The Business Problem

Car rental companies began by renting cars to travelers at airports. The business model of these companies historically has been to purchase or lease large fleets of vehicles at the lowest possible price, rent them to customers for income, and then sell them either directly to the public or at auction. The industry grew rapidly; by 2019 it had achieved a global revenue of approximately $90 billion.
Enterprise (www.enterprise.com), Hertz (www.hertz.com), and Avis Budget (www.avisbudgetgroup.com) are the three largest (in order) U.S. airport-based car rental companies by market share. In 2019 they owned a combined 94 percent share of the $32 billion U.S. rental market. Each company encompasses multiple brands:

Enterprise Holdings: Enterprise, National Car Rental, Alamo, and Enterprise CarShare
Hertz Global Holdings: Hertz, Thrifty, and Dollar Rent A Car
Avis Budget Group: Avis, Budget, Payless Car Rental, Zipcar

Despite its large revenues, however, the car rental industry is experiencing a number of problems:

Until recently, the traditional process of renting a car has been time-consuming, inefficient, and irritating to customers. Customers wait to get off their planes, wait to claim their baggage, and then proceed to curbside where they wait to board a shuttle to the rental car lot. At the lot, they wait in line, speak with a representative, manually fill out forms, and receive the car keys. Then they must go to the lot and find the car.
These companies all offer vehicles from the same manufacturers and therefore have difficulty differentiating themselves.
A few decades ago, car rental companies were the only solution to people’s need to access a vehicle without owning one. Today, people have many more options to meet their mobility needs. Car rental companies compete with ride-hailing services such as Uber and Lyft, as well as with peer-to-peer car-sharing services such as GetAround and Turo.

Ride-hailing services have had the greatest impact on car rental companies. In 2019, digital marketing firm Epsilon (http://us.epsilon.com) analyzed travel transactions for 2017 and 2018. The company found that the majority of previous car rental customers had decreased their spending on rental cars, and about half of them had stopped renting cars altogether.
In general, there are the three types of ground transportation for business travelers: ride hailing, rental cars, and taxis. According to Certify (www.certify.com), a provider of online travel and expense management for companies, business travelers use Uber and Lyft approximately 72 percent of the time, rental cars 22 percent of the time, and taxis about 5 percent.
Peer-to-peer car-sharing companies enable private car owners to rent out their vehicles. The companies take a percentage of the total cost of the rental from the people who rent out their cars, and they provide insurance for owners and renters. Customers book rentals, chat with car owners, arrange pickup and drop-off spots, and make payments directly through the companies’ apps.
To address their problems, car rental companies are investing in technology, offering more vehicle choice, and providing personalized service and much more efficient pickup and return processes. In addition, these firms want to diversify their income streams while increasing customer satisfaction.

