Commercial production of automobiles began around the year 1900 and had a profound affect on not only on transportation but also on the development of new industries (e.g., motels, petroleum refineries, car service providers) and the struc- tural economics of towns and cities. The resulting greater accessibility, mobility, and range of travel that now became possible, moreover, drastically altered urban and regional landscapes and upended the societal hierarchies and activities that had been typical of the prior century.25The impact was far and wide.
As with most consumer products that are born of new design and manufacturing technologies, autos were at first curiosities affordable only by the wealthy. Yet it didn’t
24Although the comparisons here are largely to airlines and hotels, the industry prefers to view a cruise as a vacation alternative, with land-based resorts as the primary competition.
25Stopher and Stanley (2014, Chap. 2) provides an excellent concise overview of the history of transportation.
take long for costs to decline and for passenger cars to be priced so that people of average means could buy them. In the first decade alone, half a million cars were sold, and by 1930, 27 million were registered, with more than half of all US families owning at least one car. Although growth slowed during the middle, war, and Depression- filled years of the twentieth century, by 1980, postwar prosperity pushed the incidence of car ownership to one in two persons, from one in five 50 years before.
Technology, of course, played a role in making cars more user-friendly and easier to manufacture. And as more of them were registered, political pressures for highway improvements rose accordingly, with the percentage of paved roads increasing rapidly after 1920, when states devised various registration fee and gasoline tax schemes to finance road improvements. The extraordinary growth in automobile registrations combined with road improvements then had the effect of dramatically increasing the number of miles traveled—with much of the increase coming at the expense of the railroads (Fig.3.2a). As Meyer and Oster (1987, p. 177) noted:
total intercity travel by all modes (but excluding commuting) grew from 42 billion pas- senger miles in 1916 to 198 billion in 1929, with the automobile accounting for all the growth and its share increasing from less than 20 percent to over three quarters of the market in 1929. By 1940 intercity travel had increased to 330 billion passenger miles, and auto’s share had reached 89 percent.
Although construction of Connecticut’s Merritt Parkway and Pennsylvania’s Turnpike in the late 1930s first enabled traffic to flow faster, it was not until an Act of Congress initiated the Interstate Highway system in 1956 that the quality of the road system had caught up with the capabilities of the cars. As a result, intercity travel by automobile rose several-fold to over one trillion passenger-miles by 1970. Yet, the automobile’s share of market also peaked around that time: Jet aircraft were begin- ning to take an increasing percentage of intercity traffic volume (Fig.3.2b).
Meanwhile, as Fig.3.3shows, Federal government spending on highways has been consistently greater than for any other mode of transportation. Despite these expenditures, however, traffic jams are today probably no less common than they were many years ago (especially as U.S. bridge and highway infrastructure has not been adequately upgraded).
3.2.2 Car Rentals
The global $36 billion (60 % in the US) car rental business, with approximately 70 % of its volume originating at airports, sits at the intersection of travel, where wings change into wheels. However, the business has long been structured as an oligopoly with brands including Hertz, Avis, and Enterprise, dominant. Enterprise is by far the strongest at off-airport locations, with over 50 % of that business, but Hertz and Avis have more recently been expanding in that direction.26Four distinct
26Hertz/Dollar Thrifty and Avis/Budget represent a mix of premium and low-priced brand owned by the same company. EuroCar, Sixt, and Fox operate discount brands in Europe. As noted by Loomis (2006), Enterprise’s revenues of $9 billion and profits of $700 million in 2005 were actually larger than those of Hertz, which in the same year generated revenues of $7.5 billion and
130 3 Water and Wheels
0 25 50 75 100
40 50 60 70 80 90 00 10
Air Rail
% of RPMs
Bus 0
25 50 75 100
40 50 60 70 80 90 00 10
Auto
% of RPMs
planes + trains + buses
0 25 50 75 100 125
40 50 60 70 80 90 00 10
Bus RPMs (billions)
Rail
a
b
c Fig. 3.2 (a) Percentage share of intercity revenue passenger-miles (RPMs) for private carriers
(automobile) versus public carriers (planes, trains, and buses), 1940–2013. (b) Percentage share of total public carrier intercity RPMs, 1940–2013. (c) Bus and rail revenue passenger- miles, 1940–2013
profits of $378 million. By 2011, revenues had risen to $14 billion. Enterprise obtains much of its business from insurance companies, who provide temporary replacement cars to affected drivers under their policy obligations. With Hertz acquiring Dollar Thrifty for around 2.5 billion in 2012, the industry in the US is dominated by Hertz, Enterprise Holdings, and Avis Budget Group. See Maynard (2002), Terlep and Dezember (2012), and Edleson (2013b). Zipcar (bought by Avis in 2013) offers rentals by the hour or day. And as noted in Zipkin (2015c), new alternatives are beginning to emerge.
branding tiers have emerged in the North American market:Premium(Avis, Hertz, and National);mid-priced(Budget and Alamo);value(Dollar, Thrifty, and Enter- prise); anddeep discount(Advantage, Payless, and Fox). The traditional companies account for around 95 % of the rental market, with brand ownership in 2015 being:
Avis—Budget, Payless, Zipcar Enterprise—Alamo, National Hertz—Dollar, Thrifty
In the United States, rentals are funneled through approximately 7,000 airport locations and another 12,000 others routinely at car dealers or service stations. For many locations outside the United States, franchise arrangements are also used.
