The Car Rental Industry
Unlike other mature service industries, the 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.
The rental car industry faces a completely different environment than it did
five years ago. There are many factors that shape the competitive landscape of
the car rental industry. Competitively speaking, the rental car industry is a
war-zone as most rental agencies including Enterprise, Hertz and Avis among the
major players engage in a battle of the fittest. Over the years following the
economic downturn, although most companies throughout the industry were
struggling, Enterprise among the industry leaders had been growing steadily.
According to industry analysts, the better days of the rental car industry have
yet to come.
Over the past few years the rental car industry has made a great
deal of progress to facilitate it distribution processes. In the past, managers
of rental car companies used to rely on gut-feelings or intuitive guesses to
make decisions about how many cars to have in a particular fleet or the
utilization level and performance standards of keeping certain cars in one
fleet. Because a very noticeable problem arises when too many or not enough cars
are available, most car rental companies including Hertz, Enterprise and Avis,
use a "pool" which is a group of independent rental facilities that share a
fleet of vehicles. The overall profitability of the car rental industry has been
shrinking in recent years. 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
industry. For the year 2004, on the other hand, the economic situation of most
firms have gradually improved throughout the industry since most rental agencies
have returned far greater profits relative to the anterior years. According to
industry analysts, the rental car industry is expected to experience steady
growth of 2.6 percent in revenue over the next several years which translates
into an increase in profit. There are many factors that drive competition within
the car rental industry.
Over the past few years, broadening fleet sizes and
increasing profitability has been the focus of most companies within the car
rental industry. Finally, Avis uses its OnStar and Skynet system to better serve
the consumer base and offers free weekend rental if a customer rents a car for
five consecutive days Moreover, the consumer base of the rental car industry has
relatively low to no switching cost. Furthermore, because the industry
experienced slow growth in recent years due to economic stagnation that resulted
in a massive decline in both corporate travel and the leisure sector, most
companies including the industry leaders are aggressively trying to reposition
their firms by gradually lessening the dependency level on the airline industry
and regaining their footing in the leisure competitive arena. Over the past few
years following the economic downturn of 2001, most major rental companies have
started increasing their market shares in the vacation sector of the industry as
a way of insuring stability and lowering the level of dependency between the
airline and the car rental industry. Basically, the emergence of most of the
industry leaders into the leisure market not only drives rivalry, but also it
varies directly with the level of complexity of entering the car rental
industry.
On the business segment, car rental agencies have more protection
against substitutes since many companies have implemented travel policies that
establish the parameters of when renting a car or using a substitute is the best
course of action. Basically, the threat of substitute is reasonably low in the
car rental industry since the effects the substitute products have do not pose a
significant threat of profit erosion throughout the industry. Because the rental
cars are usually purchased in bulk, rental car agents have significant influence
over the terms of the sale since they possess the ability to play one supplier
against another to lower the sales price. An interesting trend that is currently
underway throughout the industry is forcing car rental companies to adapt to the
needs of corporate travelers. Today the car rental industry is facing a
completely different environment than it did five years ago. Competitively
speaking, the revolution of the five forces around the car rental industry
exerts some strong economic pressure that has significantly tarnished the
competitive attractiveness of the industry. Realistically speaking, the car
rental sector is not a very attractive industry because of the level of
competition, the barriers to entry and the competitive pressure from the
substitute firms. There are many key success factors that drive profitability
throughout the car rental industry.
That is, car rental consumers are more prone
to renting cars from firms that have convenient rental and drop off locations.
Through technology, for instance, the car rental companies create ways to meet
consumer demand by making renting a car a very agreeable ordeal by adding the
convenience of online rental among other alternatives. Based on the impact of
the five forces, the car rental sector is not a very attractive industry to
potential new market entrants. As the level of profitability increases, I
believe that most of the industry leaders including Enterprise, Hertz and Avis
will be bounded by the economic and competitive barriers of mobility of their
strategic groups and new comers will have a better chance of infiltrating and
realizing success in the car rental industry.
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