Renting a Behemoth?

There was an interesting article in USA Today this week about the downturn in car rentals of anything larger than a Chevrolet Cobalt, which isn't a very large car to begin with. Given the high price of gas recently, it's hardly surprising that some people would balk at renting a car that gets less than 20 miles per gallon, and refuse to consider something like a Hummer, which only manages 13 MPG on the highway. Nor should it surprise us that some companies are also taking exception to this expense, and requiring their people to rent smaller cars (and refuse upgrade offers to larger vehicles). No, what I find surprising (if not amazing) about this story is that the rental car industry as a whole appears to have been caught flat-footed on this whole issue...

Traditionally, of course, the compact and economy cars have formed the "base" level for rental car programs, with anything larger commanding a premium of 300% or more above the introductory level. Many consumers made a practice of renting a smaller car than they really wanted in order to get the lowest rate, hoping that the rental company would offer them a free upgrade to something larger and/or more prestigious. Meanwhile, many businesses would allow their employees to rent anything they wanted, figuring that the whole cost was a tax-deductible expense in the first place. But lately it seems that more and more people are refusing free upgrades, and more and more businesses are deciding that they need the cash value more than the tax credits. Obvious, one might think, but apparently the rental car industry did not find it so...

If this article is correct, the industry is still using much the same mix of assets it had when gasoline was $1.50 a gallon. Their traditional "fix" of just offering customers free upgrades when they run out of compact and economy cars is now problematic, and the companies involved have no other contingency plan in place for those occasions. And without additional assets (e.g. more small cars to rent) it's difficult to suggest anything that the rental car companies could do about the problem -- although clearly just saying "that's what we've got; take it or leave it" is not working. My question, as always, is how this came to happen in the first place...

The current gas crisis did not just spring into being overnight. Most of the rental car companies interviewed about this issue have pointed out -- correctly, I believe -- that fleet purchase decisions have to be made months or even years in advance, and orders placed for this year's assets are therefore made based on last year's conditions. But even granted that this is the case, the idea that gas prices were rising and would continue to do so is hardly something that you would need an entire Strategic Planning department to grasp. Even back when gas prices were still in the $3 range, there was a vast increase in the demand for small cars to rent. So what kept the rental companies from making this adjustment?

My theory is that since larger cars rent for more money than small ones, they represent an inherent increase in value to the consumer -- that is, no one minds being given a $70 car for a rental costing $20, but the reverse trade-off will not work. In fact, someone who actually wants a luxury car or giant SUV will not be pleased at being given a compact car even for no charge at all; the small car does not and can not fulfill the need (whatever it might be) that the larger car does. That being the case, it has always made more sense to have larger cars, and if necessary, let them go for small-car rates, than to just purchase more small cars. Until now...

Going forward, of course, the rental agencies will adapt to the new market demands. Enterprise is already acquiring large numbers of hybrid cars, while Hertz has been offering both hybrid cars and hybrid SUVs for some time, and is making plans to acquire the plug-in hybrid units as soon as they become available. It remains to be seen if the industry will be ready for the new fuel technologies, like fuel-cell, solar/electric, and Clean Coal vehicles, when those become available over the next few years. Or if this same asset utilization crisis will happen all over again...