Car rental costs spiral upward

Higher gasoline prices won't be the only thing crimping family vacations this year.

Consumers will pay more to rent cars from companies such as Hertz Global Holdings Inc. and Avis Budget Group Inc., two of the largest in the United States, as they pass along the rising cost of purchasing new vehicles for their fleets. Prices jumped more than 20 percent the past two years and might increase another 5 percent in 2007.

Hertz and Avis now pay more for General Motors Corp. and Ford Motor Co. vehicles because the two largest US automakers cut decades-old discounts to try to erase billions of dollars in losses. GM's February fleet sales -- to businesses, rental-car companies, and the government -- dropped 18 percent from a year earlier.

"Consumers have gotten used to too good of a deal," said Neil Abrams, president of Abrams Consulting Group in Purchase, N.Y., which tracks the industry. "Rental prices were kept artificially low by the relationship with automakers. The practice made for irrational pricing."

Corporate rentals for business travelers aren't affected. They're negotiated at set prices, and because of the volume, their tab is more stable.

"Pricing tends to be highly volatile in the leisure market," said Kwame Webb, an analyst with T. Rowe Price in Baltimore, which owned 3.2 million Hertz shares in December. "Corporations can say 'This is my price. Take it or leave it.' "

That means it's the leisure renter who takes the hit. Hertz and Avis passed along higher vehicle costs to customers and then some, leading to increased profit and stock prices.

Shares of Hertz have climbed 55 percent since its initial public offering Nov. 15. Avis, in business since 1946 and formerly known as Cendant Corp., gained 46 percent since it began trading Sept. 4. The Standard & Poor's 500 Index has jumped 13 percent since then.

In its first report since the IPO, Hertz's fourth-quarter net income of $39.8 million exceeded analysts' estimates. Avis's profit of $4 million reversed a year-ago loss of $9 million.

Christopher Jarvis, 36, a financial consultant from Austin, Texas, said he rents a leisure car once a month. After primarily renting at Hertz, he now compares prices. "I will now price-shop unless I have a time issue," he said.

The average daily US rental price for a midsize car such as the Chevy Classic or Pontiac G6 early this month was $48.56, 23 percent more than the same time two years ago, Abrams said.

That may not stop many travelers from renting cars.

"A rental car is still more affordable than round-trip airfare of $800," said Webb.

The Abrams Leisure Travel Index comes out with the average price of US rental cars each Monday by polling companies at select airports for a midsize car booked one week in advance.

"The Abrams report is really a snapshot on a very, very narrow segment of the business," said Richard Broome, a Hertz spokesman. "There have been price increases over the past few years, but not on that level."

Overall industry prices dropped from February to March, Broome said. About 53 percent of Hertz's car rental sales come from leisure customers and 47 percent from business.

The breakdown at Avis, which has 6,600 rental locations, is 40 percent from consumers and 60 percent from corporations.

For two decades, GM and Ford kept factories running by selling excess vehicles to rental-car companies at discounts they declined to reveal. That practice is no longer the case, as US buyers purchase more vehicles made by rivals, including Toyota Motor Corp., the world's second-largest automaker.

GM says it plans to reduce sales to fleet customers by 120,000 this year, and 100,000 next. GM sold 26 percent of 2006 sales as fleet cars, down from 29 percent in 2005.

Ford sold 31 percent of its cars to fleet customers in 2006. Rental-car sales were about the same in 2005 and 2006, it said.

Ford says it will cut rental car sales by 7,000 to 8,000 units a month from March through May. Both GM and Ford declined to give the number of cars sold to rental companies.

"The automakers have decided rental cars aren't profitable," said Betsy Snyder, who follows rental-car companies as a fixed-income analyst with S&P in New York

GM lost $12.2 billion the past two years, the first consecutive deficits since 1991-1992. Ford lost $12.7 billion in 2006, the worst deficit in its 103-year history.

Hertz said its acquisition costs will jump 15 percent in 2007, while Avis predicts a 10 percent increase in per-unit fleet costs this year.

The companies have reduced expenses by keeping cars in their fleets longer and not selling back as many cars to automakers. That will hold 2007 price increases to as much as 5 percent, they said.

Hertz, which has rented cars since 1918, plans to centralize purchasing and eliminate 1,550 jobs in a workforce of 31,900. Based in Park Ridge, N.J., it has 7,600 rental car and machinery locations.

Jarvis doubts rental car pricing will return to its former level. "It irks me," he said.