April 9, 2020

The Car Rental Industry

Marketplace Overview

The car rental industry is really a multi-billion dollar sector of the US economy. The US segment of the sector averages about $18. 5 billion dollars in revenue a year. Today, you can find approximately 1 . 9 million rental vehicles that service the US segment of the market. In addition , there are many rental agencies besides the industry leaders that subdivide the total revenue, namely Dollar Thrifty, Budget and Vanguard. In contrast to other mature service industries, the particular rental car industry is highly consolidated which naturally puts potential new comers at a cost-disadvantage since they face high input costs with reduced possibility of economies of scale. Moreover, most of the profit is generated by a few companies including Enterprise, Hertz and Avis. For the fiscal year of 2004, Enterprise generated $7. 4 billion dollars in total revenue. Hertz came in 2nd position with about $5. 2 billion and Avis with $2. 97 in revenue.

Level of Incorporation

The rental car industry faces a totally different environment than it did five years ago. According to Business Vacation News, vehicles are being rented until they have accumulated 20, 000 to 30, 000 miles until they may be relegated to the used car industry while the turn-around mileage was 12, 000 to 15, 000 mls five years ago. Because of slow business growth and narrow profit perimeter, there is no imminent threat to backward integration within the industry.
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In fact , among the industry players only Hertz is usually vertically integrated through Ford.

Scope of Competition

There are many factors that shape the competitive landscape from the car rental industry. Competition comes from 2 main sources throughout the chain. Within the vacation consumer’s end of the range, competition is fierce not only because the market is saturated and properly guarded by industry leader Business, but competitors operate at a price disadvantage along with smaller market stocks since Enterprise has established a network of dealers over 90 % the leisure segment. On the business segment, on the other hand, competition is very strong at the airports since that section is under tight supervision simply by Hertz. Because the industry underwent a huge economic downfall in recent years, it has improved the scale of competition within most of the companies that survived. Competitively speaking, the rental car industry is a war-zone as most rental agencies including Enterprise, Hertz and Avis one of the major players engage in a battle of the fittest.


Over the past 5 years, most firms have been functioning towards enhancing their fleet sizes and increasing the level of profitability. Organization currently the company with the largest navy in the US has added 75, 1000 vehicles to its fleet given that 2002 which help increase its amount of facilities to 170 at the airports. Hertz, on the other hand, has added 25, 000 vehicles and broadened its international presence in 150 areas as opposed to 140 in 2002. Additionally , Avis has increased its fleet from 210, 000 in 2002 to 220, 000 despite recent economic adversities. Over the years following the economic downturn, although most companies throughout the industry were striving, Enterprise among the industry leaders had been growing steadily. For example , annual sales reached $6. 3 in 2001, $6. 5 in 2002, $6. 9 in 2003 and $7. 4 billion in 2004 which translated into a growth rate associated with 7. 2 percent a year within the past four years. Since 2002, the has started to regain its footing in the sector as overall sales grew from $17. 9 billion dollars to $18. 2 billion within 2003. According to industry analysts, the greater days of the rental car industry have yet to come. Over the course of the next several years, the industry is expected to experience faster growth valued at $20. 89 billion each year following 2008 “which equates to a CAGR of second . 7 % [increase] in the 2003-2008 period. ᾿


Over the past few years the rental car market has made a great deal of progress to facilitate it distribution processes. Today, there are approximately 19, 000 rental locations yielding about 1 . 9 mil rental cars in the US. Because of the increasingly plentiful number of car rental locations in the US, proper and tactical approaches are taken into account in order to insure proper distribution through the entire industry. Distribution takes place within two interrelated segments. On the corporate marketplace, the cars are distributed to international airports and hotel surroundings. On the leisure segment, on the other hand, cars are dispersed to agency owned facilities that are conveniently located within most main roads and metropolitan areas.

In the past, supervisors of rental car companies used to rely on gut-feelings or intuitive guesses to generate decisions about how many cars to have in a particular fleet or the usage level and performance standards of keeping certain cars in one navy. With that methodology, it was very difficult to maintain a level of balance that would satisfy consumer demand and the desired degree of profitability. The distribution process is fairly simple throughout the industry. To begin with, managers must determine the number of cars that needs to be on inventory on a daily basis. Because an extremely noticeable problem arises when too many or not enough cars are available, the majority of car rental companies including Hertz, Enterprise and Avis, use a “pool᾿ which is a group of independent rental facilities that will share a fleet of vehicles. Basically, with the pools in place, rental locations operate more efficiently since they reduce the risk of low inventory if not eliminate rental car shortages.

Market Segmentation

Most companies throughout the chain make a profit centered of the type of cars that are leased. The rental cars are categorized straight into economy, compact, intermediate, premium and luxury. Among the five categories, the particular economy sector yields the most revenue. For instance, the economy segment on its own is responsible for 37. 7 percent of the total market revenue in 2004. In addition , the compact segment accounted for 32. 3 percent of overall revenue. The rest of the other categories covers the remaining 30 percent for the US segment.

Historical Levels of Profitability

The overall success of the car rental industry has been diminishing in recent years. Over the past five years, the has been struggling just like the rest of the traveling industry. In fact , between the years 2001 and 2003 the US market provides experienced a moderate reduction in the amount of profitability. Specifically, revenue fell through $19. 4 billion in 2000 to $18. 2 billion in 2001. Subsequently, the overall industry income eroded further to $17. nine billion in 2002; an amount which is minimally higher than $17. 7 billion which is the overall revenue for the year 1999. In 2003, the industry skilled a barely noticeable increase which usually brought profit to $18. two billion. As a result of the economic downturn in recent years, some of the smaller players that were highly dependent on the airline industry have done a great deal of strategy realignments as a way of preparing their companies to cope with eventual economic adversities that may surround the. For the year 2004, on the other hand, the economic situation of most firms have progressively improved throughout the industry since the majority of rental agencies have returned far greater profits relative to the anterior many years. For instance, Enterprise realized revenues associated with $7. 4 billion; Hertz returned revenues of $5. 2 billion and Avis with $2. 9 billion in revenue for the fiscal year of 2004. According to business analysts, the rental car industry can be expected to experience steady growth associated with 2 . 6 percent in revenue over the next several years which translates into an increase in profit.

