By Thomas Heath
Washington Post Staff Writer
Wednesday, October 31, 2007
Flexcar and Zipcar, two companies seeking to change American habits by renting cars by the hour, plan to merge in a deal that would reshape the nascent car-sharing industry.
After years of losses for both companies, Flexcar, based in Seattle and controlled by America Online founder Steve Case, said it will merge with the larger Zipcar, based near Boston, in hopes of achieving profitability within the year.
"We just wanted to rapidly expand in new markets and rapidly expand the fleets," said Case, whose Revolution LLC bought Flexcar in 2005. "They're both in turbo-growth mode. We think the companies combined will be on a path to profitability in the next year or so, and with rapid and significant expansion will be ready" for an initial public offering of stock.
The two companies, the nation's largest car-sharing firms, are owned by private investors. They did not disclose the merger's financial terms.
Both companies were founded in 1999 with the intent of serving environmentally minded city dwellers and university students who could be weaned from the expense and other complications of automobile ownership. Zipcar, for instance, rents cars for $7.75 to $15 per hour on top of an annual fee.
Together, the two companies helped popularize an industry that now includes more than two dozen competitors.
"It's a niche that wasn't exploited by the larger traditional car-rental companies," said Chris Brown, managing editor of Auto Rental News. "I don't think it will ever eat into a huge percentage of the $20 billion U.S. car-rental market. It's kind of like this little cult of users that are all in it together in this cool new system."
Even so, sensing profit or as a defensive measure, car-rental giants like Hertz and Enterprise have entered the hourly rental business. Thrifty Car Rental announced this week that it is opening two hourly rental locations in Manhattan.
But the business models are different. While rental cars are most often found in sprawling lots near airports, the car-sharing companies work with municipalities and private businesses to rent spaces where subscribers could pick up and deposit the cars. Unlike the major car-rental companies, Zipcar and Flexcar have no airport counters or other bricks-and-mortar retail locations. The cars are reserved online or over the phone. Gas, repairs, parking and insurance are handled by the car-sharing companies.
"We are trying to replace car ownership," said Scott Griffith, Zipcar's chief executive. "It's a business model that locates cars in neighborhoods and uses 24-hour technology to locate the car."
The combined company will be known as Zipcar, based in Cambridge, Mass., and headed by Griffith. Flexcar chief executive Mark Norman will relocate to Massachusetts with the new title of Zipcar president and chief operating officer.
The new Zipcar will serve about 50 cities, including dozens of college towns, in 23 states and two Canadian provinces, as well as London. When the purchase is completed, which is expected to be this week, the company will have 180,000 members and more than 5,000 vehicles in dozens of models, including the hybrid Toyota Prius, the Subaru Outback and the Mini Cooper.
Case is rolling his entire stake in Flexcar into the new company and is betting that the newly merged firm can one day be as transformative as another company that reoriented American habits.
"By having one brand, you will get more awareness and ubiquity, and that's partly what has driven the recent success of Starbucks," Case said. "Only when they had enough critical mass in terms of brand and retail footprint, they became part of everyday life. And we are trying to get to that point. I really do believe it's the smart solution to urban dwellers, like in D.C. "
Although neither company has turned a profit, Zipcar said it makes money in "established" markets, defined as areas it has served for two years or more, including Boston, New York City, Washington and San Francisco. The District and San Francisco are the only cities where the two companies overlap. The company will have cars in other cities, including Portland, Ore., Atlanta, Pittsburgh, Philadelphia, Los Angeles and San Diego, as well as in university towns like Ann Arbor, Mich., and Chapel Hill, N.C.
"This allows us to get to scale much faster," Griffith said. "This will allow us to continue to invest in technology and . . . the Web site and to expand the size of our fleet."
Neil Abrams, an auto-rental consultant, said a bigger vehicle fleet could lead to profits.
"There is a threshold under which it's hard to make money," he said. "You need to get to that threshold where economies of scale kick in, where insurance is leveraged across a lot of rentals and you have lower financing costs for vehicles. Each company was a few thousand cars away from reaching those economies of scale. One you have the fleet, you have to strategically position the cars so that they are close to their market and very, very accessible."
Staff researcher Richard Drezen contributed to this article.