Hertz, Overbooking, and The Total Solar Eclipse

Posted by Alex on August 16, 2017

The 2017 Total Solar Eclipse is a big deal. Portland alone expects an influx of about one million visitors during the special weekend. The town of Rexburg, Idaho (population 28,000) expects half a million. And it's creating headaches for many travel companies. Let's take a look at Hertz–and why they're canceling hundreds of reservations.

hertz-logo 2.png

The first total solar eclipse visible in the continental U.S. in 38 years will be a spectacular sight. Astronomers and excited visitors alike have been planning for this event months, if not years, in advance, and yet Hertz "inadvertently overbooked reservations" and is sold-out. Hertz has been advertising this event for weeks, and yet the second largest car rental company in the U.S. now seems unprepared for the event.

hertz-soldout.png

Overbooking vs selling-out

Overbooking is a fact of life. But selling out is bad for business. 

Overbooking is taking more reservations than you have room for. Whether you're a hotel, airline, or car rental company–you do this. Smart companies overbook because they know customers won't show up. Some might have a smaller fleet than they planned, or a smaller airplane, and find themselves in a position of having more reservations than units to rent at the last minute. 

But Hertz started canceling reservations a week in advance of the eclipse–why? 

Hertz had sold out–in fact, they had way over sold. Selling out is unequivocally bad because it means you absolutely for sure left money on the table. Either you could have rented more units if you had them on hand, or you could have charged more for what you did have on hand. Many people are blind to this paradox, thinking selling out is good because everything is rented. Sometimes people even think that having cars left is a bad sign–showing that you could have rented them. But in fact selling out is far worse, because you are guaranteed to have left money on the table. 

Overbooking can be great for business–usually, it means you achieve a higher utilization (or occupancy) and in the case of an airline or a car rental company, can make the difference between profit and loss. Selling out is always bad–not only because you leave money on the table, but also because it creates operational challenges. Like what Hertz is grappling with in Portland.

Hertz is now moving parts of their fleet from other regions to account for the overbookings and honor reservations, but the PR damage is done, Hertz is still sold out during the eclipse, and the readers of Fox News and other news outlets cannot unread headings like 'Hertz forced to cancel 'hundreds' of car reservations weeks before eclipse' . But why didn't Hertz move parts of their fleet to account for the influx of reservations earlier?

So what went wrong?

The eclipse was, perhaps, a perfect storm–and Hertz isn't the only car rental company affected; it just happens to be the one in the news.

 

Screen Shot 2017-08-16 at 11.58.06 AM.png

(Hertz isn't the only company that left money on the table)

For even the best run company with the best people, pricing means constant vigilance. Standing sentry over massive amounts of data at tens, hundreds, or thousands of locations at once, 365 days a year. It is extremely difficult. There are people who literally never take vacation so they don't miss anything.

Even though Hertz advertised heavily for the eclipse, the pricing team has 364 other days to worry about. This is literally a full time job for teams of people, and few have the time to plan extremely unusual, once-in-38-year events like the eclipse. Because bookings for the eclipse built at a very unusual pace, they were caught off guard–as many others were. 

Why is nobody talking about the profits?

Hertz has probably modeled no show rates in Portland carefully, and knows for mid-August what the likely no show rate would be–and overbooked accordingly. The twittersphere is on fire about car rental companies not having a car when you show up with a reservation–but you don't hear car rental companies taking to twitter to rant about the thousands of no-shows who aren't penalized in any way. For some reason, consumers like not putting down a deposit for a rental car and having the flexibility to not show up and not pay anything–as a result, car rental companies have to overbook, or they end up losing money.

Overbooking in general to solve the no show problem likely makes Hertz millions of dollars in Portland every year, and it might even keep the location viable. After all, car rental is a famously low margin operation–every little bit counts. So while the customer on the wrong end of a robocall informing them their reservation is canceled has every reason to be upset, car rental companies will continue to overbook until those consumers start paying up front, like they do for hotels, airlines, buses and trains.  

Does that mean this mess was inevitable?

It's tempting to say, "nobody saw it coming". But astronomers did see it coming–and they've already started planning for the next one in 38 years, after all. The difference is one of vigilance. With so many markets to manage, its easy to not have the time to keep an eye on such an unusual occurrence. Perhaps with the tools and methods available in the past, this was in some way inevitable.

That said, with new tools like artificial intelligence (AI), it seems like either by managing exceptions using AI or managing the day-to-day with AI thus freeing up humans to manage exceptions, this mess could have been avoided. 

Get the Ultimate Pricing Book

Topics: Car Rental, Car Rental Revenue Management, Overbooking, No Show, Hertz