These are risky days for car rental fleet planners. It’s especially intimidating when you consider that it’s critical to have a disposal plan when you purchase the vehicle, yet the used car market is saturated. So, how do you refresh your fleet without losing money on the back end?
In an effort to help answer this question, Bill Lanier, managing partner, and Jerry Marifke, partner, of Automotive Fleet Resources of Memphis, Tenn., discussed the advantages and disadvantages of the many purchasing options available to operators at the Car Rental Show in Las Vegas. During their seminar, “Buying and Financing Vehicles,” Lanier and Marifke highlighted several aspects to consider, such as whether to purchase new or pre-owned vehicles, how to finance those vehicles and what’s the most profitable method of disposal. Following are nine keys to determining the least risky, most cost-effective ways to refresh your fleet.
1. Have a Fleet Plan
Because of today’s economy, operators are being forced to become more and more creative with purchasing decisions. However, it’s imperative to have a foundation from which to work. That foundation is your fleet plan.
The fleet plan takes into account your market history and helps you make educated guesses about where your fleet should be every month of the year. Industry experts recommend that you develop a 12-month fleet plan, which changes constantly due to market demands.
“Fleet is the backbone of the car rental operation. It will make or break you,” says Flavio Ruiz, director of fleet services for U-Save Auto Rental of America Inc. in Jackson, Miss. “I always tell our franchisees, ‘If you don’t have a fleet plan, you’re planning to fail.’”
U-Save’s fleet size peaks at about 15,000. Each franchise runs about 40 vehicles. If the fleet isn’t managed properly, a lot of money can get lost in the shuffle.
Frank Colonna, president of Triangle Rent-A-Car in Raleigh, N.C., also has a 12-month fleet plan, which changes throughout the year as needed. “We have an error factor of about 15% to 20%, so we underfleet by that amount,” says Colonna. “In this economy especially, it’s better to underfleet and add cars when business is going well, as opposed to having too many cars.”
Colonna also believes that creating a fleet plan is not a one-man job. “There are several people involved in creating our fleet plan,” he says. “The managers at each branch get involved as well as our regional managers, vice president and chief operating officer. This decreases our error factor considerably.” [PAGEBREAK]
2. Weigh New Versus Pre-Owned Vehicles
According to Marifke and Lanier, one of your first fleet decisions should be whether to operate new or pre-owned vehicles. One of the most important aspects of determining this is knowing your market. Do you cater to corporations? Do you focus on insurance replacement? Are you mainly renting to vacationers?
“Knowing your marketplace allows you to make the determination of utilizing new or pre-owned vehicles,” says Lanier. “Local market retail customers don’t necessarily want new cars. Corporations, on the other hand, may not want to use pre-owned vehicles.”
Merchants Automotive Group in Hooksett, N.H., deals with large corporations as well as retail customers. “Corporations want only new cars. They want to pick the colors, the equipment and all the extras,” says Alan Singer, co-owner/vice president of sales. “For the retail market, we buy pre-owned, but we never buy vehicles with more than 15,000 miles on them, so they still have time on the warranty.”
In some markets, it doesn’t matter whether you have more retail customers or corporate accounts — customers prefer new cars. Triangle Rent-A-Car mainly purchases new vehicles. “Our customers are happier with new vehicles,” says Colonna. “So, we mainly purchase new vehicles, and we only run them for 20,000 to 30,000 miles. It’s better for us too, because it keeps our maintenance costs down.”
If you buy new risk vehicles, you need to be aware of each model’s track record in the used car market.
If you’re buying new, it’s also imperative to shop for the best incentives. Colonna starts by letting the manufacturer know what he intends to purchase and getting set up with a fleet account representative, who offers a program and incentives on the cars. Then, he places an order with a fleet-minded dealer. “For example, I would order 500 cars, and they’ll sell them to me at cost plus $500 per car. I would go to another dealer, and they may give them to me at cost plus $300 per car,” says Colonna.
If you’re buying new vehicles, Lanier says, look for attractive incentives and rebates. If you’re opting for pre-owned, look for one-year-old vehicles with 10,000 to 15,000 miles. “While this is ideal,” says Lanier, “it will only work for you if your market allows it.” [PAGEBREAK]
3. Manage the Depreciation Rate
New vehicles depreciate as much as 35% in their first year. When you buy new vehicles, you take that hit. When you buy pre-owned, you can avoid that initial depreciation hit.
“The difference in cap cost between a new and a one-year-old, pre-owned vehicle could be as much as 30% to 35%,” says Marifke. “For smaller operators, this makes buying new vehicles cost-prohibitive.”
Joe Coelho, president of Sensible Car Rental of Bristol in Rhode Island, finds new cars cost-prohibitive for his operation. “The best deals right now are pre-owned program cars and lease turn-ins,” he says. “With a new car, I lose about $1,000 just driving it off the lot. Actually, it can be as much as a 15% to 20% hit, depending on the value of the car. I’m better off with a vehicle with under 7,000 miles on it for $13,000 or $14,000 than buying it new for $16,000.”
