Lower Fleet Costs Ahead?

Favorable deals with OEMs and stronger used-car prices in October will help continue the trend of lower fleet cost, according to Christopher Agnew, an industry analyst of equity research firm MKM Partners.

Agnew released this report Nov. 5, regarding recent trends in the car rental industry.

Manheim Index Solid in October

Wholesale used vehicle prices (on a mix-, mileage- and seasonally-adjusted basis) increased to 122.9 in October, up 3 percent from 118.9 in September and up 4.7 percent from 117.4 in the year-ago period.

Fleet costs represent approximately 30 percent of total costs for the rental companies. Wholesale prices remain strong in an environment where supply remains limited and used-vehicle sales year to date have increased double digit over the prior year.

Off-Rental Risk Units Exhibit Normal Seasonality

Manheim Consulting noted that the average price of risk units sold at auction showed a decline in October, from September. However, this is in line with the normal seasonal pattern. Year-over-year, risk unit wholesale prices are "well above the year-ago level." Average mileage at time of sale (36,740) was above September's level, but below the year-ago average of 40,280.

Wholesale Residual Values Are Important But Only One Part of the Equation

Fleet costs overall are a function of the purchase price, mix (some makes hold residual values better), sale price (which is increasingly influenced by remarketing distribution channel) and the time the vehicle is off-rent prior to sale.

MKM Partners believes wholesale residual values are important, but they are only one part of the equation and other factors will help drive fleet costs lower.

1. Better Deals with the OEMs. The auto rental companies have been negotiating favorable deals with the OEMs, which we believe to be a function of low SAAR and more OEM's participating in selling into the auto rental fleets.

2. Vehicle Mix, by Make and Model. The auto rental companies have increasingly diversified their fleet mix by make as well as model. This helps manage residual value risk and many of the new OEM suppliers' vehicles hold their residual values better.

3. Higher Return Remarketing Channels. Increased use of higher-return remarketing channels should help drive lower per-unit fleet costs over time as well as reduce the dependence on wholesale auction prices.

Hertz reduced its U.S. auction sales to 54 percent of total sales in the third quarter 2010 from 87 percent in 2007. The company now sells 23 percent of its vehicles direct to dealers (2 percent in 2007). Retail and HertzRent2Buy.com represent 11 percent of sales in the third quarter 2010 and online auctions represent 12 percent.

Avis Budget has also expanded its use of alternative wholesale channels. Year to date over 30 percent of its cars were sold through online channels. Avis Budget is partnering with a number of large multi-site dealer groups enabling them to source cars directly and the company is looking for new opportunities to reduce the number of days it takes to sell cars (i.e., off-rent), as well as lower the expenses associated with the traditional sales channel.

Used Vehicle Comparables Get More Difficult in 2011

MKM Partners said it expects the year over year momentum for the Manheim Used Vehicle Index to start to taper. The research firm also expects the index to stabilize, rather than decline. Used-vehicle prices are close to reaching the historical limit in relation to new-car prices.

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