Two years ago, Auto Rental News assessed the car rental market in the heart of the recession. We optimistically titled the story "Thriving in the New Economy" (Mar/Apr 2009), because we found green shoots of hope from car rental operators who were successfully adapting to market conditions.

As we slowly make our way through the recovery, we revisit operators and industry stakeholders to compare then and now. Yet the market-from travel demand, manufacturing, financing and used cars-has evolved even further.

Who is rolling with the punches and how?

OEMs Right Size

New vehicle sales into rental fleets grew from 1.1 million units in 2009 to 1.4 million in 2010 as rental fleets replaced long-in-the-tooth units held throughout the recession.

As lenders have loosened access to capital, and manufacturers are producing cars again, "It seems that the mileage uptick has ceased and it's come down a bit," says Tom Kontos, the chief economist for Adesa, the vehicle auction house.

However, with fewer shorter-term repurchase programs available and manufacturers closely managing rental fleet sales, Kontos does not anticipate a return to extremely low-mileage used rental units in auction lanes.

"The OEM manufacturing footprint is right-sized relative to long-term retail demand," says Kontos. "Manufacturers no longer need to crank out as many units and find a home for them in the rental market. And they are recognizing the residual value benefits."

Manufacturers themselves back up Kontos' statement.

"Rental sales will continue to be down year over year on a percentage basis," Brian Small, general manager, General Motors Fleet and Commercial Operations said in a February conference call. "We want to make sure we have the right amount of product going into the rental market. We don't know what the balance will be for 2011, but it will trend down."

"Today we manage our rental business with the goal of maximizing residuals," Small said, stressing that the rental market nonetheless plays an important role in exposing potential customers to GM products. "It's a bit of a balancing act, but in the end it justifies the approach."

Car rental companies have adjusted to the smaller footprint. "We saw a lot of fleet tightening and people saying, 'You know, I can own fewer cars and make more money,'" says Mark Eckhaus of Eckhaus Fleet, an independent provider of fleet to rental companies.

Wholesale Evolution

Two years ago, wholesale pricing was in a trough. "You couldn't get financing to buy new, but you could buy a used car pretty cheap and preserve your working capital," says Kontos.

That changed as the barren manufacturing pipeline dried up the wholesale market. Auction prices swelled as dealers fought over good used rental units, which fed directly to car rental companies' bottom line.

But a wholesale market short on cars-and fewer available new units-is putting some operators in a bind, says Eckhaus. Operators who would de-fleet to take advantage of high prices are forced to hold off, as new vehicle orders to replace those units are regularly backed up by a few months. And, of course, using the auctions to fleet up cheaply and quickly just doesn't work as easily anymore, he says.

Kontos says the used car market will stay tight this year, though looking further out it will begin to assimilate the 300,000-unit growth in new rental fleet sales in 2010. This overhang in supply could put some downward pressure on wholesale prices next year. "With more off-rental supply coming, it will be a little harder for rental companies to unload these cars and make the kind of money they have been," Kontos says.

Financing Eases

"Industry wide, it looks like things are loosening up a bit," says Wayne Yocum of Automotive Finance Corporation (AFC) regarding fleet financing.  "Franchisees and smaller independents seem to be faring well. These companies are cautiously optimistic and are adding fleet. Although demand appears to be on the rebound, many operators are not stocking up and opening new locations; particularly if there is any indication of uncertainty." says Yocum. 

The smaller operators that have survived the credit crisis are typically ones that fill a niche market, few of which are doing just daily rentals. Many are body shops, service garages or car dealerships with synergies for rental customers. "They're doing something a little different than the guy down the street and are able to keep the business in house rather than referring them to an outside rental agency." Yocum says. 

Business Returns

"We're up about 25 to 30 percent from last year, which I think is a reflection of how down it was the year before," says Matt Pendergast, office manager for Coast Truck Rentals in San Francisco, also a Rent A Wreck franchisee.

The company's truck business services the caterers, florists and party planners in the San Francisco event industry. "When the economy tanks, the first thing to go are the corporate parties," says Pendergast, "but it's a lot better this year. People are spending more money again."

Pendergast says rental rates were as high as he's ever seen last summer. High rates all around means "We don't have to offer the best rate in town, and people are still coming through our doors," he says.

Rates have come down, but have been higher than those in winters' past.

The company retails its used vehicles off its lot. Business has been good. "We are able to price them competitively so they'll move but still get a decent return on them," he says. 

The company has two sources of financing. While Pendergast calls the company's lending situation "satisfactory," he says he would love a higher line of credit and a more competitive rate. The company's lenders limit the types of vehicles they can purchase.

Rent A Wreck corporate made a recent push to increase its franchisees' Internet presence and list on online travel portals such as Kayak and Car Rental Express. The move has paid off in new business, says Pendergast, and the company is adding fleet. "Two years ago someone might not have even known about us, and now we show up at the top of those searches, which is generating a fair amount of revenue," he says.[PAGEBREAK]

In 2010, the industry made $20.55 billion on only 1.63 million cars in service. By comparison, the industry made only $16.45 billion on 1.62 million cars in service in 2003. The 2010 numbers translate to an average of $1,051 in RPU (revenue per unit, per month), by far the highest total ever.

