Rental sector shapes up for 2012 price war

The UK rental sector could be on the verge of a price war as the industry’s biggest operators look to grab greater market share in 2012.

That’s the view of Leasedrive Group commercial director Roddy Graham, who predicts lower rental rates as competition between major players intensifies.

He points towards an “inability” of companies in the sector to “collectively raise rates to more sensible levels”. The problem is, says Graham, one operator will always be prepared to ‘undercut’ another.

“There is always one major name willing to try to grab quick market share by not following the rest to raise prices,” he explained.

“And in that regard they are helped by vehicle manufacturers once more turning to the sector to offload product as consumer new car purchases continue to fall.”

Graham says one of the major rental companies has so upset its rivals that it is “determined to recover market share through aggressive pricing”.

“A price war for market share would result in lower vehicle rental costs,” he continued. “The only question is how long the price war can continue before one of the major names cries wolf as profits become significantly impacted.”

It’s been a particularly harsh few years for the rental sector since the banking crisis in 2008 and the subsequent economic slowdown.

John Lewis, chief executive of the BVRLA, described the end of 2010 as “tumultuous”, with a number of companies being taken over, exiting the market or going into administration (Fleet News, January 7, 2011).

Daily rental companies striking corporate deals at “crazy prices” had been partly to blame, according to one rental expert.

A year on and the companies that survived the downturn are still recovering from the losses racked up during the recession.

Northgate, which struggled during the downturn, has reduced its underlying net debt from £713 million at the end of August 2009 to £481.6m at the end of October.

Its UK fleet has steadily declined from more than 60,000 vehicles to 52,000 vehicles over recent years, as it focused on increasing its return on investment by maintaining fleet utilisation at around 90%.

However, underlying hire rates have increased by more than 2% since April and Northgate is now looking to reducing its debt further.

Northgate chairman Bob Mackenzie said: “Further progress is targeted for the second six months through hire rate improvement, efficient fleet management, further cost reductions and cash generation.

“The uncertain economic outlook makes it more difficult to forecast trading in the medium term. However, we have always been clear that we will reduce the fleet size if necessary to reflect market demand in order to maintain our high utilisation levels and returns.”

Northgate has cut the number of vehicles it has on hire by 2,200 since April 30, 2011, but its experiences of a challenging market are not unique and for some operators it could be a price war they can ill afford.

Hertz highlighted in its annual report the risk it faces through price being one of the primary competitive factors in the vehicle rental market.

It said: “If we try to increase our pricing, our competitors, some of whom may have greater resources and better access to capital than us, may seek to compete aggressively on the basis of pricing.

“In addition, our competitors may reduce prices in order to attempt to gain a competitive advantage or to compensate for declines in rental activity.

“To the extent we do not match or remain within a reasonable competitive margin of our competitors’ pricing, our revenues and results of operations could be materially adversely affected.

“If competitive pressures lead us to match any of our competitors’ downward pricing and we are not able to reduce our operating costs, then our margins and results of operations could be materially adversely impacted.”

Set against this cautious backdrop, privately-owned Enterprise Rent-a-Car remains bullish.

It has increased its fleet size by 10,000 vehicles in 18 months to more than 50,000 vehicles, of which 8,000 are vans. It operates from more than 360 locations across the UK, having opened around 50 branches during the past two years.

An example of its recent growth has been its UK airport business, which has increased by more than 50% to 15 locations this year.

Enterprise Holdings has recently acquired PSA Peugeot Citroën’s car rental subsidiary, Citer SA and its Spanish subsidiary Atesa.

It was a significant move for a company which, through its regional subsidiaries, owns and operates the National Car Rental and Alamo Rent-A-Car brands in North America, as well as its flagship Enterprise Rent-A-Car brand.

The company, with revenues of £12 billion a year, also operates out of Germany and Ireland, and has a licensee network that operates the National and Alamo brands throughout the Americas.

The newly-acquired Citer SA fleet of approximately 30,000 vehicles has deep coverage through locations in the main cities, railway stations and airports in France and Spain, giving it a worldwide fleet of more than one million vehicles.

In the UK, Rob Ingram, director of business rental at Enterprise-A-Car, said: “Our strategy, both for the past and the coming year, is to be the best value provider.

“That means the best possible service at the most competitive price.”

Meanwhile, Europcar managing director Ken McCall said that 2011 had proved a challenging year. Pricing its corporate contracts against competition in the fleet market had been tough.

“We have worked hard to manage all areas of cost to achieve this for Europcar corporate customers and it’s unlikely that conditions will be much different in 2012.

"Therefore we will continue to manage our cost base to make ourselves as efficient as possible; both to deliver the service our customers expect and also to set prices that enable us to both retain customers and grow our market share.”