Editor’s Note: Rates always have been a volatile issue in the rental industry and, in today’s difficult economy, price competition is even more fierce. There have been reports of companies cutting rates as much as 50 or 60 percent to win jobs. While examples of this practice can be found across the spectrum of rental businesses, the rate declines of public companies are public knowledge. In an exclusive interview with RENTAL MANAGEMENT, Michael Kneeland, CEO, United Rentals, Greenwich, Conn., explains his company’s strategy when it comes to rates and why rates only tell part of the story.

RM: Rental rates are a very emotional issue in the rental industry. Many independents continue to perceive the national companies as the bad guys, cutting rates and ruining the rental industry. How do you answer that criticism?

Michael Kneeland: We are in the midst of one of the most challenging economic environments that our nation has faced in more than 80 years. When times get tough, it’s easy and natural to look for someone to blame, but that kind of criticism is both unfair and unhelpful. The steep decline in construction activity is forcing all companies — both large and small — to cut rates. At the same time, some companies are probably reducing rates as a business strategy to gain market share or to hold on to valued customers, which can be a successful business strategy. What some rental companies are forgetting is that the larger players have significantly increased the customer base for equipment rentals, which can be seen by the overall growth of the rental market. Rental is more common today than ever in the past and that growth will continue once the economy takes a turn for the better. The industry needs to work together to demonstrate to customers the full value we supply in our equipment and in our service.

RM: In today’s economy, there is no doubt that there is downward pressure on rates. United Rentals reported an 11 percent decline in rates in the first quarter. How do you explain the 11 percent decline?

Kneeland: As we all know there is no single industry standard on rental rates. Our rental rates are simply a comparison with our rates from the same period a year ago. I think a better way to understand and compare companies is through dollar utilization, which is a quarter’s rental revenue annualized, divided by the fleet’s original equipment cost. That takes a lot of the noise out. From that point of view, our performance is as good as any other in the industry; indeed, better than most. Another key point for our company is that about 60 percent of our revenue comes from commercial construction, which often doesn’t have long-term contracts, so we feel more price pressure than companies that have set rates in other sectors.

RM: You have said that rates don’t tell the whole story. What’s the whole story?

Kneeland: Don’t get me wrong. Rates are very important, but anyone in this business well knows that there are other metrics that show you how well you’re performing. In addition to rates, we look closely at dollar utilization, return on invested capital and revenue per employee, just to name a few. No single metric can tell the whole story and a savvy owner or investor knows to look at all the key metrics to judge the success of a business.

RM: When you talk about a decline in rates, how does it work? Is it an across-the-board, company-wide initiative? Does the rate card change? Does each branch set its rates or do they follow corporate guidelines to change the rate card? Or does each branch decide whether to offer discounts for certain pieces of equipment to get the job and those discounts in turn reflect the rate reduction?

Kneeland: Rates are dynamic and are set and changed based upon demand and fleet in a given market. They are set by the district and region management teams, not the branch. There is flexibility based upon the size of the order, the customer and the type of equipment ordered, but anytime one of our sales people wants to significantly deviate from the set rate, he or she needs to get approval from a branch or district manager, or even a regional vice president. The point is that there is discipline in the field and there is a strong business reason when we discount. At the same time, we are rolling out a price optimization system that will allow us to manage rates in real time. Currently most companies have only a rear-view look at rates through exception reports that come after the fact. That’s not a 21st century way of doing business. Our new price optimization program will calibrate rate based on the market and the type of customer.

RM: Are the rate declines limited to any regions of the country or any specific category of equipment?

Kneeland: There are a few pockets of strength, but this recession is global and not limited to a particular region or customer sector. That said, it’s no surprise that the Southwest and Southeast, which include California, Arizona, Nevada and Florida, have been hit hardest. We have been very successful over the past year of transferring our fleet where demand is stronger and, of course, defleeting to better meet the supply-demand equation. We also have severely limited our expenditures on equipment purchases.

RM: Why cut rates or offer discounts? Other costs are going up, so why should rental rates go down? Is cutting rates an appropriate action? Why can you afford to cut rates?

Kneeland: We work hard to get a fair rate and there’s a point where we just say no. I know of many jobs that we have walked away from because the rate the customer demanded was just too low and it didn’t make sense. At the same time, we are committed to growing our National Accounts business, with an increased focus on industrial customers. We firmly believe that our broad geographic footprint is a meaningful competitive advantage. Winning these customers may require flexibility when it comes to rates, but that’s a business decision we make case-by-case. There are times when rate flexibility makes strategic sense. The same goes for good customers with whom you have done business for years and who historically have rented a wide variety of equipment in quantity. We are in this business for the long haul and that means we’re not just thinking about today or tomorrow, but next year and the year after that. I want a customer for life and now is when I can strengthen that relationship. Our capital structure, especially given our recent successful debt offering, provides us with significant runway that lets us manage the company with a long-term view. We are not only thinking about navigating through this difficult economic environment, but also how we want to grow the company in the years ahead. That’s an edge that we are using to our advantage. Now, like anyone else in this business, I’d prefer to see rates go up and we work hard at that, but market demand influences the ability to move rates and we need to see activity pick up. While the rate decline has slowed on a sequential basis, it is still lower year-over-year. Rest assured, we will continue to look for ways to improve rate performance.

RM: In listening to the conference calls with investors for the large public equipment rental companies, it seems that several are targeting some non-traditional customers and particularly focusing on industrial rental. You’ve also said that United Rentals is shifting its focus more on monthly or long-term rentals. How does this impact your rates?

Kneeland: The industrial market for equipment rentals is enormous, perhaps $12 billion a year in potential. That’s an opportunity for the entire rental industry. We have the most extensive geographic footprint, which should allow us to serve such a customer anywhere in North America. Now these customers, who usually sign contracts for three to five years, understandably negotiate better rates. In return we get less price movements and these rentals are more profitable to us because there are fewer touch points. As you also pointed out, we have been shifting our mix with a bias towards monthly rentals, which follows a similar pattern of fewer touch points, which increases profitability.