Ben Vinod is an experienced and distinguished veteran of the airline and travel industries, including holding leadership roles at American Airlines and Sabre. Currently, Vinod serves on the editorial board of the Journal of Revenue and Pricing Management and is Co-Founder and Chief Operations Officer of Charter and Go.
As I previously discussed on Kambr Media, when it comes to revenue management, although each industry has its bespoke characteristics, there are always similarities that can be found.
While in my previous interview, I outlined the hotel industry, this time, we’ll be looking into the car rental industry.
Background of Car Rental RM
The rental car travel vertical has some traits in common with airlines and hotels. The rental car product is perishable, demand is cyclical, and growth is dictated to a large extent by consumer confidence and the state of the economy.
"Early adopters include Hertz, Avis, and Budget. National Car Rental even attributes revenue management to saving the company from bankruptcy in 1995."
Since the early 1990s, the rental car industry has adopted basic and advanced revenue management techniques.
Basic controls are rate controls, while advanced controls are established by applicable rate and length of rental by pickup date at a rental location based on the value of the reservation request.
Early adopters include Hertz, Avis, and Budget. National Car Rental even attributes revenue management to saving the company from bankruptcy in 1995.
Unique Characteristics of Car Rental RM
The rental car revenue management model has several unique characteristics that make it challenging.
Fleet planning is a fundamental input to the revenue management process. An accurate estimate of fleet capacity by availability location (a collection of locations for rental car pickup) is required to set inventory controls that maximize revenues.
Estimating capacity is challenging because of the inherent uncertainty in the available supply of vehicles. The uncertainty associated with vehicle deliveries and turn-backs to the manufacturer impacts the fleet mix and revenue management controls.
In the rental car reservations system, fleet sizes are automatically projected by vehicle type and Vehicle Identification Number (VIN) based on fleet projection after fleet planning and actual distribution to the various geographic areas.
It is important to ensure that the city (geographic area) as defined by fleet planning and distribution will conform to an availability location (collection of rental car locations used for setting revenue management controls, also called a super-location) for the purposes of revenue management controls.
However, since an area and super-location may be inconsistent, it is required to have an independent definition of super-locations. Further, many rental car companies maintain separate fleets for local rentals and one-way rentals.
Effects of the Covid Pandemic
With the COVID-19 pandemic in 2020, demand for rental cars vanished overnight and rental car companies disposed of cars rather than carry the inventory which was locked-up capital.
This led to a steep increase in prices in the summer of 2021 when rental car prices reached an all-time high, which was at least 50% higher than the pre-pandemic summer of 2019.
Prices have continued to be high in the U.S. through 2022 and 2023 with weekly rental rates at most locations averaging $500 per week or much higher. The global shortage of semiconductors also contributed to the low supply of cars leading to higher weekly rental rates.
Another factor is the shortage of labor in the tourism industry. Forecasting demand is a challenge since prices are significantly higher year over year, leading to demand volatility.
Inventory Control & Rates
Rental car pickups and returns are available 24/7. Therefore, the forecast of demand for customer pickup should be by time slot, typically in increments of 1 hour or greater.
Time of day curves based on reservations on the books are required in these intervals to gauge the expected number of pickups and returns at a location ensuring that manpower is available to process these requests.
"Unlike an airline that only has a few cabin types like First, Business, and Coach and their associated fares, a rental car fleet has significantly more car class codes."
Time slot inventory must cycle throughout the day of operation. The supply count, reserved pickups and reserved pickups from an expired time slot should be rolled into their equivalent counts in its successor time slot to account for late pickups and returns.
Unlike an airline that only has a few cabin types like First, Business, and Coach and their associated fares, a rental car fleet has significantly more car class codes (also called Product Categories) such as Economy (ECAR), Intermediate (ICAR), Full Size (FCAR), Luxury (LCAR), Premiums and Convertibles (PCAR) and Minivans (MVAN) with their associated rate codes.
An airline’s seat capacity by cabin type is fixed while estimating the capacity of the rental car fleet is challenging.
There are many rates in the rental car industry and the most obvious ones are rack, corporate, qualified rates like AAA and AARP, government/military rates, weekly leisure rates, promotions, etc.
Similar rates are grouped to create rate categories for demand forecasting. Revenue management requires historical booking data to be aggregated by season to determine the pace of booking activity to forecast demand by car type and rate category along with an estimate of available supply.
Rental car revenue management also requires the capability to reposition the fleet to the various car rental pickup locations that are part of the same car availability pool.
This is typically managed with an assignment model that minimizes cost by determining the optimal movement of cars from low-demand locations to ones with high demand using drivers or car transport vehicles. Rental car selling rates at airports are typically higher at airport locations than in off-airport locations.
Further, for those airports and high-density city locations where cars are in high demand, a walkup rate model determines the price to quote to a walkup customer based on the availability of cars, inventory pickup profile for the day and selling rates at competing car rental companies in the same proximity.
Taxes & Franchises
The rental car industry is also impacted by higher taxes that result in higher prices for the customer. An increasing number of cities are adding car rental surcharges to pay for stadiums and arenas.
However, the prevailing opinion is that the additional surcharges have not directly had a negative impact on demand.
The rental car industry has both owned and franchise rental locations. The rental fleets and operations for owned and franchise operations are independent.
The volume of daily rate changes in the rental car industry is very high and resembles fare changes in the airline industry while hotels have far fewer rate changes.
Same-day rentals are unique to the rental car industry. However, some hotel chains are now renting rooms for day use in large metropolitan areas.
This was a broad overview of revenue management for car rentals. As you can see, there are similarities between RM for other sectors, but car rental RM has many of its own unique challenges.