Two years ago, Auto Rental News assessed the car rental market in the heart of the recession. We optimistically titled the story "Thriving in the New Economy" (Mar/Apr 2009), because we found green shoots of hope from car rental operators who were successfully adapting to market conditions.
As we slowly make our way through the recovery, we revisit operators and industry stakeholders to compare then and now. Yet the market-from travel demand, manufacturing, financing and used cars-has evolved even further.
Who is rolling with the punches and how?
OEMs Right Size
New vehicle sales into rental fleets grew from 1.1 million units in 2009 to 1.4 million in 2010 as rental fleets replaced long-in-the-tooth units held throughout the recession.
As lenders have loosened access to capital, and manufacturers are producing cars again, "It seems that the mileage uptick has ceased and it's come down a bit," says Tom Kontos, the chief economist for Adesa, the vehicle auction house.
However, with fewer shorter-term repurchase programs available and manufacturers closely managing rental fleet sales, Kontos does not anticipate a return to extremely low-mileage used rental units in auction lanes.
"The OEM manufacturing footprint is right-sized relative to long-term retail demand," says Kontos. "Manufacturers no longer need to crank out as many units and find a home for them in the rental market. And they are recognizing the residual value benefits."
Manufacturers themselves back up Kontos' statement.
"Rental sales will continue to be down year over year on a percentage basis," Brian Small, general manager, General Motors Fleet and Commercial Operations said in a February conference call. "We want to make sure we have the right amount of product going into the rental market. We don't know what the balance will be for 2011, but it will trend down."
"Today we manage our rental business with the goal of maximizing residuals," Small said, stressing that the rental market nonetheless plays an important role in exposing potential customers to GM products. "It's a bit of a balancing act, but in the end it justifies the approach."
Car rental companies have adjusted to the smaller footprint. "We saw a lot of fleet tightening and people saying, 'You know, I can own fewer cars and make more money,'" says Mark Eckhaus of Eckhaus Fleet, an independent provider of fleet to rental companies.
Two years ago, wholesale pricing was in a trough. "You couldn't get financing to buy new, but you could buy a used car pretty cheap and preserve your working capital," says Kontos.
That changed as the barren manufacturing pipeline dried up the wholesale market. Auction prices swelled as dealers fought over good used rental units, which fed directly to car rental companies' bottom line.
But a wholesale market short on cars-and fewer available new units-is putting some operators in a bind, says Eckhaus. Operators who would de-fleet to take advantage of high prices are forced to hold off, as new vehicle orders to replace those units are regularly backed up by a few months. And, of course, using the auctions to fleet up cheaply and quickly just doesn't work as easily anymore, he says.
Kontos says the used car market will stay tight this year, though looking further out it will begin to assimilate the 300,000-unit growth in new rental fleet sales in 2010. This overhang in supply could put some downward pressure on wholesale prices next year. "With more off-rental supply coming, it will be a little harder for rental companies to unload these cars and make the kind of money they have been," Kontos says.
"Industry wide, it looks like things are loosening up a bit," says Wayne Yocum of Automotive Finance Corporation (AFC) regarding fleet financing. "Franchisees and smaller independents seem to be faring well. These companies are cautiously optimistic and are adding fleet. Although demand appears to be on the rebound, many operators are not stocking up and opening new locations; particularly if there is any indication of uncertainty." says Yocum.
The smaller operators that have survived the credit crisis are typically ones that fill a niche market, few of which are doing just daily rentals. Many are body shops, service garages or car dealerships with synergies for rental customers. "They're doing something a little different than the guy down the street and are able to keep the business in house rather than referring them to an outside rental agency." Yocum says.
"We're up about 25 to 30 percent from last year, which I think is a reflection of how down it was the year before," says Matt Pendergast, office manager for Coast Truck Rentals in San Francisco, also a Rent A Wreck franchisee.
The company's truck business services the caterers, florists and party planners in the San Francisco event industry. "When the economy tanks, the first thing to go are the corporate parties," says Pendergast, "but it's a lot better this year. People are spending more money again."
Pendergast says rental rates were as high as he's ever seen last summer. High rates all around means "We don't have to offer the best rate in town, and people are still coming through our doors," he says.
Rates have come down, but have been higher than those in winters' past.
The company retails its used vehicles off its lot. Business has been good. "We are able to price them competitively so they'll move but still get a decent return on them," he says.
The company has two sources of financing. While Pendergast calls the company's lending situation "satisfactory," he says he would love a higher line of credit and a more competitive rate. The company's lenders limit the types of vehicles they can purchase.
Rent A Wreck corporate made a recent push to increase its franchisees' Internet presence and list on online travel portals such as Kayak and Car Rental Express. The move has paid off in new business, says Pendergast, and the company is adding fleet. "Two years ago someone might not have even known about us, and now we show up at the top of those searches, which is generating a fair amount of revenue," he says.