EasyCar Rental Business Analysis

This case describes the situation faced by easyCar.com at the start of 2003. EasyCar is the low priced European car rental business founded by easy Jet pioneer Stelios Haji-Ioannou. EasyCar had just reached breakeven in 2002 on sales of ¿½27 million, and had as its goals to reach sales of ¿½100 million and profits of ¿½10 million by the end of fiscal year 2004 in order to position itself for an initial public offering. To do this would require opening new locations at a rate of two per week and expanding its fleet of rental cars from 7000 to 24,000. The case describes the company’s processes and facilities as well as its pricing and promotional strategies. It also describes a number of significant changes that the company has made in the last year, including a move to allow rentals for as little as an hour that was designed to position easyCar as a competitor to local taxis, buses, trains and even car ownership. The case also explores several legal challenges the firm faced, including a ruling that threatened one of the core elements of its business model. Students are asked to evaluate easyCar’s operations strategy and assess the likelihood that easyCar will be able to achieve its ambitious goals.

INSTRUCTORS’ NOTES

Recommendations for Teaching Approaches

The case has been written primarily to illustrate concepts relating to operations strategy and service process design. Specific concepts that the case can be used to illustrate include:

How to align a company’s operations strategy with its business strategy (i.e., low price market strategy supported by processes, procedures and systems totally focused on achieving low cost), and how to use the concept of order winning criteria to facilitate linking process design decisions to the firm’s operations strategy (Hill, 1999).

How to apply production line approaches to a service through standardization, the use of technology, and the reduction of the discretionary actions of employees (Levitt, 1972).

Why a low cost service does not necessarily imply a low quality service to the consumer. The case provides a good illustration of Parasuraman, Zeithaml and Berry’s (1985) service quality model and the notion of service quality relating to customer perceptions compared to customer expectations.

How services differ from manufactured products (i.e., intangibility, perishability, heterogeneity and simultaneity), how services differ from each other, and how the characteristics of a given service influence the design of the service delivery process (i.e., relative focus given to physical facilities and policies, employee behaviors and employee judgment).

How the customer can be designed into the service delivery process (i.e., so that they are performing a portion of the service delivery).

How valuable sophisticated forecasting and demand management systems can be to a firm and how process details can be designed to aid forecasting and capacity planning efforts (e.g., early bookings, no cancellations).

The discussion questions that follow were written so that the instructor can simply walk the class through the questions in sequence. This takes the class basically through a discussion of different order winning criteria that a rental car company might choose to compete on (cost, quality, flexibility) and looks at easyCar’s processes, policies and procedures with respect to these possible order winning criteria. Questions 5 and 6 are designed to either further reinforce the lessons of questions 1-4 or to test students understanding of the ideas discussed in these earlier questions. Some instructors may wish to assign only questions 1 -4 and 7 and integrate the important discussion points from questions 5 and 6 into questions 2 and 3. Question 7 is designed to help bring closure to the discussion and emphasize to students that the success of easyCar’s operations strategy will depend in part on how well it can implement the strategy during a period of rapid growth.

DISCUSSION QUESTIONS

1. What are the characteristics of the car rental industry? How do these characteristics influence the design of service delivery processes in this industry in general?

This first question is intended to have students think about the nature of the industry that easyCar competes in and the nature of car rental services in general. This will help students better understand and distinguish between actions taken by easyCar’s that are related to the nature of the industry and service and those related to easyCar’s strategy. Perhaps the best way to start the discussion is by looking at the general characteristics of services and which of these characteristics are most significant in the case of car rentals. In general, services are characterized by their intangibility, perishability, heterogeneity and simultaneity. But different services vary significantly in the extent to which these characteristics hold.

Intangibility – While strictly speaking, 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.

Perishability – 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. Heterogeneity – Car rental is not a particularly heterogeneous service, as compared, for example, to the services provided by a doctor, an architect, a lawyer or a hairdresser. While customers may request different vehicles or different extras (e.g., child seat, ski rack) or different rental terms (return with empty or full tank, unlimited miles, etc.), the majority of customers will receive exactly the same service – the use of a vehicle for some specified period of time. Further, the basic interaction or contact that employees of the rental car company have with customers is going to be very similar.

Simultaneity – The issue of simultaneity is not a major issue for the car rental industry. The service being provided by the car rental industry is the use of a vehicle in a location where the customer both needs one and does not have one (i.e., typically when the customer is travelling). While there is simultaneity in the sense that the customer and the vehicle are together during the time that the service is consumed, most of the process of creating the service (e.g., creating the facilities, arranging for the right car to be in the right place) is done without the customer in the process. The customer only interacts with the service organization when booking the vehicle and when picking up and returning a vehicle. While these interactions are important, they do not limit the ability to achieve economies of scale in the industry the way simultaneity does in some other industries.

Service design has been characterized as having three basic components – (i) physical facilities, processes & procedures, (ii) employee’s behaviors, and (iii) employee’s professional judgement. 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?

