High gas prices threaten Zipcar's car-sharing model—yet more companies than ever want in on the action.

Commentary about business and finance.
July 11 2008 7:45 AM

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High gas prices threaten the car-sharing model—yet more companies than ever want in on the action.

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So the central problem remains: If Zipcar couldn't make a profit before, when gas prices were manageable, then they're going to be hard-pressed to turn a profit now, with no crude solution in sight. Zipcar says it needs about two years in a metro area to establish itself before it can turn profit. But the company has been in operation for more than four times that time span nationwide, and it hasn't figured out how to make a profit yet. Nine years is a long time to still be in growth mode. In May, Zipcar's CEO said it should be profitable by the end of this year or early 2009. As a private company, Zipcar doesn't release financial data, but that timeline is hard to swallow given the current economic climate.

The clear solution, of course, is to raise prices more than 3 percent to 5 percent. But that move may be even riskier than relying on new membership. Zipcar's niche industry is about to get more heavily trafficked, and competition usually drives prices down. U-Haul, Hertz, and Enterprise are all dipping their toes in the car (share) pool. If Zipcar raises its prices, it could alienate its users just as new outfits come in to challenge Zipcar's stronghold.

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This summer, U-Haul will push 75 PT Cruisers onto the streets of 10 cities under the not-so-clever guise of U Car. Hertz has by-hour rentals already available in some cities and is thinking about creating a full-fledged car-sharing service. Enterprise pluralizes U-Haul's initiative with a pilot program in St. Louis (PDF) called WeCar that could be expanded nationally. U Car and WeCar both include gas in the upfront fee. (Hertz could not be reached for comment.)

For the traditional rental car companies, car sharing offers a lifeline from a crashing car-rental market. Between a decrease in travel, a poor U.S. auto outlook, and high gas prices, car-rental stocks aren't in good shape. Car sharing offers a new revenue stream for the companies to explore, if to appease shareholders more than anything else. But these new entrants are going to be even worse at turning a profit than Zipcar. They have to go through the growing pains of learning a new industry that has subtle differences from their bread and butter. Plus, they can't compete too heavily with Zipcar on pricing because of the thorn in everybody's side: gas prices. Entering the fray is a fool's errand.

U-Haul knows this, but they're forging ahead anyway. Mike Coleman, the program manager for U Car, told me that the company doesn't expect to earn a profit from car sharing for a long time. Eventually they'd like to be profitable, but for now they're in it to help grow the car-sharing industry and get cars off the road. As he was describing these lofty ideas to me, Coleman sounded like a program manager for an environmental nonprofit, not a private trucking company out to make a buck.

The irony, though, is that by trying to help the industry, U-Haul and the other new car-sharing entrants may end up suffocating it. As evidenced by Zipcar's profit struggles, car sharing is still too fragile to be ready for competition. Competition will prevent companies from raising the flat rates, which will stop them from recouping losses on higher gas prices. Car sharing was originally an economic model ahead of its time. Now, though, its moment appears to have passed, without ever shifting into high gear.