Reader C.B. asks,
I’ve always wondered why car rental agencies haven’t taken a page from the airline playbook (no cancellations without penalty)[…?]
Car rental companies have tried to move to a prepaid model, and there are some prepaid rates out there now even apart from opaque booking sites like Priceline and Hotwire.
But for the industry as a whole, for this to become the norm, it only works if everyone does it. Everyone can be prepaid and non-refundable, or with cancellation fees. Or for the most part no one will, unless they’re offering substantially greater value or lower prices than other players in the industry.
It’s an interesting question why airlines were able to move to that model for the most part while car rentals haven’t been able to make that transition.
Hotels meanwhile have done something different entirely… full forfeiture most of the time on prepaid non-cancellable rates but most rates remain cancellable. Rental cars do the same thing, there ar some prepaid rates which offer savings, but they haven’t been as widely adopted as prepaid hotel rates have been — perhaps because a percent off of a car is usually a smaller amount than off of a hotel stay, so not enough to induce consumers to trade off convenience for savings.
Still, even hotels haven’t managed to follow the airline model where the vast majority of the time tickets are non-refundable with a stiff and ever-increasing cancellation fee. They have, however, managed to uniformly push cancellation deadlines out to a day prior to check-in rather than a day-of deadline which was standard until recently on most non-prepaid rates.
I am not sure I can explain these nuanced differences actually. Why do you think rental cars haven’t gone more prepaid and non-cancellable, while other forms of travel have made greater strides in that direction?
Clearly they would benefit from reduced breakage, or at least revenue from breakage.
Rental cars are not a necessity for most travelers – they are a nice to have often times. Hotels & airfare is a necessity.
They want to make booking as attractive as possible. Also, cars are way more of a commodity than a loyalty/branding buy.
More restrictions will make people less likely to use them possibly.
I think its just a matter of competition, there might be only 5 airlines operating a route, but across the 5 airlines, the hotel industry may have 500 hotels which consumers can choose from.
For rental cars, the same companies consistently appear at the same airport every single time. It’s like United, Delta, AA, flying on every single route, it just means more competition and they have to be more flexible.
It also doesn’t help for when cars / hotels are rented out, people extend stays, they change dates when utilizing their services. For airlines, once you utilize a service, you can only purchase a new service, you can’t be booked on a flight from Vancouver to San Francisco and mid-way decide to go to Los Angeles instead.
There are alternatives to rental cars, such as taxi, Uber, car service, airport shuttles, friends/family, etc. Also, usually there are more cars (supply) than number of people needing rental cars (demand).
@pthacha Uber doesn’t explain it since they weren’t able to make the transition pre-Uber. Hotels have alternatives, and not just Airbnb, by your logic people can room with friends. And instead of flying people can drive on shorter routes or take the train or bus, yet cancel policies don’t differ on short haul routes generally.
One other possibility is that rental cars might get more last-minute walk-up type business than planes, so if you don’t show, the odds of that car getting rented are higher than an abandoned airline seat. It might be a question of the marginal value of that specific good. Most airline seats represent more lost revenue than any hotel room.
I think you hit the nail on the head Gary. Nobody wants to be caught with their pants down. If one company announces that they will no longer do non-prepaid reservations and the others don’t follow suit, then the company who instituted the policy may:
a) Lose business while the policy is in place
b) Have to backtrack and rescind said policy possibly losing credibility
A couple of other things to note…
First, Hertz has been going through a period of turmoil of late. Without getting into too much detail, the company basically lost its way, had some sever accounting gaffes, and kicked out their former CEO Mark Frissora (who landed at Caesar’s Entertainment in LAS), and brought on board John P. Tague as the new CEO, former President and COO of United before the merger with CO. Tague had this to say in his first investor call since becoming CEO of Hertz:
“I think it will probably take us 9 to 12 months for example before we can get the credit card at the front end of the transaction. That’s a big enabling step for a lot of what we want to do to in effect get that credit card upfront and tie it to the transaction throughout their customer journey. It’s key to being able to do some of the segmentation and some of the choice products that we would like to offer. It’s sort of amazing when you go to purchase a rental car online I think we’re about the only product online where you can take the car off the shelf and give us your name and an email. That is not logical going forward. So that is probably going to takes a 9 to 12 months. We have been able to correct some of the issues around revenue execution currently.”
So here you have an industry outsider who is now on the inside and sees the disconnect between how things have been done in the past and how he’d like them to be done in the future with regard to pre-payment. It remains to be seen whether it can be successfully implemented and remain competitive.
Remember that Enterprise is bigger than both Hertz and Avis, and they have deep pockets and an extremely well established brand and management structure. Even if say Enterprise bought into the idea of forcing the customer to hand over their credit card up-front, they might hold back if Hertz and/or Avis implemented that reasoning that they could gain much more revenue and market share by being the holdout than they would by following suit and reducing no-shows and increasing cancellation penalties. It’s not a simple decision.