Once you look at the initial depreciation hit, you have to decide how you’re going to depreciate the vehicle after it’s in your fleet. Are you going to depreciate it at a high rate every month, so you get more on the back end, or will you depreciate it low throughout its life in your fleet and not expect as much on the back end? In a weak used car market, this decision is critical and can cost an operator a lot of money.
“During the past year, many operators under-depreciated their vehicles,” says Marifke. “When trying to sell the vehicles, they were upside-down anywhere from $700 to $1,500, depending on the market. I don’t think they expected that big of a hit.”
Lanier and Marifke advise operators to depreciate at 2.5% to 2.75% in this sluggish economy. “It’s much better to spread out the depreciation cost while you run the vehicle in your fleet than to have a big surprise at the end,” says Lanier. “We think we should be depreciating cars higher today. We depreciate some imports as high as 4%.”
Ruiz has followed this advice — and raised the rate in some instances. “We depreciate our vehicles at a minimum of 2.5%,” says Ruiz. “Some models are depreciated up to 5%.”
Some operators can do well with negotiated programs through manufacturers. When purchasing program cars, ask for what you want. It’s a buyer’s market. You don’t know what the manufacturer will be willing to do for you until you ask. Colonna says such negotiated programs are the best way to keep depreciation costs under control. [PAGEBREAK]
4. Manage the Mileage
In this market, operators are stretching the miles beyond the warranties. In some cases, miles on resale vehicles are getting as high as 50,000. That’s not necessarily a bad thing. Once again, this depends on your market.
“I generally like to pull cars before 36,000 miles,” says Ron Jawidzik, fleet manager, rental division, for Merchants Automotive Group. “Because the used car market is so soft, I’m running vehicles up to 40,000 miles to avoid taking the wholesale loss.”
Merchants Automotive Group disposes of most of its risk vehicles at its retail lot, Merchants Auto Sales, so having a few more miles on a car isn’t going to kill the resale value.
In an ideal market, you might buy a pre-owned vehicle with under 10,000 miles on it and run it in your fleet for about 10 months, then sell it with 30,000 miles on it. This is not an ideal seller’s market. However, keeping the miles as low as possible can help differentiate your vehicles from your competitors’ and make selling the vehicle a little easier. It’s important to weigh these options carefully when deciding how long to run a vehicle in your fleet.
“We’ve found that the value of the vehicle is a lot more if you keep it below 40,000 miles,” says Lanier. “If you put a vehicle in your fleet that has 12,000 to 15,000 miles on it, and it’s doing about 2,000 miles a month, you want to run it about 12 months, so it comes out at about 36,000 miles.”
Lanier and Marifke agree that the optimum time a pre-owned vehicle should be in your fleet is about 12 to 14 months. “One good thing about new vehicles is you can probably run them for about 18 to 20 months. You can’t do that with a pre-owned vehicle and keep it within the mileage range we think it needs to be,” says Lanier.
Also critical for maintaining mileage is calculating your true fleet holding cost, especially if all or most of your fleet is made up of pre-owned vehicles, says Marifke. “If an operator purchases pre-owned vehicles with 12,000 to 18,000 miles and monitors the monthly mileage usage, it can have a significant impact on the maintenance cost and residual value at time of disposal,” says Marifke.
One way to keep the miles down is simply to pay attention. Designate in your fleet plan the range of miles you’re willing to rack up on a vehicle, and keep track of how many miles each vehicle is being driven. If you have more than one lot, shuffle cars based on usage. For example, if one lot is busier than the other, you may be able to shift a car that’s racking up a lot of miles to the less busy lot and slow its usage. [PAGEBREAK]
5. Shop Around
Most consumers shop around when they’re looking to purchase a vehicle, and operators should be no different. Take the time to browse the auctions online. Call all of your sources to find out what’s available. Keep in touch with noncompetitive operators. The more you know, the better deals you’ll find.
“The Manheim Market Report (MMR) is one of the best tools I’ve ever used in the industry,” says Ruiz. “If I want to buy a Taurus, I can use the MMR to evaluate the markets they’re selling in and purchase it in a market that gives me the best price.”
Coelho agrees that it’s important to do some research and shop around. “I’m not looking as often to replace vehicles in my fleet, but I am always looking for deals. I just bought a 2002 Ford Escort with 6,500 miles on it for $6,950. If you shop around, you can find the deals,” he says.
In addition to shopping around for the best deals on vehicles, it’s critical to shop around for the best financing sources.
“When you have something in hand, it’s easy to get comfortable and stop looking for anything else,” says Coelho. “A few months ago, local banks and certain manufacturers started pulling back on our credit. It forced me to look elsewhere. I went to Manheim and pulled a rental line of credit. It’s been a blessing. I would suggest operators shop around for what’s available.”