A Number of Possible Solutions

A button icon reads, M K T. Improving the customer experience with online apps. As noted previously, car rental companies have had poor customer service processes in the past. In order to make the rental process as seamless as possible, car rental companies have developed sophisticated mobile apps. In 2020, almost 70 percent of car rentals were made online via apps.
The apps contain data on drivers, including name, address, driver’s license number, and payment details. With these data, the apps enable customers to easily sign in via their e-mail or social network. Customers can quickly and easily make or change a reservation, receive confirmation and details of the current rental and all upcoming rentals, receive receipts, and have the option to cancel the booking. The apps make the check-in and drop-off processes much faster and easier. Further, to ensure that customers can quickly find the car that best meets their needs, the apps also have pages for each type of car that include the car description, images, features, rental rules, and availability.
Avis was the first rental car company to introduce split payment functionality in its mobile app. The company surveyed travelers nationwide and found that 87 percent were likely to mix business and leisure in the same trip. Accordingly, Split My Bill provides travelers with the ability to split car rental payments between two credit cards or forms of payment. Customers have the option to split their payment by total bill amount, rental days, or additions such as SiriusXM radio. Customers can also charge vehicle upgrade costs to a second form of payment during their rental period.
And the result of investment in its mobile app? In December 2019, consumer insights firm J.D. Power awarded Avis with its top rental car travel app for receiving the highest score in the firm’s U.S. Travel App Satisfaction Study.
A button icon reads, M I S. Connected cars. Car rental companies are connecting their vehicles to the internet. For example, by the end of 2019 Avis had connected more than 200,000 of its vehicles to the internet, and it planned to connect all 600,000 of its cars by the end of 2020.
Each car contains sensors that monitor certain variables, from the car’s exact location in case the driver needs roadside assistance, to fuel levels, tire pressure, and brake pad condition. The sensors also enable the driver to remotely lock and unlock a vehicle and flash the lights. The companies’ goals are to improve driver safety, reduce maintenance costs, ensure that their cars spend more time on the road, and generate new sources of revenue from selling ads and services.
For a car to make a profit for a rental company, it must be rented out at least 82 percent of the time. If car rental companies can monitor a car’s performance in real time, then they can avoid spending money servicing cars that do not need it. In addition, they can reduce the chances of a breakdown that would take a car out of service and irritate customers.
Location tracking also helps these companies generate more revenue-earning days out of their fleets. For example, when cars are towed and impounded because of parking violations, renters often walk away. This situation leaves the car rental companies to handle the problem, which includes finding the lot in which the car is impounded. To address this problem, car rental operators have set up geofencing—a virtual perimeter for a real-world geographic area—around the largest impound lots in the United States. As a result, they no longer have to wait for impound workers to contact them. Geofencing has reduced the average recovery time for an impounded car by half, to six days.
Connected cars also enable these firms to broaden their customer bases by placing their cars closer to more drivers. They hope to become less reliant on airport locations, where they earn approximately 70 percent of their revenue. Additionally, car rental companies are working with retailers, mall developers, and city planners to create self-service, counter-free hubs where people can pick up and drop off a car.
For example, Avis is using this model in Kansas City, Missouri, where all its 5,000 cars are connected. Avis is sharing live car-location data to help city planners refine their digital traffic flow models. In that way, city planners can more effectively determine which roads are used most frequently, and they can schedule repairs more efficiently. In return, the city has provided dedicated parking places for Avis cars.
A button icon reads, M I S. Autonomous vehicles. Industry analysts expect that autonomous vehicles will be attractive to the lucrative business traveler market. McKinsey believes that business travelers will want self-driving rental cars, which will enable them to work on the way to their destinations. Business travelers make up roughly 40 percent of car rental company customers.
Car rental companies have been planning to be in this market from its beginnings by partnering with autonomous vehicle companies: Enterprise and Voyage (www.voyage.auto), Hertz and Aptiv (www.aptiv.com), and Avis and Waymo (www.waymo.com).
A button icon reads, P O M. Fleet management. Car rental companies operate huge networks of garages, and they possess expertise in maintaining, repairing, and cleaning cars. As a result, these firms sell fleet management services to other companies, including autonomous vehicle makers.
For example, Waymo’s driverless taxis need to be on the road as much as possible during each 24-hour day. Therefore, these cars must be serviced and cleaned much more frequently than typical cars. All of the Big Three car rental companies have outstanding fleet-management operations.
In Phoenix, Avis is servicing Waymo’s fleet of 600 self-driving Chrysler Pacifica minivans. Avis handles tasks such as oil changes, tire rotations, and cleaning, while Waymo maintains the autonomous vehicles’ digital systems. Avis’s deal with Waymo provides added revenue without the large fixed cost that comes from actually owning cars. At the same time, Waymo avoids the expense of managing maintenance.
Car sharing. Although car sharing accounts for only 1 percent of the revenues of car rental companies, these companies have car-sharing brands. These units help them prepare for a future with more counter-free locations for their rental fleets. Key car-sharing brands are Zipcar (Avis), Enterprise CarShare, and Hertz 24/7.
Resale retail. Rental car companies sell their cars after a few years. Unfortunately, the weak second-hand market has reduced industry profits. To better control the timing and location of those sales, the Big Three are building their own physical used car sales lots.
These firms rotate their vehicles out of their rental fleets while the vehicles are still under the original manufacturer’s warranty, and they sell them through their sales programs. The cars in these programs are certified, meaning that they have passed a rigorous multipoint, bumper-to-bumper inspection process by certified mechanics. They usually offer 12-month, 12,000-mile warranties (which cost extra).
Value-added services. In 2018, Hertz launched Hertz+, a platform on its website that offers its customers access to more than 130,000 global experiences. These experiences include exclusive events, tours, and other travel opportunities. Hertz+ works with PlacePass.com, a technology company that helps companies access the market for in-destination experiences.
Avis has deployed an open software development system that allows ride-hailing services, digital mapmakers, city planners, and other potential partners to share data with Avis’s app. This system has produced revenue for Avis. For example, a department store could pay Avis a fee, in return for which Avis would embed ads in its app to steer users to the store’s website. The app could also literally steer customers to the physical store. For example, an Avis customer who forgot to pack a needed article of clothing could be taken to a physical store by his or her self-driving rental car.

The Results

According to J.D. Power, customer satisfaction with rental car companies reached record highs in 2019. Based on a 1000-point scale, Hertz scored 856, Enterprise 855, and Avis 833, with an industry average of 843. The small 23-point difference between Hertz and Avis highlights the competition in the industry.
Unfortunately, the COVID-19 pandemic has damaged the entire travel industry, including car rental companies. As of May 2020, car rental reservations at airport locations had declined between 50 and 75 percent, according to the American Car Rental Association. Neighborhood branch locations experienced a smaller decline in reservations than airport locations did. One possible reason for the smaller decline is people involved in accidents need an insurance replacement vehicle.

Car rental firms began to furlough employees in March 2020. By May, they had begun to lay off employees. For instance, on April 20, Hertz announced that it would lay off 10,000 of its 29,000 employees in its North American operation.

And the bottom line? Regardless of the uncertainty that the car rental industry faces, the U.S. Department of Homeland Security (DHS) has declared the industry essential, and it remains open for business.
In May 2020, Hertz filed for bankruptcy, a victim of the coronavirus pandemic. By declaring bankruptcy, Hertz maintained that it intended to stay in business while restructuring its debts and emerging a financially healthier company.

Questions

This case has addressed a number of possible solutions for the problems afflicting the car rental industry.

1. Which solution do you think had the greatest strategic impact on the industry? Provide specific examples to support your answer.

2. Which solution do you think has the least strategic impact on the industry? Provide specific examples to support your answer.

3. Apply the five forces of Porter’s Competitive Forces Model to each possible solution discussed in this case (individually). Which forces are most applicable to each solution? Support your answers