I also wanted to point out that a typical model in place today is a small discount when booking a prepay rate on the car rental company website, and then a $25-$50 cancellation fee if you cancel greater than 6-24 hours before pickup, and within that timeframe a $100 penalty for a no-show or a cancellation within the 6-24 hour period. They offer this as an option to paying the rack rate, but most folks reading this know that you can typically do just as well or better by using coupons and/or discount codes and not prepaying, so it’s targeted more toward the less informed leisure traveler for the most part.
I think that @steve horowitz has it basically right. I think car rental companies have chosen to massively overbook their car rental supply (based on the number of times that I don’t get the car I rented), much moreso than flights or hotels, and know that there are a lot of walk up rentals, so they have figured out that they can make more off of the walk up rentals and the people that actually show up to rent than they would out of guaranteed advance rentals at discounted rates.
I think this is also why unique vehicles that they can’t just swap out with another type, like minivans, are so much more expensive.
I am a Avis preferred member which means I should have special access to talk to reservations. I only state that because I wanted to ask have you ever tried to be respectful and cancel a reservation that is close to pick up. There have been several times I have tried with no success in getting anyone on the phone or through the application. Possibly it is easier with other companies,
With regard to car rentals changing policies.
I try to avoid hotels that have cancellation policies which extend pas 5 pm day of arrival. Many of the SPG hotels will do this with 48 hours till arrival. Unless this is a destination I absolutely need to go to and I really prefer a SPG property I will choose another. I was recently told Hilton Garden inn also changed their policy to 24 hours. I will now be more careful with those bookings. I am not trying to be irresponsible, I just need the flexibility.
Here’s my theory:
1) Car rental agencies offer many more buckets of hard product than airlines or hotels.
2) To be able to satisfy requests, car rental agencies must keep a greater amount of inventory on-site.
3) Most renters book the lowest category product that meets their needs.
4) Rental agencies can overbook the lower product classes far beyond what hotels or airlines could ever do because the differential cost of providing a higher product mostly falls on the customer in the form of a higher fuel cost (less efficiency). (Aside: I HATE this. A passenger van is NOT an upgrade from a midsize, thank you very much.)
5) It’s also much easier to move inventory between nearby rental sites — you can’t move an empty seat to LAX onto a flight to SFO, nor can you move a hotel room from San Jose to San Francisco, but you can move a vehicle between the two.
6) Speculation: less regulation means there are lower penalties if a rental agency has to “walk” you. (A higher percentage of rental customers are members of the lowest tier of their loyalty program than hotels or airlines, so it’s also easy to tell who to walk.) Have you ever been walked by a car rental agency? I haven’t.
So, my theory is that higher levels of differentiated, and transferable, inventory means that there is minimal financial advantage to the rental agency to give a discount for pre-paid rental.
A pre-paid non-cancellable rate is a big risk for a rental-car customer, especially for airport pick ups where the customer must rely on an airline to get them to the right airport on time and on the right day. Paying a cancellation fee because an airline had a cancellation or there were weather problems in another part of the country would be hard to swallow.
Rental car companies ask for (but do not require) your flight information when renting from an airport location. I often wonder why. Do they really check flight status for customers who are late or do not show?
@Jared You make a number of very valid points, but keep in mind that it’s not just about inventory management, it’s about keeping the business. Customers who don’t pay up-front are free to continue shopping their rental around and many do. Even if they don’t intend to initially, they get an email from some competing rental company with a new coupon and the light bulb goes off and they think, hey let me see if this coupon from company X will get me a lower rate than I currently have from company Y. Even if the coupon does nothing, there’s a good chance rates have dropped since they booked and they get a lower rate anyway.
The bottom like is that while a prepaid model certainly helps reduce the no-show factor and improve inventory management significantly, that $25-$50 fee helps the rental car company hold onto that customer and not lose them to a competitor. Focusing on just the inventory benefit is only half the picture.
OT but on car rental: I’m currently in the midst of an infuriating experience with Hertz, and wonder if you have any advice.
I have Hertz President’s Circle status. In May, I rented a vehicle from Hertz in Israel. (Hertz Israel, it turns out, is actually a franchisee, Kesher Rent-a-Car.) A few weeks before the trip they sent me an email saying that if I didn’t want to pay LDW I would have to bring a letter from my insurance saying that they would cover the rental.
I have the excellent Chase Sapphire card which has primary rental coverage. I called them up and they sent me a “to whom it may concern” letter an hour later.
When I picked up the car I presented this letter, which was photocopied into the file. On the rental form there was a field “Third Party Property Insurance: Yes” which the agent said represented that I was using a third-party insurance (my credit card). The 2 week rental itself was fine, other than having a car with more dings than I could count, something that seems standard in Israel.