Competitive Rivalry Among Sellers

There are many factors that will drive competition within the car rental business. Over the past few years, broadening fleet dimensions and increasing profitability has been the focus of most companies within the car rental business. Enterprise, Hertz and Avis among the leaders have been growing both in product sales and fleet sizes. In addition , competitors intensifies as firms are continuously trying to improve their current conditions and provide more to consumers. Enterprise provides nearly doubled its fleet size since 1993 to approximately six hundred, 000 cars today. Because the market operates on such narrow income, price competition is not a factor; nevertheless , most companies are actively involved in developing values and providing a range of amenities from technological gadgets to even free rental to satisfy customers. Hertz, for example , integrates its Never-Lost Global positioning system within its cars. Enterprise, on the other hand, uses sophisticated yield management software to control its fleets.

Finally, Avis utilizes its OnStar and Skynet program to better serve the consumer base while offering free weekend rental if a client rents a car for five consecutive days Moreover, the consumer base from the rental car industry has relatively low to no switching cost. Alternatively, rental agencies face high fixed operating costs including property leasing, insurance and maintenance. Consequently, leasing agencies are sensitively pricing there rental cars just to recover operating costs and adequately meet their customers demands. Furthermore, because the industry experienced slow growth in recent years due to financial stagnation that resulted in a massive drop in both corporate travel and the discretion sector, most companies including the industry commanders are aggressively trying to reposition their particular firms by gradually lessening the dependency level on the airline market and regaining their footing in the leisure competitive arena.

The Potential Entry of new Competitors

Entering the car leasing industry puts new comers at a severe disadvantage. Over the past few years following the downturn in the economy of 2001, most major leasing companies have started increasing their particular market shares in the vacation industry of the industry as a way of covering stability and lowering the level of dependency between the airline and the car rental sector. While this trend has engendered long-term success for the existing firms, it has heightened the competitive landscape for new comers. Because of the severity of competitors, existing firms such as Enterprise, Hertz and Avis carefully monitor their competitive radars to anticipate Sharpe retaliatory strikes against new traders. Another barrier to entry is created because of the saturation level of the industry.

For example , Enterprise has taken the first mover benefit with its 6000 facilities by saturating the leisure segment thereby placing not only high restrictions on the most typical distribution channels, but also high reference requirements for new firms. Today, Organization has a rental location within fifteen miles of 90 percent from the US population. Because of the network of dealers Enterprise has established around the country, it has become relatively stable, more recession proof and most importantly, much less reliant on the airline industry in comparison to its competitors. Hertz, on the other hand, will be utilizing the full spectrum of its 7200 stores to secure its position in the marketplace. Basically, the emergence of most from the industry leaders into the leisure marketplace not only drives rivalry, but also this varies directly with the level of difficulty of entering the car rental sector.

The Threat of Substitute

There are several substitutes available for the car rental industry. From a technological standpoint, renting a car to go the distance for a meeting is really a less attractive alternative as opposed to movie conferencing, virtual teams and cooperation software with which a company can instantly setup a meeting with its employees from anywhere around the world at a cheaper price. In addition , there are other alternatives including taking a cab which is a satisfactory substitute relative to quality and switching cost, however it may not be as attractively priced being a rental car for the course of a day or more. While public transportation is the most cost efficient from the alternatives, it is more costly in terms of the procedure and time it takes to reach one’s destination. Finally, because flying provides convenience, speed and performance, it is a very enticing substitute; however , it really is an unattractive alternative in terms of cost relative to renting a car. On the company segment, car rental agencies have more security against substitutes since many companies possess implemented travel policies that establish the parameters of when hiring a car or using a substitute is the best course of action.

According to Tracy Esch, a benefit director of marketing operations, her company rents cars up to a 200-mile trip before considering an alternative. Generally, the threat of substitute is reasonably low in the car rental industry because the effects the substitute products possess do not pose a significant threat of profit erosion throughout the industry.

The Bargaining Power of Suppliers

Provider power is low in the car rental industry. Because of the availability of substitutes and the level of competition, suppliers do not have a great deal of influence in the terms and conditions of supplying the rental cars. Because the rental cars are often purchased in bulk, rental car agents have got significant influence over the terms of the sale since they possess the ability to play a single supplier against another to lower the sales price. Another factor that reduces supplier power is the lack of switching cost. That is, buyers aren’t affected from purchasing from one provider over another and most importantly, altering to different supplier’s products is hardly noticeable and does not affect consumer’s leasing choices.

The Bargaining Power of Buyers

While the leisure sector offers little or no power, the business segment possesses a significant amount of influence in the carrental industry. An interesting trend that is presently underway throughout the industry is making car rental companies to adapt to the requirements of corporate travelers. This pattern significantly reduces supplier power or maybe the rental firms᾿ power and boosts corporate buyer power since the business segment is excruciatingly price delicate, well informed about the industry’s price structure, purchase in larger quantities and so they use the internet to force lower costs. Vacation buyers, on the other hand, have less influence over the rental terms. Because vacationers are usually less price sensitive, purchase in lesser amounts or purchase more infrequently, they have vulnerable bargaining power.

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