Expert Insight

How the shared economy is changing the car rental market

Traditional car rental companies are competing heavily with new shared economy start ups and will need to adapt to the changing market in order to survive.

There has been a lot of buzz about the shared economy in the travel and tourism sector, with Airbnb being a good example. In late 2013 Airbnb hit the news as New York State tried to ban the website, ruling it illegal. Hotels also fear losing clientele because of AirBnB and other peer-to-peer accommodation web platforms, such as HouseTrip and HomeAway.

However, the hotel industry probably has less to fear from this new trend than the car rental industry. As can be seen in the chart below, in major European countries (except for the UK) the car rental markets recorded negative growth in terms of market values in 2012. Although slow growth is expected for the coming years, none of the markets are expected to be back on pre-crisis levels in terms of market values before 2017. In contrast, according to Navigant Consulting, a consulting firm, global carsharing services revenue stood at around US$1 billion in 2013 and will jump 600% to reach around US$6 billion by 2020.

Car rental market value (USD million)

There are many direct and indirect competitors for the traditional companies. Zipcar, for example, was the first rental company to offer hourly rates. It increased in popularity rapidly and started competing against the international brands before being bought out by Avis in 2013. Other variations are Uber and BlaBlaCar which are distance ride sharing websites that connect drivers with paying passengers.These companies neither own the vehicles nor maintain them, but only act as an intermediary. Other variantsi includepeer-to-peer car rental services such as RelayRideswhere drivers pay to borrow someone else’s car.

Why traditional companies are falling behind

The increasing popularity of peer-to-peer car rental companies is driven by to two main factors. Firstly, finding a car or ride is relatively easy compared to traditional car rental companies, which are limited to a certain number of pickup points. Secondly, and perhaps more importantly, prices are cheaper. Offering hourly rates, renting out a private car or sharing a ride fits in perfectly with the philosophy of the sharing economy.

Although traditional car rental companies have introduced their own car sharing services, (including Hertz on Demand and Enterprise CarShare) their revenues still depend on traditional car rental activities. Adding value by selling extras in current time proves difficult, as, for example, most people are using smartphone apps instead of paying for a navigation system. Hertz has already lowered its revenue projection for fiscal 2013 due to weaker volumes. As many direct and indirect competitors are changing the car rental market rapidly, companies such as Hertz will be better off restructuring their existing model by mixing in aspects of the shared economy system in order to survive.

Judging by the growth potential of the car sharing industry and the current climate of the car rental industry the big companies have to find an answer soon.