The airport return process did not provide a final receipt; it’s an off-site drop off and shuttle.
When I received the final receipt in email I had been charged $238 of “Non-Waibable (sic) Excess”. A different form later labeled this as “Third Party Property Insurance”.
I contacted Hertz Customer Service, and they said it would take a week to get more information about the rental. After a week, I contested the charge with my credit card. I called Hertz several times to check on their investigation and never received further information or a return call or email until this week.
After 6 weeks, Chase contacted me to say that the vendor (Kesher) sent them documentation saying I had agreed to the charge, which was basically the “Third Party Insurance” line I mention above as well as a set of forms that had never actually been presented to me. Chase also continued to request a signed receipt with the final expected charge amount, but as you know no such thing typically exists for a car rental.
After two months and several more calls, Hertz finally got back to me saying that “we were told by the vendor that all rentals in Israel require third party insurance” which is clearly false given the email they provided me before the rental (which I provided to them). I pointed this out and they said they would look into it, which will surely take another two months…
So, what do I do now, other than never book from Hertz in Israel again? Chase doesn’t seem to be particularly on my side here, and Hertz is essentially disclaiming any responsibility because they don’t consider it their rental (even though I booked it through their website). Write a letter to the president’s office?
@John Some companies like Hertz have flight information baked into their counter systems and absolutely do take delays into account. Most of the discount brands do not, so while you may enter that information at the site you booked, it is either discarded completely or ignored by those companies.
Excess car inventory is cheaper than airline.
Here’s a scenario I never considered before it cost me a LOT of money. I needed a car for 28 days in LA. Hertz had by far the best deal, if I paid in advance. I booked with Hertz against my better judgment, because their location at LAX is really terrible and I’ve had nothing but trouble with every rental I’ve done there. I took a quick look at the T&Cs for the prepayment and noted a penalty for cancellation, but it was a small enough amount to be worth taking the chance, I thought.
Long story, but the car was absolute crap and I took it back to the airport to exchange it less than a week into the rental. I was in a hurry and they (as usual) were understaffed. After waiting nearly an hour they hadn’t accomplished anything and still wouldn’t give me a car, so I said “screw it, I’m turning this one in and going to National.” Big mistake. What I has neglected to note in the T&Cs is that once the rental begins, it is 100% non refundable. I lost hundreds of dollars and Hertz just shrugged.
This is also a big problem if you do a prepaid rental, even for a week or 10 days, and your trip is unexpectedly cut short. You will lose all that prepaid money.
@Mary Next time something like that happens, go to a local neighborhood branch to do the swap instead of the airport. Any corporate location should be able to assist you and usually the local branches are a lot less busy not to mention friendlier.
One possible explanation:
The economics do not require that rental car companies move to a different model. Both airlines and hotels sell a highly perishable commodity with high fixed costs. If an airline does not fill a seat today, it still has to fly the plane. If a hotel does not sell a room, it still has to pay a mortgage. The incremental savings from an empty seat or room are modest, especially so for airline seats. I suspect that the residual value of rental cars (remember: Avis is in the business of producing used cars) is driven more by mileage than by calendar age. So the cost of the care and the lifetime of a car in the rental fleet is, to a large degree, measured more by mileage than days. If a rental car sits idle for a day, it costs very little.
Compare that to an airplane: the residual value of the airplane will be determined by flight hours, not number of passengers carried. If the plane only flew 10% full, the lower wear and tear on the seats will likely not give any added value in the resale market.
A certain percentage of car rentals are not travel related, but rather replacement vehicles in case of accidents, breakdowns etc. I think I read somewhere that these constitute the majority of rentals at non-airport locations. Reservations far in advance make little sense for this segment, and it may be large enough to affect the market as a whole.
Your missing how really tight supply of there is on airline seats. I need a car for a day. I need a hotel for a night. But I need Detriot to Las Vegas that leaves around 8 to 10am and arrives by 3pm with no or one stops. A 12 pm flight or 9 am two stop that arrives at 8 pm won’t do. Thus the airlines can demand non refund for a low low fare (look at airline profit margin per seat). Hotels and cars not only have huge supply in number but also don’t have (for the most part) availability in time and length of time in same day issues.
@Shonuffharlem you need a car at an exact time, and even if you check out of a hotel at 2am you’ve used it for the full night…
Hotel: right you only need a hotel room for a night. Not nine am to two pm like a flight you demand. Everyone needs a hotel for a night. But if I need to fly somewhere and land by two pm but leave after nine am most of the flights won’t do for me.
Cars: again you rent cars overnight. Since most of the time not all cars are rented, and the rest are balanced out by people returning cars to get on planes and people arriving getting off planes, time demand isn’t an issue.