How Airports Became Ground Zero in the Rental Car Startup Wars

When Rujul Zaparde started running his company’s new peer-to-peer car rental service at San Francisco International Airport last year, it came with a heavy dose of entrepreneurial hustle. Glitz and glamour, not so much.

“It was me, greeting you at the car in a terrible-looking green vest,” he says with a laugh. “It was pretty bad.”

Ten days later, the company got a cease-and-desist order from the airport, which was not pleased that FlightCar was operating without permission in one of its parking lots.

FlightCar fled, but didn’t go away permanently. After relocating to a facility in nearby Millbrae, CA, the Y Combinator-backed startup continued doing business—FlightCar lets everyday customers park their wheels for free, and offers the chance to earn some money if another person else rents the car while they’re away.

The change of scenery didn’t satisfy airport officials. Since it was serving SFO travelers, the argument went, FlightCar had an obligation to operate under the airport’s strict rental car regime, which includes a 10 percent tax on revenues and a $20 fee for each rental.

In the 2012 fiscal year, SFO raked in more than $90 million from those charges, according to the lawsuit that SFO filed, accusing FlightCar of unfair business practices. The startup is fighting the case.

In November—about six months after the lawsuit against FlightCar and just in time for the start of holiday travel—another peer-to-peer car rental service came to San Francisco’s airport. This time, the reception was different: a glowing press release from SFO announcing the agreement it had reached with an innovative new company, RelayRides.

The deal allowed RelayRides to offer its customers free parking and a little payback if cars were rented out, similar to FlightCar’s offering. Instead of ferrying customers from the lot to the airport in local town car services, as FlightCar does, RelayRides would be using a local hotel’s shuttle bus. And it would be shelling out 10 percent of its sales and the $20 per-rental fee, just like the big rental companies.

“RelayRides, which offers a forward-looking new concept, has clearly taken the leadership position as the first such company to establish an authorized service with SFO. We applaud their proactive approach, and for providing an example for others to follow,” airport director John L. Martin said. 

Similar battles are becoming almost routine as startups born of the digital economy confront the real world’s established power systems, particularly in the emerging “sharing economy,” where online tools help networks of consumers rent things to each other. And as these young companies try to manage rapid growth and fend off threats to their survival, the decision about whether to fight regulators or accommodate them can become another way to gain a competitive edge.

RelayRides is a perfect example of the boom in sharing economy startups. The company was founded in 2009 in Boston before raising venture capital investment from August Capital and Google Ventures, and moving the company headquarters to San Francisco.

The original idea was to operate as an hourly car-rental service akin to Zipcar, but with a significant twist: instead of owning an inventory of cars, the company would let users rent their unused car hours to other people around town.

RelayRides’ strategy has shifted since then. The company ditched hourly rentals last fall, focusing instead on more lucrative long-term contracts, particularly for people away from home. “Our business is focused, right now, primarily on travelers,” community director Steven Webb says. 

RelayRides has expanded rapidly in the past two years, fueled by $18 million in venture investment. In the spring of 2012, RelayRides was still available in just two markets. Today, the system lists cars for rent in 1,900 cities and 287 airports across the country, Webb says.

Those airports are especially critical if RelayRides is going to continue growing. The company just started offering airport-specific rentals last summer, and “we expect it to be around half of our business within a year,” Webb says.

That tracks with the broader rental car market: airports provide about half of the revenue for the U.S. industry, which generated an estimated $24 billion in 2012.

“The average rental through an airport is a lot higher than the average rental to someone in your neighborhood,” Webb says. “Airports represent a lucrative opportunity for us, and they represent a lucrative opportunity for our members who are renting out their vehicles.”

But, since they’re typically built by public entities, many airports are also heavily regulated. If you want to build a business that taps into the lucrative stream of airport travelers, that often means getting permission from the airport’s bosses and paying significant fees and taxes for the privilege.

Getting more aggressive in the airport market meant another significant change in tactics for RelayRides. In almost all of its locations, including all the other airports it serves, the company works as a relatively passive online network connecting car owners and renters—it puts the two parties together, processes the transactions, provides some insurance, and takes its cut of the bill.

In striking its deal with SFO regulators, RelayRides put employees on the ground for the first time, Webb says. Now, instead of just listing where cars were located and letting the renter and owner meet up, RelayRides keeps the fleet in a central parking lot (provided by another business) and uses an airport shuttle bus, which is operated by a local hotel. To entice more owners to rent their cars, RelayRides also offers free parking at the airport lot, in addition to earning 10 cents a mile from any rentals. 

Essentially, it’s the same model used by FlightCar. And RelayRides plans to expand its footprint at other airports by following the same pattern, which includes playing nice with regulators.

Webb says RelayRides decided to go the regulated route at SFO because it would be easier and more sustainable. The company can still compete with traditional rental car behemoths after paying the fees, he notes, because it has lower costs from not owning and maintaining a large fleet of cars.

“We found when we were discussing with the authorities at SFO, we were able to create a very long-term, mutually beneficial agreement that, for us, represents a really solid way to grow the business elsewhere,” he says.

FlightCar’s approach to local regulations couldn’t be more different. Since getting booted out of the SFO parking lots in February 2013, the company has fought airport officials’ insistence that it is operating illegally.

In fact, co-founder and CEO Rujul Zaparde says, the public dustups with SFO has been good for business. “During that week, when the SFO litigation had come up, we actually had our best numbers up to that point,” he says.

The company’s decision to dig in for a legal battle is remarkable in the face of a growing competition with RelayRides, whose investment haul is about triple the size of FlightCar’s $6 million total venture capital backing.

FlightCar’s fundamental argument is that the old-fashioned regulations put in place for rental-car companies just shouldn’t apply to its business. “We’re not a car rental company. We’re a peer-to-peer car sharing company,” Zaparde says.

It’s also aided by some quirks in the local geography—San Francisco County owns the airport itself, but the land is surrounded by neighboring San Mateo County. That means FlightCar’s Millbrae parking operation isn’t on … Next Page »

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