Once the student understands the characteristics of the car rental industry from a service design perspective, the discussion can move to how easyCar’s operational design allows it to compete on the basis of price. Given the extent to which easyCar has designed its process to reduce cost, students should not have a difficult time identifying the features of its process design that allow it to offer a lower price. The key point to drive home is the extent that easyCar has gone to align its operations strategy and process design with its business strategy. Clearly the order winning criteria in this case is low price, (see Terry Hill’s Manufacturing Strategy textbook for more on the concept of the order winning criteria in operations strategy). Perhaps the best way to make this point is to explicitly compare easyCar’s operations with the operations of a traditional car rental company. Exhibit TN-I shows this comparison. After having gone through this comparison, the instructor can ask students why all rental car companies don’t follow easyCar’s lead and reduce their costs in this manner. Doing this drives home the link between the operations design and the business strategy – that is, the traditional car rental companies have strategies focused more on flexibility and service, and as such have different order winning criteria and different operational designs to support these criteria. (An alternate way to ask this is to ask what easyCar gives up to achieve this low cost, although discussion questions 3 & 4 are really designed in part to get at this issue).

Finally, once the components of the easyCar operations systems have been brought out, they can be used to make the point that many of the methods that easyCar uses can be thought about as applications of production line approaches applied to a service context. This point is particularly worth making if students have been assigned to read Levitt’s (1 972) “Production-line approach to service”. The easyCar situation clearly illustrates the ideas of service standardization, reducing the discretionary action of employees and using technology to support or substitute for people in the process.

3. How would you characterize the level of quality that easyCar provides?

Asking students about quality is a logical follow-up to the previous question focused on cost. Discussing quality is important so students see that low cost does not necessarily imply low quality in the minds of the customer. The discussion can also be used to illustrate several important service quality concepts. One way to begin this discussion is to ask what is quality in this case in the mind of the consumer. Clearly easyCar is targeting a particular segment of the market that is very price conscious, but the students should recognize that “quality” in the consumers’ minds is more than simply a low price (or alternatively, the needs 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. This discussion can also be used to introduce Garvin’s eight dimensions of quality as a way to better understand the multidimensional nature of quality. Garvin’s dimensions 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 reliablity of the vehicle rented, and the conformance of easyCar processes to the specifications provided on the easyCar web site (across all locations).

The instructor can next ask students why easyCar started with a fleet of Mercedes A-class vehicles (or students may raise the issue in the context of aesthetics from the discussion of Garvin’s dimensions). This choice seems inconsistent with easyCar’s positioning as a low cost provider, and indeed the company has recently switched and is now using more Vauxhall Corsas and similar vehicles. The key to understanding the launch of easyCar with the more expensive Mercedes is that easyCar did not want to be perceived as a low quality service provider (this comes through in the quote in the case from Stelios about not compromising on the hardware). The importance of the Mercedes ?-class is not just for the current customer. Since a major advertising strategy of easyCar is to put its name in bold orange lettering on all its cars, the Mercedes A-class vehicles are likely to be more positively perceived by those who see the vehicle and the easyCar advertising. EasyCar wants to create an image of reliability that a fleet of new Mercedes might imply (as opposed to being associated with other very low-price rental car companies that often rent older vehicles). In addition to understanding meanings of quality, the case provides an excellent opportunity to discuss the issues of dealing with service quality in particular. For many services, quality is particularly difficult to deal with because of the intangibility, heterogeneity, and simultaneity of the service. These features of a service typically make it difficult to specify and maintain quality standards. Because car rental is not as intangible or heterogeneous as many services, and the simultaneity is associated primarily with the facilitating good, quality standards are not as difficult to establish or maintain. What is more relevant to the easyCar case is the research indicating that consumers evaluate the quality of a service largely by comparing the perception they have after receiving the service with the expectations they had in advance for the service. Parasuraman, Zeithaml, and Berry’s (1985) service quality model can be introduced at this point to drive home this idea. EasyCar is good example of an application of this model. EasyCar now goes to great lengths on their website to communicate exactly what customers will receive and what they will not receive. The reason that easyCar does this is to manage its customers’ expectations regarding the service (gaps 4 & 5 in the Parasuraman, Zeithaml and Berry model). When easyCar was launched, it experienced some bad press as a result of customers who did not fully understand the easyCar approach. EasyCar does not want customers to be surprised by any of the features of its service that are different than traditional car rental companies, as such surprises would have a negative impact on the customer’s perceptions of service quality.

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 an 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.

