The U.S. car rental industry not only survived, it prevailed in 2022. The industry successfully rode the roller coaster of tight supply, high rates, and unbelievable used vehicle values to drive the highest overall revenue ever.
What will 2023 bring? Many factors point to a welcome return to relative normalcy. No, the used car market may never be that hot again, so those unbelievable gains on sale will decrease. But we knew it was unsustainable anyway. Luckily, the used car market is showing unexpected resiliency to start the year.
Supply is loosening, which will ease fleet and utilization headaches. Car rental rates are buoyant to start the year. This is in light of the fact that lucrative international inbound business is still only about half of what it was before Covid, but is expected to grow.
Corporate business isn’t back to pre-pandemic levels either, but it may never get all the way back in this new age of digital meetings. Nevertheless, car rental has a way of finding new business as needs for vehicles shifts to other forms.
Sure, we can call increasing depreciation a slight headwind, along with rising interest rates. But this has forced a prudent approach to fleeting. In this environment, rental companies will be less inclined to sell vehicles to capture excessive value and can return to seasonal demand as the primary driver of fleet decisions.
So, what could throw a wrench into the works of this well-functioning engine?
Fleet Electrification Question Mark
Let’s talk rental fleet electrification. It’s moving from theory to reality: Hertz will expand its EV fleet from less than 10% in Q4 to 25% by the end of next year. Other large rental companies are electrifying too but at less aggressive rates. Nonetheless, they’re in process, and encountering all the bumps in the road along the way.
Smaller rental companies might be able to leave EV rentals to those motivated to serve that niche. But after a while, that may not be an option to any sized rental company.
Municipal, county, and state governments are starting to dictate emissions standards for their fleets. To no one’s surprise, California is the leader, with requirements to fleet zero emissions vehicles (ZEVs) kicking in next year. That’ll mean those fleets will need to rent from companies that have ZEVs to offer.
Of course, the ban grows beyond governments to all ICE vehicle sales by 2035 in not only California, but states that follow such as Washington, Oregon, Massachusetts, and New Jersey.
The automakers are falling in line as well, with major OEMs such as Mercedes-Benz, Audi, and General Motors phasing out production of ICE vehicles by then, or sooner. Others such as Volkswagen are committing to percentage phaseouts.
Aspirational? Definitely. The timelines very likely will be pushed out. But with the billions automakers have been spending on battery plants, engineering, and factory changeovers, the die has already been cast.
This is all being driven by the idea that EVs are “good.” And I do believe they are good for the planet. For those in disagreement, we can have that argument in another forum. Regardless, there are unknowns in the transition that need to be worked through. Fleet electrification is finally moving from theory to reality. And as reality sets in, we’re finding that it’s more complicated than we thought.
Larger car rental companies have the capital to invest in charging infrastructure and the people power to manage the process. How much of a margin squeeze will this cause? It’s tough to say just yet. Smaller rental companies don’t have that capital.
EVs have substantially higher capitalized costs than ICE vehicles, but their aftermarket values are still unknown. Yes, the Tesla Model 3 is a residual value hero, but the many new and coming EV models are untested in the aftermarket. That puts a question mark on depreciation expense.
With lower maintenance costs, it is expected that EVs can be run longer, which will help lower depreciation over the life of the vehicle in fleet. (I rode in one of Tesloop’s fleet, a Model S nicknamed eHawk, which surpassed 400,000 miles before my ride. The depreciation was taken out of that unit a long, long time ago, and it was still a premium experience.)
At least until now, battery issues seem to have been somewhat overblown. Further, battery warranties on electric passenger cars are generally eight years and 100,000 miles, which still leaves a long useful life in fleets. Nonetheless, batteries are more expensive than any single part of an ICE vehicle, including the motor.
So, with a longer length of keep, EVs could pencil out in rental fleets. It’ll just take some rethinking of when to fleet and de-fleet, which will no longer be based mostly on traditional seasonal demands.
By now you’re well aware of the operational issues — the renter that runs out of juice on the road or brings the car back with 1% battery life. QTA (quick turnaround) might not be so quick at the beginning. But car rental is good at solving operational challenges.
Let’s get into EV charging infrastructure: It’s expensive. There are grants, but it’ll still be expensive even with the grants applied. Charger maintenance will be a new, ongoing cost. You’ll need educated staff that can interface with your EVSE (charging equipment) suppliers and manage the software.
Have you ever seen the thousand-yard-stare of a fleet and facilities manager who is trying to get a charging depot project across the finish line? Sites that require more than a handful of Level 2 chargers need to consider power and transformer upgrades as well as trenching. Any major upgrades could throw your timelines off by a few quarters or even a few years.
Hopefully, your electric rental vehicles won’t show up before then, because if they do, you won’t be able to charge them. Timing both will be a financial balancing act.
The Tipping Point
I think all the above issues are solvable. But there is another growing concern that is less in the car rental industry’s control.
We are likely facing a grid capacity problem. The scope of the problem is obviously based on pace of electrification. But as it stands right now, creation of new energy sources is not keeping pace with energy demand, which is expected to ramp more dramatically in the next few years.
This is only vaguely unsettling, until it’s defined on a local basis. At some point, your utility may run out of electricity allocation in your area. In other words, if you want more power to your depot to charge all those new EV rentals on the way, your utility might not be able to give you the juice. Your neighbors may have already eaten up the capacity.
There are well-funded new companies in the real estate and EV charging infrastructure space that are making sure that they get the allocation now. They’re setting up charging-as-a-service platforms that could be a pretty good deal for fleets. Nonetheless, for some fleets it’ll be out of necessity.
Back to the timeline: The transition to EVs may happen much slower than expected, which gives fleets time to make the switch incrementally and gives the grid time to catch up to demand.
Others see a quicker change. This could produce a tipping point, a fight for electric vehicles and more importantly a fight for grid allocation. If it happens quicker, and you’re just then getting around to this whole EV thing, you could find yourself blank out of luck.
All this doesn’t necessarily mean you need to go out and start buying EVs. Formulate your plan. Work with your utilities and third-party consultancies to find out if you’ll need $10,000 in transformer upgrades or $100,000. There are ways to find out how much capacity your immediate area has now, to help you gauge the scope of the problem later.
When it comes to implementing new technology, there is the perennial conversation of whether to be an early adopter or wait until others get it right for you. The grid capacity issue is one very good reason to start your electrification process right now.
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