Page last updated at 00:04 GMT, Tuesday, 17 March 2009

Hertz eyes carmaker co-operation

By Jorn Madslien
Business reporter, BBC News, Heathrow airport, London

The transfer buses that connect Heathrow's airport terminals with the Hertz rental car depot keep arriving and departing at regular intervals.

Hertz bus operations manager Kearnan McGrane
Hertz's bus drivers re-engineered the route they were driving

It was not always so. For years the service was both slow and chaotic, until Hertz asked the drivers for ideas on how to improve it.

"We sat down and said 'let's question it'," says bus operations manager Kearnan McGrane.

"We had never questioned it; we were never flexible before."

A small team comprising drivers and managers soon discovered that it would make sense to replace large buses that circled the then four terminals with smaller buses that would serve just one or two terminals each.

"You can either go around all the terminals in an orderly fashion or you can split the routes and halve the journey times," adds regional manager Gustaf Isaksson.

Falling demand

For Michel Taride, president of Hertz Europe, the restructuring of the bus service at the Heathrow branch is an example of the "speed and depth of the transformation" Hertz is going through.

Michel Taride, president of Hertz Europe
We will buy fewer cars this year than we did last year, perhaps by as much as 40%
Michel Taride, president of Hertz Europe

"We are proud to have done a lot of what companies are now forced to do while we were in good shape," he says, explaining that staff members are being urged to get involved in planning and improving how work is being done.

These days, the car rentals sector, including global leader Hertz, is in trouble, having seen a sharp decline in both holiday and business travel since the onset of the recession.

Ratings agency Standard & Poor's has pointed to how Hertz and its rivals have been hit by a sharp reduction in the number of flights taken and raised concerns about their ability to raise finance in the future.

Hertz's share price has plunged from a peak of $14.50 last spring and now trades at about $2.40.

Cutting costs

Shaking his head, Mr Taride is eager to mollify investors.

Hertz share graph

"The low level of our share price is irrational," he insists, pointing to how even before the downturn the company had taken steps to make its operations more efficient and reduce its costs.

The company's global workforce has already been dramatically trimmed, with a third of jobs axed since 2006, including 4,000 job cuts announced in January.

Meanwhile, the remaining staff have changed the way they work as the company has adopted the Japanese Kaizen management philosophy that aims to eliminate waste by standardising processes.

"We're ahead of the curve," Mr Taride declares.

Fewer cars

But operational efficiencies will not on their own help Hertz adjust to reduced demand. That requires cuts to its fleet of cars.

Hertz counter
Demand for rental cars has fallen since the start of the recession.

In an average year, Hertz Europe buys some 180,000 cars, though "we will buy fewer cars this year than we did last year, perhaps by as much as 40%", Mr Taride says, adding that "we will also try to extend the life of existing cars".

Such cuts by Hertz and its rivals deliver serious blows to carmakers whose sales have plunged, who suffer severe cash flow problems, and whose inventories are uncomfortably large.

Mr Taride hopes the situation will improve their bargaining power.

"They depend on us," he declares. "As an industry, we buy between 8% and 15% of their production."

Changed power balance

The carmakers' relationship with rental firms and other fleet buyers has always been awkward.

"On the one hand, they need to sell cars to us," explains Mr Taride, adding that carmakers benefit car rental deals because they help them show off their wares to potential customers.

"But on the other hand, if they sell us too many, the second-hand market can't absorb them."

Second-hand valuations are crucial for carmakers. If they drop too far, it becomes difficult for them to get the asking price for new cars.

Fleet buyers, who are traditionally able to negotiate notable discounts, can therefore squeeze the carmakers from two sides.

Not only do they pay less in the first place for new cars. They also drive the overall market lower.

In the past, therefore, carmakers have tried to limit the number of cars on offer to rental firms at a discount.

These days, the shoe appears to be on the other foot.

"If the new car market doesn't turn around, we're going to see better offers," Mr Taride predicts.

Mutual dependence

But although carmakers and rental firms seem to have colliding desires, Mr Taride is eager to stress that "this relationship is not confrontational".

Gustaf Isaksson
You can either go around all the terminals in an orderly fashion or you can split the routes and halve the journey times
Gustaf Isaksson, Hertz regional manager

If the carmakers' problems escalate, Hertz will suffer too. This is especially so when it has entered into buy-back deals with carmakers that might go bust.

In such cases, the buy-back fleet will not be sold back to the carmaker, leaving Hertz to sell it in the second-hand market.

Hertz already run some so-called "risk cars" in its fleet, and the proportion has been growing in recent months, but it is not in its interest to move further into the second-hand car market.

Mr Taride insists he is eager to support the carmakers through the current crisis by working more closely with them.

"We've been trying to change the model with manufacturers for many, many years," he says. "We have a lot of waste in the system between us."

For instance, he suggests, it might be time to negotiate better buy-back deals with flexible holding periods.

Currently, it takes carmakers between three months and one year resell a buy-back car. Mr Taride says Hertz should be allowed to keep cars running until they are sold, thus boosting its own income and reducing carmakers' costs.

There is also room for much automation in the area of processes and paperwork, he insists.

"We could improve profitability for them without impacting our cost," explains Mr Taride. In the current market, that may just be an offer no carmaker can afford to refuse.

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