Top 10 car rental companies by 1994 U.S. sales (chart) POTHOLES MAR CAR RENTAL HIGHWAY BUSINESS TRAVEL ON THE SKIDS BUT LEISURE TRAVEL EXPLODES

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Warning: Rough road ahead for the car rental industry.

Faced with rising interest rates, through-the-roof fleet costs and razor thin profit margins, the competitive and price-sensitive car rental industry is looking for new roads to growth. It wants to drive up rates about 8% annually in the next several years and steer more of the fast-growing leisure business its way, as the industry's dominant business travel base sputters.

Success in maneuvering this path could be a matter of survival for some companies. Hundreds of small independents already have been driven from the business.

"It could shake out like the airline industry," said John W. Power, senior VP-sales and marketing, Budget Rent a Car, Lisle, Ill. "Brands could disappear."

Industry profits are unknown. Hertz, believed to be the most profitable, had a margin of less than 2% in 1993 when it reported profits of $53 million on $2.85 billion in worldwide sales. General Motors Corp. took a $744 million write-off on troubled National Car Rental Systems in 1993.

"The industry right now is not the healthiest," said Bob Cardillo," senior VP-sales and marketing at Avis, Garden City, N.Y.

Car rental companies are trying to maneuver around a seismic shift in the economics of the business that has the industry in upheaval. Detroit auto manufacturers no longer are giving car rental firms an abundance of special deals now that retail sales are strong and rental operations are not needed to soak up excess inventory.

The U.S. Justice Department in October began investigating major auto marketers' pricing practices to determine if they are giving favorable prices to their businesses, hurting independents.

"Some [car rental] operators think it's happening only to them, but it's tough for all of us," said Joe Russo, VP-government and public affairs at Park Ridge, N.J.-based Hertz, owned by Ford Motor Co. "Detroit is selling fewer fleet [cars]."

Detroit's decreased reliance on car rental companies is evident by automakers' increasing willingness to sell them. Last year, GM agreed to sell National to Vestar Partners; Chrysler Corp. sold Snappy Car Rental to a management group and consolidated its Dollar Rent A Car Systems operations in Los Angeles at Thrifty Rent-A-Car System's Tulsa, Okla., site, although each is still marketed separately. Ford acquired the remaining interest in Hertz; but speculation is that Ford is preparing Hertz for a sale, though Ford and Hertz deny it.

"I think everything is for sale," said Bob Dimmick, Thrifty's VP-marketing, who said he knows of no pending deals. "In the 1980s and 1990s auto manufacturers were driven by market share; now they are trying to be responsive to their shareholders. As long as [auto manufacturers'] capacity is not a problem, all the car rental companies are for sale."

Such companies are counting on an improved economy and low airfares to continue driving sales, which grew 12% to $12.5 billion in 1994, Auto Rental News estimates.

"Approximately 90% of our U.S. car rental business is attributable to someone who is carrying an airline ticket," said Mr. Russo of Hertz.

Major outlets-Alamo, Avis, Budget, Hertz, National and Thrifty-will keep advertising focused on the crowded $8.8 billion airport/near airport market, which makes up 71% of industry sales and grew 10% last year, according to Auto Rental News. The dominant business travel base will continue to be the main focus, but some will aim more marketing efforts at the faster growing leisure segment.

Hertz and Avis, for example, are offering more airline-hotel-car rental vacation packages through tour operators. Avis in August began testing AvisSaver Weekend Escapes, offering car-hotel travel packages and discount coupons to Atlantic City, N.J., and New York. Hertz signed several low-cost airlines, including ValueJet and Kiwi International Airlines, as marketing partners.

Business travel represents about 55% of car rental sales and leisure 45%, estimates D.K. Shifflet & Associates, a McLean, Va., travel research company.

"Business travel growth will be modest 2% to 3% annually. But leisure travel is posed for explosive growth-4% [in 1994] but 5% to 7% in the coming years," said Stan Plog, chairman-CEO of Plog Research, Reseda, Calif. "Businesses cut back on all travel in the Gulf War and recession and have decided to stay lean and mean. But on the leisure side, people say, `We survived. The economy is getting better. Let's have some fun.'*"

Budget and Thrifty also are moving into the suburbs to go after more leisure business in the relatively untapped $3.6 billion local/insurance replacement market, which makes up 29% of industry sales and grew 12% last year, according to Auto Rental News. Independents dominate the segment, except for fast-growing St. Louis-based Enterprise Rent-A-Car, which rose to No. 2. Avrett, Free & Ginsberg, New York, has done print ads and TV spots in the "Pick Enterprise. We'll pick you up" campaign.

"Americans are dependent on their cars," said Andy Taylor, Enterprise president-CEO. "Women are working and dad can't ask mom for her car when his is in the shop. She's got to go to work, too."

Budget and Thrifty want to get people to think about renting cars in a new way. Families could rent a minivan for a vacation or weekend getaway. A businessman might want to rent a better car to transport an important client. Weddings, funerals or college reunions might warrant a temporary new set of wheels. Some people even are renting cars to test before deciding whether to buy.

"Growth is going to be in the suburban marketplace; the business market is shrinking," said Mr. Dimmick of Thrifty, which began positioning itself in fall ads from Compton Partners, Saatchi & Saatchi, New York, as "Your neighborhood Thrifty car rental." "We think consumers, if properly educated, will take rental vehicles rather than the old family car."

Car rental companies basically have the same marketing goal: maximum fleet utilization. They also want to stand out from the pack with new products and services-especially if they add value to the price-sensitive product. These value-added extras are particularly important if they allow the profit-squeezed companies to pick up a few extra dollars.

"A vehicle is basically a commodity ... all the companies have basically the same genre of cars," said Neil Abrams, president of Neil Abrams & Associates, a Purchase, N.Y., car rental consultancy. "The difference is in the service, the speed of the rental and the perception of overall value. Customers will pay money for more perceived value."

Avis introduced Return Valet, a service that drops hurried airport passengers at the terminal door for an extra $5 to $10, in October TV spots from Bates USA, New York. No. 1 Hertz followed in November with print ads from Wells Rich Greene BDDP for its own Curbside Return service, after unsuccessfully trying to sue Avis for false advertising because some airports don't allow it.

Avis also is airing TV commercials for its new in-car vehicle navigation system that provides audio and video directions-even though it is only available in a limited number of cars in a few markets. Hertz also is rolling out a similar system that will be supported with advertising.

Budget in November introduced World Class Drives, offering driving vacation packages for leisure travelers that include maps with local history, points of interest and coupons to hotels, restaurants and attractions. It also teamed with American Express Co. to offer a free American Airlines ticket to those who rented a car five times in the U.S. from September through December in its "Play It Smart" promotion. Print, national radio and direct mail supported from Tracy-Locke, Dallas.

"We want to take the focus away from pricing and look at the total experience in renting a car," said Mr. Power of Budget.

Alamo in November introduced Alamo Express Plus Kiosks in 10 markets with another 20 planned to allow corporate customers to bypass the service counter. It also gave ski lift tickets in some locations to those renting a four-wheel-drive vehicle. Samsonite luggage and 30-minutes in free long-distance calling also were given to those who upgraded to pricier cars. Hal Riney & Partners, San Francisco, is the agency.

"The customer today wants more than price; they want value," said Bob Coffey, Alamo's VP-marketing.

National in the fall broke print ads in USA Today allowing renters with a reservation to choose the car they want to drive, rather than being assigned one. "Three words that will change the car rental business: Choose any car" is part of its "Green means go" campaign from W.B. Doner & Co., Southfield, Mich.

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