The Rental-Focused Operator
The rental-focused operator sets the value of her vehicles and a specific date at which to dispose of them. This operator knows how many miles and in what condition her rental vehicles will be in at the time of disposition.
This operator calculates the actual cost per month based on purchase price minus sale at disposal. This gives the operator a fixed monthly depreciation expense for each vehicle as a starting point and an ending point (or exit strategy) on each car.
Her management team knows the miles on each vehicle against what it should have at any given time. The rental-focused operator looks at her fleet as equipment rather than inventory. Rental vehicles are simply a tool to generate income.
When a rental comes across the counter and is going a long distance in a short period of time, it becomes a management function to rent the vehicle with the lowest miles against the forecasted miles.
This enables the operator to manage her business by looking at revenue objectives. The management of the fleet allows the operator to then make more rentals with unlimited miles knowing how the fleet stacks up against the forecast.
The rental-focused operator who sells cars has her exit strategy planned out. She knows what she must sell the car for and when. This type of operator utilizes buyback programs when she can, because her exit strategy is planned out for her.
Each of these schools of thought has a place in the industry. Now you may be able to see how some operations run unlimited miles and some do not.
Use the Guidebooks
OK, some of you in the back are grumbling:
"There is no way the rental-focused operator can know what her car is worth in 24 months."
You are right, but you can use auto residual guides such as the National Automobile Dealers Association, Kelley Blue Book and Black Book to project value.
Let's say the rental-focused operator buys a 2010 Chevrolet Cobalt LS for $16,000.
The rental-focused operator looks up the wholesale value for the same model, only two years older, in average condition and 60,000 miles. That is 9,000 miles more than the average from the ARN survey.
The current book value of a 60,000-mile 2008 Cobalt in good condition is about $4,900. The Cobalt depreciates about $462 per month. This Cobalt can accumulate 2,500 miles per month, yet not affect the residual value.
An Exit Strategy
OK, so those of you in the back:
You are right; it is only a guess, but it is an educated guess. No matter what sources she uses, they give her an exit strategy for each car, and this method includes miles. She now has a handle on the value of her fleet and how many miles the vehicles must have on them at any given time.
So, which method is better?
The point is not to establish that one method is better than the other. It is about defining which operator you are and how you establish your rates.
Jim Schalberg spent 16 years in the rental industry as an owner/operator. He now serves as the owner of Jim Schalberg Auto Rental Training.