Rental Car Prices Are Giving Us Sticker Shock
The price of renting a car -- often the American traveler's transportation of choice -- has risen substantially in recent times.
Ponying Up in Portland
An August survey by CheapCarRental.net found that the average daily rate for the cheapest available rental car in many cities was much higher on a year-over-year basis. For example, the most expensive city was Portland, Oregon, with a $111 rate, while in the car manufacturing capital of the country, Detroit, it stood at $90, and in Denver it was $88. Rewinding one year, CheapCarRental's survey had a rate of $86 for Portland, $55 for Detroit and $65 for Denver.
The blame can be laid at the feet of the major rental companies. Avis Budget Group (CAR), for example, in its most recently reported quarter, lifted its U.S. rates by around 4 percent, excluding its budget brand Payless and short-term rental subsidiary Zipcar. Such raises seem to be a habit for the company these days -- in the previous quarter, it advanced its U.S. pricing by 2 percent.
Given that, it's no surprise that the company's revenue advanced 10 percent on a year-over-year basis to $2.2 billion in that most recent quarter, while net profit grew a robust 28 percent to $74 million.
The other big publicly traded auto lender, Hertz Global Holdings (HTZ), saw a nearly 20 percent pop in revenue in its fiscal 2013, with top line rising to $10.8 billion.
This, despite a heavy slate of recalls from the industry's big suppliers. So far in August alone, General Motors (GM) has recalled in excess of 380,000 vehicles. Meanwhile, in the same month, Ford (F) began the recall of 83,250 of its cars across several models.
Fewer Cars in the Parking Lot
Behind the higher bills and fatter profits is consolidation. With fewer competitors, of course, there's less pressure to offer attractive prices.
Avis Budget Group gets half its name from the Budget chain, acquired in 2002. Also under its spreading wing are more recent acquisitions Zipcar and another (relatively) low-cost renter, Payless.
Anyone who thinks that competition should be strong and lively thanks to the presence of midmarket names like Enterprise Rent-a-Car, National and Alamo had better guess again. All three stalwarts are part of the same company, privately held Enterprise Holdings.
According to Auto Rental News, in 2013, Avis Budget Group, Hertz Global Holdings and Enterprise Holdings combined had roughly 1.8 million rental cars in service in the U.S. -- 93 percent of the total. The three heavyweights commanded "just" 87 percent of the domestic fleet in 2012. Not coincidentally, back then Dollar Thrifty Automotive Group (acquired that year by Hertz for $2.3 billion), Zipcar and Payless were nearing the end of their tenures as separate, competing firms.
This basically makes the domestic car rental market an oligopoly, a fact which is not lost on federal regulators.
In the wake of Hertz's Dollar Thrifty deal, the Federal Trade Commission attempted to dilute that consolidation a bit. The commission ordered that Hertz divest Advantage Rent a Car, a smallish brand it bought in 2009. The company dutifully complied, but Advantage soon filed for bankruptcy.
Outside of that, there hasn't been too much action on the regulatory front, so it looks like the three kings will continue to rule. This dominant position has been noted by the market, with investors bidding up Avis stock by a powerful 70 percent so far this year. Hertz has seen only a modest rise, but this may be due less to fundamentals than deep-seated accounting issues delaying the release of quarterly results.
That's the situation on the road now, but what about the future? There are some cautiously optimistic indications that price hikes might soon level off, at least in the near term.
In their latest Global Travel Price Outlook, the Global Business Travel Association and Carlson Wagonlit Travel estimate that in 2015 U.S. car rental prices will remain at the same level as this year.
But that might be only a brief stop at a red light. At the moment, the business is dominated by only a handful of monster companies whose price lifting has revved up their results and (in the case of Avis) stock prices. That light will very possibly change soon, after which renters might start paying even more.
Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford and Hertz Global Holdings. The Internal Revenue Service is encouraging investors to support America's growing energy renaissance with a tax loophole that's explained in a new special report, "The IRS Is Daring You to Make This Investment Now!" Try any Foolish newsletter services free for 30 days.