In 2010, the industry made $20.55 billion on only 1.63 million cars in service. By comparison, the industry made only $16.45 billion on 1.62 million cars in service in 2003. The 2010 numbers translate to an average of $1,051 in RPU (revenue per unit, per month), by far the highest total ever.

It's Okay to Sell Out

For VERC Rentals, serving southeastern Massachusetts, the biggest boost to business recently has been a string of winter storms, says Jack Vercollone, president. VERC's six locations are regularly sold out serving the replacement market.

Overall, business is great, he says. The company went through its own downturn before the recession, which resulted in the cutting of three of nine locations, yet the downsizing helped the company weather the economic storm. The company's funding source, a local bank, stood by them through it all. As a result, VERC has been doing well for three years in a row, Vercollone says.

Vercollone is seeing the benefit of the OEM's bid to right size sales, especially the domestic manufacturers. "It used to be real difficult for us to buy American cars when the big boys [major RACs] were buying them so much cheaper," he contends. "It hurt resale values. Now that everything is tightening up, [the majors] have to make their money a little more on rental rates, and that helps us."

Dealers are coming to him on the hunt for used cars, but they're all out on rent, says Vercollone. "It's a nice thing to go to the auction and see very little cars and such great demand for our cars," he says. 

Vercollone is comfortable holding cars to just under 36,000 miles. "We like to sell them when they're still under warranty, while they have some value to the dealers and before they start costing us a lot of money on maintenance," he says.

A new directive is to keep utilization high. While this has been a logistical challenge, especially with the weather and replacement rentals, the company is not losing money by letting fleet sit. "If you have a car waiting for every customer every day, you are over-fleeted," says Vercollone.

"You're going to have your peaks and your valleys," he says. "Cut off your peaks. You want to be out of cars a couple of days of the week. And when you have your valleys, they're not as deep."

No Credit, No Problem

Joe Zawatski, a used-car dealer and U-Save franchisee in Cleveland, started a rent-to-own program during the worst part of the recession. The business took off immediately, and today, while leisure rentals in the area are still "down to the ground," says Zawatski, his rent-to-own business is up 30 percent compared with two years ago, as credit-challenged customers look for reliable transportation.

The quality of customer has improved-delinquencies are down to 6 percent from 21 percent a year ago. "Good people lost their jobs and their cars, but they still need a way to get back and forth," he says. 

Similarly, the quality of candidates for open positions at his company is much higher too. "I interviewed [an applicant] for a position recently, and the first four out of five candidates who walked in the door had college degrees and were extremely well-qualified but had lost their jobs and couldn't find a new one."

Zawatski now offers maintenance services to his rent-to-own customer and has hired on three technicians and a service writer. "We charge about 40 percent less [than dealer servicing]," he says. "I make some money and I keep my cars in better condition."

Overall, the company has grown from eight employees two years ago to 12 full-time and two or three part-time.

Fine-tuning High Mileage

Monty Merrill, a Dollar and Thrifty licensee in Texas, is relieved to be looking at the recession from the rear-view mirror. "We're not as afraid as we were then [in early 2009]," says Merrill. "Our blood pressure went down a bit."

Merrill says the company lost some dollar average between 2009 and 2010 but did much better transactionally. In fact the company ended 2010 with record profits, with much of that attributable to the high residual values of his fleet. The company added 10 percent to its fleet last year and will add another 10 percent this year.

Locally, Merrill says the subtraction of a rate bottom feeder-and its subsequent return-had a big impact on rates in his market. "You just scratch your head and say 'What in the world are you doing?' It can't be good for you, and it's certainly not good for us. It's not good for anybody," he says.

While Merrill's company didn't lose any financing during the recession, it experienced a peculiar situation with its funding source: Merrill had cars to buy that were approved on his line of credit but the banks told him they had no money for the deal.

That situation got worse when manufacturers turned off the production pipeline. Healthy $6,000 spiffs dwindled to $1,500 or less. "We decided to wait it out and just sit on the cars and I'm glad we did," said Merrill.

"In the past, if you let a car hit 30,000 miles, you would take a huge hit on the residual," he says. "Today, that's just not the case. We have more flexibility in that regard than we've ever had. The higher mileage and longer hold times did nothing but help the car."

With higher mileage cars, Merrill had to adjust his maintenance schedule to include brakes and tires, and he even overhauled his cleaning procedures. He bought a steam cleaner and "used the heck out of it."

Today, the banking is easier and there is supply in the pipeline. But while he's pulled back on hold times to some degree, Merrill says his customers have accepted the higher odometer-especially as a value brand-as long as the cars are clean and well maintained. And the more stringent procedures are working. "It's funny; I think the cars are actually cleaner now because we focus on it," he says.

Now, instead of offering a car with mileage in the teens, Merrill is selling some two-year-old units with 50,000 miles. This hasn't slowed sales: With teen-mile cars virtually nonexistent these days, dealers are forced to grin and bear it.

Merrill believes residual values and rental traffic should stay solid through 2012. After that, he says, "It's harder to say anything about the long-term anymore."