Big 3 production cuts mean higher prices for rental cars

AP Business Writer

As the nation’s Big Three automakers remake themselves into smaller, leaner companies, the rental car business is suffering collateral damage.

All three have cut production this year to bring supply in line with lower demand for their products, and further cuts are inevitable next year. They’re also trying to wean themselves of rebates and other incentives to bring sales prices closer to the sticker.

That means fewer cars available for low-profit bulk sales to rental companies, and some industry analysts and rental company officials say that already has led to price increases at the airport service counter.

“I think they’re going to have increased costs, which they will have to try to pass on,” said Michael Millman, an analyst who follows the car rental business for Soleil Securities in suburban New York City.

General Motors Corp., the nation’s largest automaker, said last week its sales to rental car companies and other fleet buyers in October were down by 10,000 vehicles compared to the same month last year. Company officials have predicted a reduction of 80,000 to 90,000 for the full calendar year, with the decline continuing into next year.

Ford Motor Co. won’t give specific fleet sales numbers until later in the year, but said they are up 9 percent in 2006 mainly to the phase-out of the Taurus model, which in its final year of production was sold primarily to rental companies. Ford expects fleet sales to drop next year without 175,000 Taurus models on the market.

DaimlerChrysler AG’s Chrysler Group also won’t give out fleet numbers but said it had reduced them in October in line with a strategy to focus more on retail sales.

At Dollar Thrifty Automotive Group Inc., President and Chief Executive Gary Paxton said the company has finished negotiations on its 2007 purchases and likely will need per-day rental price increases of 7 percent next year to cover increased costs.

The Big Three’s production cuts likely will force every rental company to raise prices, he said.

“It varies a little bit from company to company, but it’s pretty close to the same number. We see all three of the major U.S. manufacturers, the domestics, both restricting the number of vehicles available for rental fleets and increasing the depreciation costs to us,” Paxton said.

To handle the higher prices, most rental companies will hold onto their fleets a little longer, meaning that you’re likely to see slightly older rental cars in the coming year, said Michael Gallo, an analyst who tracks rental companies for C.L. King & Associates in New York.

At Enterprise Rent-A-Car, Chairman and CEO Andy Taylor said the company increased prices this year by 0.1 percent, and he doesn’t see a large increase in 2007 because of cost cuts and the way the company buys cars.

Enterprise buys from manufacturers outright, reselling the cars itself. Many rental companies do the same, but also buy a higher percentage of their fleet with the automakers guaranteeing to buy them back after a certain time period.

Taylor said Enterprise, the nation’s largest rental car company, may have to pay more for cars in the beginning but also will benefit from to higher resale values.

“We are paying some more for cars,” Taylor said. “We’ll see how that shakes out with the used car market.”

Millman said some rental companies are turning more to Asian manufacturers as the Big Three cut back, but those automakers have a much tighter supply and less flexibility. He said the Big Three’s glut of large sport utility vehicles may present some opportunity for rental car companies.

“The rental companies probably would be limited in how many of those they would like to accept,” he said.

Paxton said there’s no evidence that the Big Three will back off from their production and fleet sales cuts, but he doesn’t see increased rental car prices beyond 2007.

At Enterprise, Taylor said this is just another of many cycles he has seen in the automotive industry, although the automakers’ troubles may have deeper roots than in the past. But he predicts more stable pricing for car rental companies in years ahead.

“There’s still is an overcapacity of manufacturing in the world,” he said. “When that production all settles out, then I think you’ll see maybe the trend return to several years ago.”