. The company declared bankruptcy in May 2020. It emerged over a year later with 20,000 fewer employees, about half its employees at the beginning of Covid and 33% fewer automobiles to rent.
Despite the significant damage done to the industry leaders, there are more than 17,000 auto rental businesses in the US. That number continues to grow at 2.7% a year in a market where revenues grow at less than 5% a year. This may be an industry where bigger is not necessarily better. See HERE for an explanation.
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