6. Weigh Repurchase Versus Risk Vehicles
Weigh the benefits of repurchase programs versus the benefits of having a risk fleet. If you looked at this one year ago, it’s time to look at it again. In this buyer’s market, you might be surprised at some of the risk incentives being offered.
If you can meet the terms and conditions of a repurchase program, it’s easier to get financing. “Banks like repurchase programs because there’s a guaranteed buyer at the end,” says Lanier. “However, if you have retail disposability, you can buy the vehicles a lot cheaper with risk incentives than you can in repurchase programs.”
Ruiz uses repurchase programs to get into specialty vehicles. “Anything bigger than a full-sized car, we consider a specialty vehicle,” says Ruiz. “They’re substantially more expensive and the demand is not great. They’re also more difficult to sell, and the values drop more quickly. With a repurchase program, we can keep these vehicles as little as six months, then give them back to the manufacturer.”
“Right now, the used car market is so soft, repurchase vehicles are working out well for us,” says Jawidzik. “I buy a lot of passenger vans, which get used heavily in the summertime. At the end of the summer, my vehicle count can drop quickly. Plus, I have a guaranteed depreciation amount, so I don’t take a big financial hit.”
Of course, larger operators dominate most repurchase programs. It can be difficult for smaller rental companies to qualify for a repurchase program because of minimum order requirements. “In some cases, there are franchise programs that allow you to piggyback with a number of other franchisees to pool enough buying power to get into the guaranteed repurchase programs,” says Marifke. “Also, businesses like ours, where a number of companies lease vehicles from us, have enough pooled resources to help you get into these programs.”
The other risks involved with repurchase programs are turnback charges. There are penalties for going over the mileage terms as well as any damages incurred. “When you get into a repurchase program, be sure you know all of the terms and conditions, so you can manage the risks,” says Marifke. “If you don’t, you could lose a lot of money on the back end.” [PAGEBREAK]
7. Weigh Leasing Versus Financing
In most cases, for small operators, leasing is an attractive option. One advantage with leasing is that the cap cost will not appear on the balance sheet, freeing up capital for other expenses. The balance sheet only carries the monthly payment for the vehicle, not the total cost.
“If you purchase a vehicle, for example, the balance sheet shows $12,000 versus a monthly payment for the leased vehicle,” says Marifke. “When you want to borrow money, the bank looks at your balance sheet. The more money on the balance sheet, the greater the risk and vice versa.”
If you were looking to lease a two- or three-year-old vehicle with 25,000 to 40,000 miles on it, that would carry a very low payment. If you’re going to do this, you need to account for the true holding costs, which include the monthly payment and the maintenance costs. “Let’s say you have a Taurus with 40,000 miles on it that goes in for repairs,” says Marifke. “Because it’s past its warranty, you’re looking at $600 in repairs. Over a 12-month lease, that’s $50 a month. That added to your monthly payment is the true holding cost for that vehicle.”
Another key to leasing is to establish an adequate residual, so there are no big surprises at time of disposal. Make sure to depreciate the vehicle adequately throughout the time of the lease. “Operators should be depreciating a $10,000 domestic vehicle at 2.5% to 2.75% a month,” says Marifke.
Marifke recommends leasing as an option for small operators, especially with the pre-owned car market being saturated. “We recommend current-year used vehicles, because over a 12-month to 14-month lease, the manufacturers’ warranty remains in place, which reduces the maintenance cost for that vehicle.”
8. Maintain Disposal Flexibility
Disposal flexibility is also critical in today’s market. If a customer wants to purchase one of your vehicles, and you can make a profit, sell it. You can always acquire another car for your fleet, but you can’t always make a profit disposing of one. With guaranteed repurchase, you have the flexibility to do that, but depreciation rates are so much different, you can be upside-down on that vehicle and not make the money you want to. However, if you’re depreciating your risk fleet correctly, you can usually make good money on the sell.
Establish other avenues to dispose of vehicles. Retail or lot consignment are usually the best options. You can make more money on the vehicle. You have no fees to pay. The only cost is that of having it sit on your lot versus generating revenue in your rental fleet. And selling in your local market allows you to use your good reputation as a marketing tool.
Establishing relationships with local dealers can also be a great way to dispose of vehicles. “Local dealers often like rental operators,” says Marifke. “Establishing a relationship with a local dealer may get you priority service.”
9. Look for Damage
“If you’re buying pre-owned, have someone out there who knows how to spot prior damages and repairs,” says Lanier. “If you have vehicles with more than $3,000 or $4,000 worth of repairs, it certainly hurts the value when you go to dispose of it.”
For many operators, playing the purchasing game is one of the most fulfilling challenges in the business. In today’s economy, it’s especially challenging. However, many operators are finding it’s not impossible to minimize risks and maintain a cost-effective fleet.