The question is whether these forms of flexibility are sufficient to make rentals of a couple of hours appealing to customers. There are several significant limitations from the customer’s perspective that will likely limit easyCar’s ability to attract these customers. First are the preparation fees or activities that the customer will have to pay and/or engage in to rent the car. There is a euro4 standard preparation charge and a euro5 charge if the customer uses a standard credit card to pay for the rental. Then the customer may have to wait once arriving at the easyCar location to collect their car if there is a queue of other customers, which as the case indicates can occur, particularly during peak times, because of the minimum staffing levels maintained at each location. Once the customer picks up the car, he or she will then have to put gas in the car before it is ready to go. When the customer returns the car, he or she needs to wash the car or pay the euro16 cleaning fee, and must again potentially wait to return the car. This all amounts to a significant investment in time or money to rent for a couple of hours. The second limitation is that easyCar’s prices typically increase as the time of the rental period draws near, particularly during peak periods. While a few customers may know well in advance that they need a vehicle for only a couple of hours on a given day, it would seem that this market segment is likely to buy more at the last minute. This makes the price somewhat less competitive. Obviously easyCar can factor this into their pricing model, so that if a customer does want a car for a short term period on short notice and the vehicle is available and would likely go unrented, then the system can quote the customer a reasonable price. However, this raises a third limitation, which is that frequently easyCar will not have a vehicle on such short notice, as they currently achieve 90% utilization of their fleet. If a customer frequently finds no vehicles available, at some point he or she will stop bothering to check and simply use the alternatives. The point to make is that most of easyCar’s processes are tailored much more to the customer who knows his or her travel plans well in advance and has the extra time to go to a secondary location and perform some of the traditional service themselves. This does not seem compatible with the renter who might want to use the easyCar for an hour or two on short notice instead of taking one or a couple of taxi rides. For easyCar to successfully compete for such customers may require changes to its service process. Such changes might include, for example, a relaxation of cleaning policies (e.g., the exterior is free from mud, grime, etc. rather than evidence that the car has been washed) and some type of automated drop off system to reduce the time factor for customers.

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?

A total of five recent changes are identified in the text that easyCar has made in the last year. Discussing some or all of these is designed to reinforce some of the proceeding lessons as well as further highlight some of the trade-offs that the company must deal with in its efforts to compete based on cost. The discussion can also be used to emphasize that all companies, regardless of what their competitive priorities are, must still seek continuous improvement in their methods. Rental by the Hour – This would have been discussed in detail in the preceding question. 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 case indicates that 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. This is particularly an issue in shifting vehicles between Mercedes and non-Mercedes locations. Customers who have paid a few euros extra a day to rent from a location that offered the Mercedes vehicles would likely be disappointed if they showed up to pick up there vehicle and were given a Renualt Clio or Ford Focus. So operationally, what easyCar has done with this change is to lower its cost some, but at the expense of some operational flexibility. The long term question related to this is whether customers will develop preferences for specific vehicles and how easyCar will deal with this on the market side of things. This situation can also be used to introduce extending operations strategy issues to the supply function. Clearly the move by easyCar pushes their vehicle suppliers to offer competitive prices, although it moves easyCar away from a supplier partnership models intended particularly to improve quality and flexibility along the supply chain. Clean Car Policy – This 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. It is worth mentioning that the change in policy on the operational side has a real impact on the market side as well. The policy lowers the price to customers willing to take the time to wash the car by euro7 (i.e., through reduction of the vehicle preparation charge from euro11 to euro4) while increasing the price of the vehicle to customers not willing to wash the vehicle by euro9 (i.e., such customers now pay a euro4 preparation fee a euro16 cleaning fee instead of the previous euro11 preparation fee). EasyCar is likely to pick up some new, price sensitive customers by the euro7 reduction in price. However, for customers who don’t want the inconvenience of cleaning the vehicle, the euro9 price increase may push some of them toward traditional rental car companies.

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. Discussing 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. According to the quote by Stelios, allowing customers 7 days to change or cancel reservations without penalty would cause utilization to fall from 90% to 65% and prices to triple. While these estimates are in all likelihood an overly pessimistic assessment of the impact, the impact none the less would be significant given the central role yield management plays in easyCar’s approach. Further, it is worth using Stelios’ estimates to give students a better feel for the significance of the high utilization rate that easyCar achieves. At a 90% utilization rate, easyCar would have (0.9)(24,000) = 21 ,600 vehicles rented out at any given time by the end of 2004 if its growth goals are realized. To have the same number of vehicles on rent at the end of 2004 with a 65% utilization rate would require a total fleet of 33,200 (21,600/0.65) or a 38% larger fleet than currently planned. Further, current easyCar facilities rent as few as 15-20 spaces in a parking garage to operate a fleet of 150 cars. To service the same number of customers out of a location at a 65% utilization rate would require a fleet of 208 (0.9*150/0.65) vehicles and an absolute minimum of 72 (208*(l-0.65)) spaces to park un-rented vehicles. Students could be asked what would happen to easyCar’s hoped for ¿½10 million profit if it had to purchase an additional 9,000 vehicles and quadruple the size of all of its facilities. Going through this analysis and asking students to think about and calculate the impact on profits should drive home the cost savings achieved from the high utilization rate. 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. The value of including this in the case, and possibly in the discussion, is two-fold. First, it indicates to students the significant cost of this problem to the rental car industry. Second, it illustrates that basically a “zero mistakes” process must exist for implementation of this policy to minimize the chance of any legal claim against the firm.

7. What is your assessment of the likelihood that easyCar will be able to realize its goals for 2004?

This question is really intended to bring closure to the discussions. The established goals, a quadrupling of sales from ¿½27 million to ¿½ 1 00 million via the opening of 1 30 new locations in the next two years while realizing a ¿½ 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.