Car-rental firms cope with shrinking client base, profits
would be in the fast lane by now when it first set up shop in Kyiv just over a year ago. The financial crisis dimmed those high hopes in a hurry.
Avis and its competitors on the Ukrainian rental-car market are coming to grips with the harsh reality that the economic progress in Ukraine has by some estimates been set back five years.
Bjorn Markstedt, Avis' general director in Ukraine, continues to try to put an optimistic spin on the economic situation in Ukraine. But his frustration with the country is obvious.
'I'm satisfied in one way, but dissatisfied in another,' Markstedt says. 'The major reason for my frustration is the economic crisis. It has slowed down our growth a lot.' 'But we're still very optimistic,' he adds. It's hard to see why.
The Ukrainian car-rental market, which barely existed four few years ago, was starting to look promising around the beginning of 1997. After years of hyperinflation, the Ukrainian economy had settled down. Soviet-era travel restrictions had broken down and for the first time a wealthy, albeit corrupt, business class had emerged in Ukraine, complemented by a steady influx of wealthy multinational companies. The car rental market was ripe for development. International juggernauts Avis, Hertz Rent a Car, and Europcar all flocked to the country.
Then the economic crisis hit. Foreign companies began scaling down, and some bailed out of the country completely. Rental firms immediately saw their client base pared down substantially.
The reduced client base quickly trimmed profits and increased competition amongh companies already on the car-rental market. Close to a dozen small Ukrainian car-rental companies are competing with the three big international renters.
Markstedt says Avis, Hertz and Europcar have little to fear from local car renters because they target a different market segment: foreign businesses. The foreign business community is drawn to international rental companies' newer cars, better insurance coverage and good international reputations, Markstedt says.
'We offer brand new cars and insurance that covers up to $1 million in expenses, even if you cause the accident,' he says.
It is exactly that insurance coverage - and the hefty price it carries - that repels Ukrainian consumers.
'Ukrainians don't appreciate [insurance],' Markstedt says. 'The brand name and insurance don't mean anything to them. Why would they need insurance, if they don't even use it for their own cars?'
With their eye almost exclusively on rich foreign businesses, the three big international rental companies don't even pretend to be affordable. Avis charges $278 per day for an Opel Omega sedan, and $107 per day for a more modest Daewoo car.
The rates, which elsewhere would constitute nothing less than larceny, are a necessity in Kyiv, according to Markstedt.
'You may think that we're making large profits charging this kind of money,' Markstedt says. 'But that's not the case. We're only planning to break even after two-three years of operations.'
Markstedt says that Ukraine's countless taxes - some of which he described as 'unique' - and other business-related problems contribute to overhead being higher in Ukraine than in the West.
Markstedt points out that discounts are available for regular clients and extended rentals.
With foreign car-rental companies focused on international clients, a host of domestic companies are left to jockey for slices of the domestic pie.
Unlike on the multinational market, it is price that often determines the winner on the domestic field.
'Our prices are generally one-and-a-half to two times lower than those of foreign companies,' says Serhy Shamenko, the general director of Ukrainian car rental company Sota. 'The market is pretty much divided now. Our clients are mostly Ukrainian businessmen and visitors from the former Soviet Union.'
However, Shamenko says his company has also gained a good reputation among foreigners and is now cooperating with seven large foreign companies.
Renting an Opel Omega at Sota for a day costs a customer $140 (150 kilometers provided), and a smaller Skoda Felicia only $85. And despite foreign companies' claims to the contrary, Shamenko says Sota provides comprehensive insurance.
Low price is not the only factor driving Ukrainian clientele to home-grown firms. Foreign companies demand payment by credit card, and even if Ukrainian customers have plenty of cash they might not have a credit card.
Foreign car rentals defend this method of payment as not only simpler, but more secure.
'Some people would come and offer us $300 in cash per day for a car. But most of them would have no intention of ever returning the car,' Markstedt says.
Shamenko says it has its 'own methods' of ensuring that its cars are returned.
'After five years of being in this business we've also worked out a security system that filters out suspicious customers,' says Shamenko, who's company has a modest fleet of 15 cars. 'We've even had cars stolen. But we've had all of them returned. We have our own methods.'
But Shamenko's company has few methods at its disposal for dealing with the economic crisis, which has caused the firm to close its Kharkiv, Donetsk and Yalta branches, leaving only the company's Kyiv branch still standing.
Shamenko admits the foreign firms are better prepared to withstand the crisis.
'If I had the kind of money [that international car rental companies have ] and was buying cars at the same prices as they are, I'd be dominating in the market here,' he says.
But hardly anyone doubts that the rental-car market it Kyiv will grow - eventually.
Markstedt estimates that the entire car rental fleet in Kyiv - not including chauffeur services and van hire - numbers only around 200 vehicles (rental car availability outside of Kyiv is practically non-existent). By contrast, in Britain, whose population is only slightly larger than Ukraine's, there are come 110,000 cars available for short-term rent.
Hertz general manager Andry Lyushnyakov is hoping that growth will start taking off after Ukraine's presidential elections in October.
'We hope for better prospects in the future,' he says. 'We don't expect drastic reforms in Ukraine before the presidential elections, but we do after them.'
'It's a business of the future in Ukraine, and it's already popular,' Shamenko adds. 'Everybody understands that there's no point dragging a car 700 kilometers from Donetsk, if you can rent one here.'
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