Ever wondered how you'd ever get around without a rental car on long road trips or when your vacation destination doesn't have a subway system?  More families and budget-conscious travelers may have to find out for themselves as Avis and Hertz continue to raise rental car prices that have already escalated almost 20% in the last two years, although the price hikes won't affect business customers because corporations rent at a high volume and a set rate.  Hertz gets 53% of rental sales from consumers and 47% from corporate clients while Avis gets 40% from consumers and 60% from businesses.

After the steady price increase, the average daily rate for a midsize vehicle in the U.S. now comes out to $48.56.  The driving force behind the rising prices comes from the recent adversity that the Big 3 domestic automakers have faced in recent years.  For decades, GM (GM) and Ford (F) sold their excess vehicles to rental car companies at generous discounts.  However, now that the automakers have billions of dollars in losses to cover, rental companies have to buy their vehicles at a higher price that more accurately reflects their market value.  Rental companies then pass the higher costs onto their customers by charging higher rates. 

So what does this mean for the rental car industry?  At the very least, don't expect Avis (CAR) or Hertz (HTZ) stock to continue growing at the nearly 50% rate that each has experienced since their respective IPO's in late 2006.  While experts point out that renting a car costs a lot less than a round-trip airplane ticket, driving still involves gas expenses, increased travel time and requires full attention to the road.  Furthermore, domestic automakers plan to decrease monthly sales of cars to rental companies in an increased effort to cut their losses in an unprofitable sector.  The shrinking market means that Avis and Hertz will need to figure out how to give customers more for their money in the coming years.  If they don't, you may see more travelers flying the friendly skies in the near future.

Disclosure: I do own a mutual fund that may contain one or more of the stocks mentioned in this post. However, any interest that I may own is subject to the discretion of my mutual fund manager. 

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