Depending on location, a typical agreement might call for between 5 and 7.5 % of gross rental revenues to go to the franchisor.27
At first glance, the business of renting cars to travelers seems simple enough.
The price paid by the renter is somewhat proportionate both to the length of time for which the car is rented and the value of the car. The price paid would also be sensitive to local-market competitive conditions. And revenues per transaction ought to be higher from leisure than from business rentals because leisure rentals are generally for longer periods. Profit would result when the rental price received exceeds the all-in costs of buying and holding the vehicle and of administration and marketing to customers.28
0 40 80 120 160 200 240
60 65 70 75 80 85 90 95 00 05 10
Av iation Highways
M ass Transit
$ billions (2014 dollars)
Fig. 3.3 Total public spending (Federal, State, and Local) for
transportation by selected type of infrastructure, 1960–2014, Table W-7.
Source: Congressional Budget Office, March 2015 available atwww.cbo.gov/
doc
27Rental prices are tracked by the Abrams Rate Index, which measures the cost of a midsize car rented a week in advance.
28Beginning in early 2002, the major car-rental companies decided to bolster profits by eliminat- ing travel agent commissionsv on certain corporate and government accounts such as those in the US and Canada operating with negotiated discount plans. Prior to 2002, travel agencies, which book between one-fourth and one-half of all rental agreements, would have been entitled to earn 5 % of sales for corporate bookings and 10 % for other types of bookings.
132 3 Water and Wheels
A significant part of a rental company’s profit is, however, likely to be derived from the difference between prices paid for cars (whether leased or bought outright) and the prices for which they are sold after being used by customers. In dominant airport-location companies such as Hertz, with a 30 % share of the US market, it is not unusual to find that most of the cars acquired (80 %þ) will be bought under manufacturer repurchase (i.e., “program”) agreements wherein the repurchase price is subject to mileage, repair, and depreciation-schedule charges. Because such arrangements tend to limit the rental company’s residual risk, cars acquired under these conditions are referred to in the industry as “nonrisk”.29 The cost and the availability of suitable cars are thus important variables in the determination of profits. To further reduce risk, the major companies will tend to pool their inven- tories at independently operated rental facilities.
The trade-off here, though, is between the lengths of time that a car is owned by the rental company and the car’s ultimate depreciated value on resale. The longer the vehicle is owned, the more rental turns it can potentially generate, with the average fixed cost per rental declining over time even as the variable costs of maintenance and repairs inevitably begin to rise. The larger companies will usually hold a car for at least 6–7 months (and 18,000 miles), although some may be kept for more than a year. In 2016, there were around 2.2 million rental vehicles in the United States and the annual revenues generated per unit was estimated (see autorentalnews.com) to have been $12,600 ($1,050 per month). Some key metrics for analysis would be the average number of rental days, vehicle utilization percentage, average revenue per vehicle, and average net monthly depreciation per vehicle.
From a macroeconomic standpoint, the rental business is somewhat sensitive to general economic conditions and also more specifically to airline industry prospects and prices. Almost by definition, in prosperous times, both airlines and rental companies will benefit from strong pricing of their services and relatively benign behavior of fuel, borrowing, and labor costs—all of which are important to both of these similarly capital- and labor-intensive industries. Because of the close linkages between them, with one segment largely feeding the other, capacity utilization trends (fleet utilization in cars and load factors in airlines) must track, up and down, more or less in tandem. This implies that car rental company profitability is apt to be cyclically volatile, with operating and financial leverage relatively high.
29A key factor here is the quantity discount received by car rental companies in their fleet purchases from manufacturers. Given that several of the automobile manufacturers have from time to time held partial equity interests in rental companies, the discounts on fleet purchases may amount to more than 30 % of retail car prices. As noted in Loomis (2006), Enterprise differs from Hertz in that it actually itself sells the some 800,000 cars a year that it buys from manufacturers.
See also Everson (2007b) and Sorkin (2007). By 2006, rental companies began to hold onto cars longer because fewer cars were in short-term lease programs, which were then curtailed by manufacturers, and a larger percentage of the fleet were so-called risk cars because rental companies bore the resale price risk. See McCartney (2013a).
From a microeconomic standpoint, the goal of the car rental company is to maximize fleet utilization at the highest possible price. Again, here, marketing and price-discrimination (i.e., yield management) strategies and reservation systems retain their importance in the overall scheme of operations. And the analytical framework remains comparable to that applied to other oligopolistic, capital- and labor-intensive industry segments. Table1.6shows the composite financial oper- ating performance of major car rental companies.30