The summer season is in full swing and you're ready to rent cars - but have you seen that used car market? Auction prices are higher than ever and dealers are scrambling for low-mileage used units - the cars you're renting right now.
It's the perfect car rental Catch-22: You're sitting on gold, yet you can't cash in because replacing your current fleet with new inventory is a questionable proposition at best. So what are car rental companies doing? And how long will this last?
"We have some [rental operators] that were selling their cars for $500 to $1,000 more than the price they bought from us a year ago," says Mark Eckhaus of Eckhaus Fleet, a supplier to auto rental companies. "We have guys that have gone to the auction and from week to week the car is $800 more."
Matt Rawlings of City Auto Rental in Cleveland, Ohio, reports similar pricing. Rawlings bought a 2009 Kia Rio at auction in December for $7,400 that was fetching $10,000 in May. Similarly, a 2010 Chevy Aveo bought for $9,200 was going for $11,000 five months later. That's right, a used Chevy Aveo.
The numbers are not anecdotal. In May, a straight average of auction prices for rental risk units remained above $14,500 for the third consecutive month, according to Manheim auction data. The Manheim Used Vehicle Value Index stood at 127.8 - the highest it's ever been.
But if you sell, you have to replace those cars. And there isn't much out there. After bankruptcy, the auto manufacturers had found religion with their new business model of building to demand and regulating sales to the rental market. Then the Japan crisis forced both Japanese and domestic manufacturers to cancel orders to rental and commercial fleets.
"We've been advising people that if you have cars on order, and you think you're going to get them, don't sell what you're renting yet," Eckhaus says.
David Wilson, a Thrifty licensee in Nashville, Tenn., says that while he would like to sell into this market, he is staying put for now. "We decided because of the uncertainty about orders, we'll turn off our sales and hold our fleet through the summer, hoping that the market will hold and we'll sell for a profit later this year," he says, adding, "Though it's tempting to keep selling right now, we're in the business of renting cars."
Jack Vercollone of VERC Rentals in Massachusetts was able to replace canceled orders through purchases from other manufacturers and fleet dealers. "We're paying more money for them," Vercollone says. "But there's an opportunity on the flip side to sell some of our small stuff. We're willing to go with tighter utilization now if we can sell those cars at a good profit."
"We had a bunch of orders canceled but I think we'll be all right, and yes, we're going to have to run some cars longer because of that," says Charlie Mullen of ACE Rent A Car, regarding the company's 12 non-affiliate locations. Mullen - and other operators - report that early summer demand has been soft, mitigating some of the supply issues. "All things in balance, we're going forward with a smaller summer rental fleet and we'll have higher rates," Mullen says.
Tough on the Little Guy
While holding inventory is viable for some, the depleted used car market is not helping the independent RACs, such as Rawlings, who rely on the auctions to stock their fleet. "It's costing me $2,300 more just to buy the exact same car I bought five months ago," he laments.
This hurts his floor plan as well as the business model. "I've got to go out and borrow more money just to maintain the same fleet size, or come up with more capital somewhere," Rawlings says. "I have inexpensive cars and an inexpensive rate. It's hard to maintain that rate when your costs go up by $2,000."
Moreover, the cars Rawlings traditionally bought with 15,000-20,000 miles now have 30,000-40,000 miles and require more recon, including tires. "It's costing me more to put those cars on the road," he says.
On the back end, Rawlings has adjusted his remarketing strategy. He moves most of his metal from his own lot. He has a website to advertise his inventory and has arranged for flexible financing for buyers with less-than-stellar credit.
"I've picked up my retail selling efforts instead of taking them to the auction," he says. "I'm doing a better job of letting my renters know I have cars for sale."