National Rental Car
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Edelman Award Paper
Revenue Management Saves National Car Rental
By M.K Geraghty and Ernest Johnson
In the January/February 1997 issue of INTERFACES magazine, M.K. Geraghty and Ernest Johnson were presented as finalists of the Franz A. Edelman award for their presentation on a state-of-the-art Revenue Management System that would turn a huge money losing rental car company, National Rental Car, into a profitable business within two years.
In 1993, General Motors took a $744 million dollar charge against earnings related to its ownership of National Car Rental Systems. National was facing liquidation and a layoff of more than 7,500 people unless it could post a profit in the near term and prove that the car rental business was worth saving.
Before National began using the Revenue Management System, it faced the same issues as its competitors. The car rental industry relied heavily on corporate customers that paid fixed rates and only traveled during the week leaving most rental car companies with large fleets of idol cars on the weekends. Whereas the competition was making adjustments to try and capture leisure weekend customers to generate more revenue, National remained solely focused on the business renters missing out on potential opportunities. National also planned its fleet in one-year cycles as opposed to shorter cycles more often, which led to failure in meeting changing customer demand.
The bottom line was that National did not have the proper communication tools in place to be able to react to the industry’s changing environment. National did not pursue leisure weekend customers even for break-even profit, was not able to adjust for increased or decreased car demand when planning its car fleet and had a tremendous number of missed opportunities because of a lack of supply in areas that had high demand. National was also faced with the fact that their competitors were much more nimble at making short-term pricing changes ultimately increasing their competitor’s profitability.
National quickly put together a team to assess and experiment on processes that its competitors were already implementing. Realizing that they could also raise prices and increase revenue and not erode customer satisfaction, National brought in the help of turn-around specialists to understand National’s business, quantify revenue potential, recommend organizational structure and staffing requirements, estimate costs, provide cost/benefit analysis and prioritize an implementation plan.
Using the information gained from the evaluation, National began a revenue management system that would centralize their capacity management, pricing and reservations control. The capacity management function targeted high-valued fleet utilization. Pricing enhanced corporate revenues through sensitivity to consumer price tolerance. Reservations control maximized revenues by accepting or rejecting booking requests based on length-of-rent controls.
As a pre-requisite in making this model work, the Revenue Management System (RMS) relied on a demand forecasting methodology using a combination of long-term and short-term forecasting. The long-term forecast was based on a time series model using historical data and provided stable predictions early in the planning horizon. The short-term forecast considered the offset of the actual reservations and as more information became available from the actual booking behavior, the short term dominated the forecast of final unconstrained demand.
As one of the main areas of RMS focus, capacity management became the first step in the planning process which included proper fleet planning, planned upgrades and overbooking. Fleet planning went from annually to short-, medium-, and long-term planning over a 5-day, 60-day, and 18-month planning horizon, respectively. Planned upgrades exploited the relationship between segments, capitalizing on those willing to pay more. Overbooking was put in place to account for the impact of no-shows and cancellations.
Another area of RMS focus was pricing strategy, before RMS, National’s pricing strategy was not dynamic and was often linked to competitors pricing. This meant pricing changed without regard to National’s business revenue strategy. After RMS was implemented, pricing recommendations were based on on-rent demand for each arrival date. The system would increase price if it felt the demand was greater than the supply and decrease price to stimulate demand if the supply was higher. By making frequent adjustments, National would maximize revenue and profits.
The final area of RMS focus was on reservations inventory control, the combination of capacity management and pricing worked to provide some reservations control however both were demand based. By controlling the length of rent, National could more precisely trade off between demand elements that were competing for inventory.
By consistently managing these aspects in a manner that improved revenue per car, revenue per day, and utilization levels, National could realize and sustain revenue improvements. By using a number of analysis techniques, National was able to create a plan that would assist the managers in efficient planning activities, maximized revenue and profits and effective cost control. Within the two year period of implementing RMS, National increased their profit margin, revenue and market share. In 1995, General Motors sold National Car Rental for $1.2 billion.
What is your opinion of the value of the article with respect to the business community? Why?
National Rental Car faced dire possibilities. In 1993, General Motors had considered liquidating or selling the unprofitable business. National and their 7500 employees had just one chance. They had to make the business profitable in the short term despite losing $744 million in previous periods.
With dubious goals imposed upon the management staff, a decision was made to try and turn the company around. The importance of this action was in the impact that could be felt in the business industry if liquidation had occurred. As businesses fail, competition decreases and consumer confidence erodes. Had the business ultimately failed, 7,500 people would have lost their jobs and countless more would have been affected by a loss in business. General Motors might have also felt the impact