Characteristics of the car rental industry
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Published: Tue, 18 Apr 2017
Car rental is clearly a very perishable service. If a day goes by and a car is not rented, the opportunity to generate revenues from that unrented time is lost forever. Perishability is a critical factor in the rental industry given the generally high fixed cost associated with the service (i.e., a fleet of vehicles). All industry players must cope with this perishability and different companies will have somewhat different strategies for dealing with it.
The service of car rental is intangible, given the physical nature of the rented vehicle, it really is not as intangible as many other services in the sense that the consumer can see and touch the rented vehicle. For the vast majority of the period during which the customer uses the service of car rental, the physical car is the service provided. For many services, intangibility makes it very difficult for the consumer to judge quality and for the producer to control quality. This is not nearly as difficult a proposition in the case of car rental. The convenience factor (e.g., location, speed of pick-up and drop-off, etc.) associated with rental is the most significant intangible associated with rental cars.
Service design has been characterized as having three basic components – (i) physical facilities, processes & procedures, (ii) employee’s behaviors, and (iii) employee’s professional judgment. Given that car rental service is a relatively tangible, homogenous service with fairly low levels of customer contact (i.e., simultaneity), rental companies tend to focus their service design on the physical facilities, processes and procedures. While employees’ behaviors are not unimportant, they are of secondary importance to facilities, processes and procedures in service design in the car rental industry. This can be seen industry wide.
2. EasyCar obviously competes on the basis of low price. What does it do in operations to support this strategy?
EasyCar is targeting a particular segment of the market that is very price conscious. The need of this segment is more than simply low price. The idea of value as a concept relating both quality and price can be introduced here, with value equating to the benefit of the service provided relative to the price paid. Dimensions of quality as a way to better understand the multidimensional nature of quality are: performance, features, reliability, conformance, durability, serviceability, aesthetics, and perceived quality. EasyCar’s customers would likely define quality in terms of the basic functionality (i.e., core performance benefit) of the vehicle rented, the reliability of the vehicle rented, and the conformance of easyCar processes to the specifications provided on the easyCar web site (across all locations).
3. How would you characterize the level of quality that easyCar provides?
Quality is important that easyCar situation clearly illustrates low cost does not necessarily imply low quality in the minds of the customer. EasyCar’s customers would likely define quality in terms of the basic functionality (i.e., core performance benefit) of the vehicle rented, the reliability of the vehicle rented, and the conformance of easyCar processes to the specifications provided on the easyCar web site (across all locations).
4. Is easyCar a viable competitor to taxis, buses and trains as Stelios claims? How does the design of its operations currently support this form of competition? How not?
EasyCar sees itself as a potential competitor to taxis and buses because it allows customers to rent a vehicle for as little as one hour. From easyCar’s position, this makes sense as part of their effort to achieve maximum utilization of their fleet. If they can rent out a car for even extra one or two hours when the vehicle would otherwise sit in a garage unused, then it adds to their bottom line. Further, it is possible that such very short term rentals seem most likely to come during the work week, a traditionally slower period for easyCar given its primary appeal is to leisure travelers who demand vehicles more on weekends than on weekdays. In this way, the very short-term rentals may help balance out demand on a weekly basis.
EasyCar’s change to allow rentals for as little as one hour provides a good opportunity to discuss the issue of the flexibility of EasyCar’s processes. The easyCar process is flexible in that it allows customers to choose exact pick-up and drop-off times and pay for only that time. Traditional rental car companies charge by 24-hour periods and for a minimum of one day. Further, easyCar charges customers for each individual service that they use (e.g., cleaning the car, extra kilometers), allowing customers to pay only for the services that they require. This flexibility really revolves around prices. In two cities, easyCar also offers flexibility in terms of location. Fully half of easyCar’s rental sites are in either London or Paris.
Having many locations in the same city also clearly makes easyCar a more viable competitor to taxis, buses and car ownership. This has significant implications to easyCar’s expansion strategy. If it truly wants to compete against taxis, buses and car ownership, it will focus its expansion on opening multiple locations in the major European cities. If it sees itself more as competing for tourist customer, it will open more locations in tourist destination locations, either near airports or train and bus stations.
