The writing has been on the wall for some time — new vehicle sales are slowing, and to move the metal, manufacturers have been raising new car incentive levels. Combined with volume growth in the wholesale market, vehicle residual values will soften further in 2017 and depreciation will accelerate.
Both Avis Budget Group and Hertz made this point in their third quarter conference calls.
To better align fleet costs, car rental companies have been using a few tools at their disposal. First, rental companies are following the general consumer trend into growing crossover and SUVs segments with better overall residual values. Crossover and SUV sales will eclipse cars in 2016 for the first time.
Through October, car rental companies fleeted 31.7% more trucks and SUVs (including crossovers) than last year while car sales into rental fleets dropped by 12.3%. Even full-size pickups, today’s value retention heroes, have found their way onto car rental lots — not as heavy payload haulers, but as alternatives to large cars.
At Hertz, fleet mix has not been aligned to depreciation trends, as the company reported in the third quarter. Hertz said it overbought in the compact car category, a segment that, along with midsize cars, suffered higher depreciation than anticipated. As a result, Hertz reported that net depreciation per vehicle/per month increased 14% year-over-year in the quarter, which resulted in a $63 million increase in net vehicle depreciation expense year-over-year.
To rebalance its mix to a more optimal level, Hertz is getting out of those compact and midsized cars quicker, though the shorter cycle has exacerbated holding costs further.
Avis also said residual values came in lower than anticipated at the start of the year, though aggressive fleet management kept any substantial rise in per-unit feet costs at bay.
Avis drove these results in a few ways. The company said it better honed its “ability to choose the right time, mileage, place, and method” by which to dispose of its risk cars, selling 45% in the third quarter through channels other than auction. Avis expanded its direct-to-dealer network and opened its first retail sales location in Vero Beach, Fla. More are planned. The company is also bumping its risk fleet percentage from 67% this year to more than 70% in 2017.
Like Hertz, Avis sold cars earlier in certain cases, but it was done opportunistically to more tightly manage depreciation, the company said.
In general, rental companies have taken a more proactive approach to selling their vehicles into the rental market by de-fleeting the cars earlier in the calendar year to avoid lower prices in the fourth quarter, said Bob McConkey, president of McConkey Auction Group, which oversees independent auctions in Seattle, Spokane, Wash., and Kansas City.
“The rental market has been one of the brighter spots,” said McConley. “Risk cars have held up really well because the rental car companies de-fleeted the majority of their fleets early, so there isn’t a big supply of those vehicles. They're holding up better. They're not competing as hard with the new cars.”
Another silver lining is that car rental rates are good. Hertz saw a positive growth in retail pricing in the quarter. Avis achieved a per-day rate increase of 2%, driven by a 4% increase in leisure pricing in the quarter. This represents “a substantial turnaround in pricing in the Americas,” Avis said.
Both Avis and Hertz see industry fleet levels as “rational” and “reasonably tight relative to demand.” Avis said it ran fleet intentionally tight, which pushed third quarter utilization to its highest quarterly point in at least five years.
This austerity is good for the industry, especially in light of a softening outlook on travel. According to October data from TravelClick, the pace of new hotel bookings is down 2.2% compared to 2015, while group business bookings shrunk 8.5% over the same period. Meanwhile, most airlines are cutting capacity this fall, or at least slowing their capacity increases.
Like car rental, the hotel and airline industries are running tight on capacity. Hotel room rates and revenue per room are up year=over-year and still growing, and airlines have said their capacity cuts are designed to boost unit revenues as opposed to seeing a dire outlook on travel.
This was a difficult quarter for Hertz, though admittedly those issues were self-inflicted, and are within its grasp to remediate through better fleet management. The overall outlook for car rental in 2017 is positive.