Since the late 1980s, General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler Group have produced far more vehicles than they can sell to consumers and dumped the excess on rental fleets, often at bargain-basement prices. This has allowed them to avoid shutting down plants amid shrinking market share but has also pulled down the prices they can charge for new cars, weakened their brand images and left them producing some models that few car buyers want.

"It is crucially important that they see this through," said Michael J. Jackson, chief executive of AutoNation Inc., the U.S.'s largest auto-dealer chain and a major retailer of GM, Ford and Chrysler cars. He added, "If you're producing products nobody wants and you dump them at discounts on rental fleets, you're undermining your chances of success."

Now all three Detroit car makers are implementing policies that could result in higher prices on car-rental companies. Hertz Corp. "expects a double-digit [percentage] cost increase in our fleet for 2007," said Richard Broome, the rental company's vice president of corporate affairs.

Nevertheless, it isn't clear how successful the effort will be, especially at a time when the Big Three worry about losing sales and market share.

The effort likely wouldn't arouse regulatory concerns because rental companies can play one auto maker off another when negotiating prices. While GM has made clear to several rental companies that it intends to raise prices, Ford and Chrysler haven't yet held their annual meetings with the rental companies. Also, their moves in many cases have more to do with choosing to build more expensive cars to then offer to fleet operators, instead of merely raising prices.

A few weeks ago, GM officials told franchise owners for National Car Rental, part of Vanguard Car Rental USA Inc., that prices would rise for 2007 cars, which rental agencies will begin ordering this summer, said people who have met with GM officials. The auto maker is meeting this week with more rental customers in Nashville, Tennessee, and is expected to deliver a similar message.

Chrysler hasn't begun meeting with rental customers but also plans to push for price increases. The auto maker hopes to charge more for the new models that are replacing older cars it had been producing largely for rental fleets, people familiar with the company's plans said. Ford is taking a similar tack, a company official confirmed. Later this year, it will stop making the Ford Taurus, which is sold almost exclusively to rental companies.

Mr. Broome of Hertz and executives with other rental-car companies declined to discuss prices in detail, saying it is a competitive matter.

For consumers, the shift could lead to a modest rise in rental-car rates next year and push up prices of new cars somewhat, after several years during which new-vehicle prices, adjusted for inflation, have declined. Raising rental-car prices, and reducing the numbers of vehicles sold to rental fleets, could also improve the resale value of Detroit-brand cars sold to consumers.

For years, the Big Three have had to contend with a flood of cars that spend six months in rental fleets and then appear in nearly new condition on dealer lots. There, these barely used cars typically sell at bargain prices, pulling down the prices of Detroit's new cars and eroding the manufacturers' already-thin margins.

Raising prices could lessen this problem, said Sherb Brown, publisher of Auto Rental News, a trade publication, by causing rental agencies to keep more of their cars on the road for nine to 12 months instead of six to eight months. Those cars would then find their way back to the market with 30,000 or more miles, or roughly 50,000 or more kilometers, too many to compete much with new cars, he said.

Rental companies in the U.S. buy about two million cars a year. While companies like Hertz and Cendant Corp.'s Avis Rent A Car System Inc. can shop around for the best auto prices, their leverage is limited. They use offers of new cars and hot models to lure customers and prefer to get rid of vehicles before they begin to break down and incur higher maintenance costs. They replace their fleets roughly twice a year, buying a batch of cars in January and February, and a second batch in July and August.

Executives at Detroit's Big Three have long vowed to wean their U.S. operations from dependency on bulk, low-margin sales of vehicles to rental fleets. But because United Auto Workers labor agreements compel the Detroit car makers to pay their U.S. factory workers close to full wages and benefits even if they sit idle, GM, Ford and Chrysler continued to use rental-fleet sales to keep factories operating when consumer demand for a model fell short of expectations.

During the first quarter of this year, 41% of the passenger cars that GM sold in North America went to fleets, the company reported.

Brian McVeigh, GM's manager of fleet sales, said in an interview the car maker hasn't yet revealed the exact pricing the company will offer rental customers for 2007 models. But he acknowledged GM is trying to improve the profitability of cars it sells to rental customers and expects its sales of rental vehicles to decline 5% to 10% in 2007. This year GM will sell roughly 600,000 cars to rental fleets.

Ford is planning to slash sharply the number of cars it sells to rental fleets next year, partly in hopes of lifting prices, said the company's top sales analyst, George Pipas.


Source:  Cendant