How Car Rental Operators Can Prevail in 2024

This column appears in newly released the 2024 Auto Rental News Fact Book.

It’s becoming clear that 2021 and 2022 were anomalies of historic proportions.

Sure, fleet was hard to come by, but everyone enjoyed insanely high rental rates and was able to exit fleet with minimal net holding costs. Profit margins were historically high for everyone, from the majors on down to the guy with 20 crossovers.

Those days are over. Here’s a snapshot into 2024:

• As inventory grows, obtaining fleet is less of an issue.
• Pricing has retreated from over MSRP to around invoice. Incentives are picking back up, but not at pre-pandemic levels.
• But fleet mix is more expensive: Automakers are no longer building inexpensive cars and they’re pushing higher trim levels and content.
• The wholesale market is deflating, but still strong compared to pre-pandemic levels.
• Revenues are up slightly, but costs are up even more.
• Demand is stronger than ever.

This portends a good market, even better than in 2019. We’ll take that any day. Right?

However, the biggest issue for car rental in 2024 isn’t fleet, it’s the cost of money. Financing at 8% compared to 2% adds hundreds to a car, and that money doesn’t come back at resale. The Fed indicated rate cuts for 2024, but nowhere near 2022 percentages.

This is compounded by the fact that those expensive vehicles that operators were forced to buy will come back to the market in greater numbers in 2024. Under-depreciated units combined with high interest rates will be the biggest heartburn to profits this coming year.

The consequence of this dynamic is a thinning of competition, as the new entrants into car rental who were looking to take advantage of those post-pandemic Gold Rush years are now exiting the market.

From a Turo host friend: “This past year has been pretty rough for us. We made a strong push to obtain multiple vehicles at decent rates through different financing options but the cost of doing business was to the point where it became unfeasible to secure a sustainable profit margin. We're pivoting from the business going forward.”

The key takeaway: There’s room for the smart operators in this challenging market.

Guidance for 2024

Based on this market up ahead, here’s some advice for the coming year:

• As a hedge against high finance rates, be better friends with your bank and form a relationship with a new bank.
• If you don’t see Teslas driving around your neighborhood now, don’t worry about renting them to your customers (yet).
• Look for new customers and customer segments and align your ever-changing fleet mix with those new segments.
• For smaller independents, car rental is still a relationship business. Invest in outside sales — a dozen donuts on a receptionist’s desk still goes a long way.
• Embrace technology: Telematics makes the rental process more efficient, but to really maximize telematics’ value, understand how you can use it to expand your customer base.

Black Swans Are Normal

I was at a fleet event in October, and walking to the conference area I noticed that the pond was full of black swans. I had to chuckle. Were they a harbinger of some new, yet-unknown disruption that would hamper our return to “normal?”

My conclusion is no, simply because there will never be a return to normal. The business environment we knew, the society we knew, isn’t returning to normal. The black swan events — geopolitical shocks, union strikes, recessions, microchip shortages, extreme weather events, supply chain disruptions, and (oh my) the potential for a new global pandemic — are the norm.

While 2021 and 2022 were aberrations, expect new epic anomalies of a different kind ahead. No business can count on the same customer base forever. But those customers are still out there, and they need personal mobility to get around.