South-Western College Publishing - Economics  
Rental Cars: They're not just at airports anymore
Subject Rental car companies move more and more into the suburbs for growth.
Topic Supply and Demand; Production and Costs; Profit Maximization and the Firm
Key Words

profit; costs; demand; supply; competition

News Story

The biggest growth in car rental agencies isn't coming at the airports; it's coming instead from the suburbs. Lining up next to coffee shops and bank branches in strip malls in suburban landscapes, rental agencies are quick to take space in the suburbs.

Enterprise Rent-A-Car, the largest suburban provider, has approximately 5,000 non-airport locations nationwide, and claim to be "within 10 minutes of 90% of the population of Chicago and northwestern Indiana," according to one company spokesperson. Hertz Corporation, long the leader in airport rental locations, plans to create about 1,300 non-airport locations nationwide. Other brands, such as Avis and Budget Rentals, are expanding into the suburbs, but much more slowly than either Enterprise or Hertz.

Part of the problem with tying rental car agencies to airport locations is that it forces car rentals to be based on airline travel. And in a post-9/11 world, with airline travel faltering, car rentals at airport locations are faltering as well. In fact, Alamo Rentals, Budget, and National Car Rentals have all recently come out of bankruptcy proceedings. Further, some airports require a guaranteed volume for counter space, and rental companies must also pay for shuttle service to their parking lots and rent for the counter space.

Costs are much lower in suburban areas, requiring (in some instances) only a computer terminal and one or two employees. Further, the growth observed in these suburban rental offices is growth that the companies themselves can control, as compared to airport offices, the growth of which derives largely from economic changes. Much of the business in these suburban areas is generated from insurance replacements: When individuals are in accidents and need loaner cars while theirs are being repaired, insurance companies typically look to the rental companies for assistance. Car rental companies have developed relationships with auto insurance carriers to guarantee rentals.

(Updated September, 2004)

Questions
1.

How has 9/11 affected the market price for airport-located car rental agencies? Illustrate your answer with a graph of supply and demand.

2. Give two reasons from the article why profitability of car rental agencies is likely to be higher in suburban locations than at airport locations.
3. How would you expect the price of a car rental in a suburban area to change over time? Why?
Source Kathy Bergen. "Rent-a-car firms take fight for sales far from airports." The Chicago Tribune, August 2004, http://www.chicagotribune.com

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