It is time to accept the rental car with 60,000 miles on it. Wow, that felt liberating.
If a rental car is late model, clean and mechanically sound, why not? Vehicle reliability has improved dramatically in 15 years. Shouldn’t the car rental industry take advantage of this?
Of course this has all been precipitated by unprecedented changes in the automotive market, namely the higher cost of capital and a lack of new car supply. This has forced a new discipline on the car rental industry of tighter fleets and longer hold times. And a business model might be changing along with it.
There are signs of a philosophy shift in the market:
- Consumer’s perception of the high-mileage unit is slowly changing, perhaps begrudgingly.
- Some operators report that they are not getting financing for new cars, but are for used cars.
- Majors are buying used units at auction in increasing numbers.
- Ricky Beggs of Black Book noted in a recent video blog that the mileage of rental units at auction has climbed significantly. This type of vehicle and mileage level, Beggs added, is becoming a little more acceptable. “There is a market, at the right price, for 2008 models with 46,000 to 53,000 miles,” Beggs stated.
- On the retail side, a national used car dealer chain is increasing the mileage expectations of the cars on its lots.
- One independent brand is even building infrastructure (a dedicated mechanic and detailer at each branch) to manage older fleets that could run into the 70,000-mile range if needed.
But what happens when the economy gets better, when pent up demand is released? Will the industry go back to the old lure of hefty spiffs, resulting in overstocked fleets?
I don’t think so, at least not to the levels of a few years ago. Most of that demand will be satisfied not by rental fleet purchases but consumers finally getting back into new cars.
For the major car rental companies, credit won’t be as cheap as in the days of investor-driven securitization deals. And the right-size initiatives of the manufacturers are bringing different cost structures—there is no longer the need to sell cars to rental fleets for a loss.
The guiding principle seems to be matching supply with demand, both on the manufacturer side and the auto rental side.
So, why stop just short of 60,000 miles? Why not run them past 70,000? First, auction guys talk about a psychological sales wall at 60,000 miles. And the cars in that mileage band are typically coming off commercial and consumer leases. Off-lease cars will be older than rental units, but it seems logical not to muddy those waters. In addition, cars in that mileage band incur a sizable hike in preventive maintenance expense.
There are compelling economics to running higher- mileage cars. It brings up a few questions as to how the market will react.
Will traditional large brands run the new vehicles while other smaller brands run the high-mileage units?
And does this lead to a new caveat emptor climate where there are “well-maintained 60,000-mile vehicles,” and other companies that run poorly maintained high-mileage units?
If the market does split in this fashion, how will this be marketed to consumers? Will the Internet portals try to make that differentiation clear? For example, will Expedia boot any high-mileage chains off its preferred suppliers list?
If a company positions itself as a high-mileage provider, will it ever be able to get back to a new fleet, both from a finance angle and from a market image angle?
And how will the auctions react? No one yet knows, because that volume of cars has yet to impact the market. The summer sell off will be interesting.
In the meantime, the industry is enjoying phenomenal rates. As of this writing (June 25), rates for July 7 at Seattle/Tacoma airport started at $96.81 for an economy car.
So the industry is making money renting cars. Imagine that.