5. What are the operational implications of the changes made by EasyCar.com in the last year?
Rental by the Hour – Introduction of vehicles other than the Mercedes A-Class – Perhaps the most interesting change that easyCar made, other than allowing rentals of only an hour, was to move away from its one car model and offer a number of different, although generally similar, vehicles at its different locations. The change was made to keep pressure on suppliers (i.e., the automobile manufacturers) to keep costs down and to in turn be able to lower the price of a rental to customers. What is perhaps surprising in the change is that easyCar went from having one vehicle type to having five vehicle types. Part of the operational benefits of a single fleet is site specific. Any car can go to any customer and significant economies of scale would exist in the maintenance of the fleet. However, having different vehicles at different locations reduces easyCar’s flexibility to shift vehicles between locations easily if demand is greater at one location than at another.
Clean Car Policy – these changes is clearly very consistent with easyCar’s low cost strategy. Basically it represents a transfer of a task traditionally done by the company to the customer. Operationally, it has several implications. It reduces the need for staff at the rental site, helping easyCar reduce one of its costs. More significantly, perhaps, it also speeds the turnaround of a vehicle. That is, this policy combined the empty fuel policy, means that most vehicles are returned in a condition that allows them to be immediately rented to the next customer. This helps easyCar maintain a very high fleet utilization. But what is also interesting operationally is that it makes the employees’ task somewhat less predictable. Whereas with the old policy employees knew they would have to clean each vehicle, and they knew how many vehicles were coming back each hour, with the new policy there is an additional element of uncertainty in the process because an occasional car will need to be cleaned. This may mean that one or more customers may have to wait at the easyCar site while the employee cleans such a vehicle. This is particularly an issue at sites which are staffed by a single employee.
Empty-to-Empty Policy – This change, like the previous one, is clearly consistent with easyCar’s low cost strategy. Operationally, the empty-to-empty policy would seem to significantly reduce the chance that an easyCar employee would have to deal with the gas level. Previously, customers had to worry about taking the time to fill the tank. Customers running late might skip this step to save time, leaving the task for an easyCar employee. With the new policy, the gas can be at any level as long as the low fuel indicator light is not on. Since most drivers are unlikely to allow the gas level in their vehicles to drop this low anyway, the chance that an easyCar employee would have to deal with putting gas in the car is small. Combined with the previous change, this policy basically means the vast majority of customers bring their car back in a condition that allows it to be immediately re-rented.
Requiring Customers to Purchase Insurance – This policy change probably has greater implications on the marketing side than on the operations side. Operationally, however, it greatly reduces the likelihood of conflict between customer and easyCar employee when a customer returns a damaged car. Previously customers who did not purchase the optional insurance had some liability, and the employee on duty would have to sort this out with the customer. This can be a timely process, and present difficulties particularly for a location staffed by only one person. Such incidents would likely cause delays for other customers attempting to pick up or return cars at the same time.
6. How significant are the legal challenges that easyCar is facing?
Clearly the OFT ruling against easyCar is much more significant than is the posting of the pictures of renters with overdue vehicles. The OFT ruling against easyCar is designed primarily to reinforce the cost benefits gained from easyCar’s demand management system and its high utilization rates it achieves.
The other legal challenge easyCar faces deals with its posting of the pictures of customers with overdue vehicles. This is not as significant, both because its impact is not as great and because no legal action has yet been taken.
7. What is your assessment of the likelihood that easyCar will be able to realize its goals?
The established goals, a quadrupling of sales from 27 million to 1 00 million via the opening of 1 30 new locations in the next two years while realizing a 1 0 million profit are certainly ambitious. It is worth noting that easyCar’s operational model certainly makes opening new locations easier than for traditional rental car companies, given the minimum facilities required and the creation on the part of easyCar of vans with all the equipment needed to run a location. The bottlenecks for expansion more likely rest with hiring and training all of the employees to staff these locations, as well as providing sufficient marketing support to launch 130 new locations on a minimum marketing budget. The greater challenge operationally will be to continue to find ways to drive costs down while maintaining customer satisfaction so that it can realize profits at the same time.
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