The most successful rental car operators know the importance of back-end management, particularly within their fleets. When TSD first began developing products for the car rental industry in 1983, many companies were thrilled simply to automate their counter operations. But from the beginning, TSD built controls that allowed car rental operators to take a more holistic view of their fleet and business through reporting.
As the business of car rental becomes increasingly complicated, TSD has responded by developing new tools to increase business visibility and controls. As the way car rental companies conduct business changes, we are often among the first to hear about it — courtesy of requests for feature updates and changes from our large and varied base of customers.
So when we began to hear that our customers needed more robust reporting on vehicle depreciation, we knew there was a shift happening within the lending industry that required car rental companies to dig deeper and produce more accurate fleet accounting.
New Demands by Lenders
We discovered many of our customers spent large chunks of valuable time in spreadsheets as they met their various lenders’ requirements for depreciation reporting. Their ability to effectively manage the back end became essential to getting financing and weathering a tough economy.
While many car rental companies struggle to get financing, those that are able to manage fleet values properly have a distinct advantage. “Banks are super sensitive about customers being underwater, so they’re taking a look at the strategies companies are using to depreciate their fleet,” says Neil Abrams, head of Abrams Consulting Group.
1st Source Bank Vice President Joe Opferman saw firsthand how important leveraging your fleet is in the current market. “Currently, the rental car organizations with the strongest balance sheets are being actively cultivated by lenders,” he says. “Lenders who had abandoned the market when the economic crisis hit are returning, but are focusing on the most financially strong companies.”
One significant change that many car rental operators face is the demand put on them by finance sources to track depreciation. While for decades car rental companies have calculated their fleet depreciation with a straight-line strategy, as available financing tightens, banks are requiring more detailed depreciation reports and a more accurate account of the fleets. The burden to prove their financial stability falls on the car rental company.
“Banks are requiring that we put 5-10% down on fleets, and they want to make sure there is enough money in collateral among the rest of the fleet,” says Tom Krug of Express Car & Truck Rental, a TSD customer who initially approached us for more robust depreciation reporting.[PAGEBREAK]
Getting a Loan
In today’s climate, having the right information about your fleet at your fingertips is a hugely important aspect of securing fleet financing. According to Opferman, the banks are requiring exceptionally high standards in terms of fleet composition and management.
While a traditional review focusing on cash flow and leverage is still in place, lenders also look for operators who use the favorable post-recession environment to actively build a strong balance sheet, with leverage of less than eight to one. Prior to the economic meltdown, 10 or 11 to one would have been acceptable.
“Aside from the normal list of ratios, my personal favorite factor is simply the answer to the question: ‘What percentage of your fleet could you sell today with a cash gain on sale?’” Opferman says. “The answer to that question tells me how flexible the organization is to changes in demand in the market.”
Because of the banks’ vested interest in the assets of car rental companies, Krug and many other car rental operators began to receive requests to report on the fleet depreciation in ways they never had to before — and in ways they weren’t necessarily equipped to deal with.
“Banks began asking us to generate different types of reports, so now we need to report by finance source, set up tables and export everything from an Excel spreadsheet instead of pulling a single report as we’d done before,” says Krug, who uses TSD to manage his business. “Multiple banks result in multiple ways to calculate depreciation.”
Depreciation reporting had always been available in TSD’s software, but industry standards had only demanded a simple, straight-line depreciation calculation until recently. Straight-line depreciation reporting means a user enters a single percentage for vehicle depreciation, and that number remains static every month. Any change to the percentage later in the life of the car would be retroactive, affecting its historical value as well.
Until recently, this calculation was enough for lenders. Users were accustomed to pulling depreciation reports quickly and easily from their software, but as banks became more demanding in their reporting requirements, it put a heavy burden on the car rental operators.
By Krug’s estimation, the depreciation calculations were taking two workdays a month to complete thanks to a bevy of complicated spreadsheets and complex calculations. So, he turned to TSD for help to see if there was a way to pull these reports within TSDRental.net.[PAGEBREAK]
Three Types of Depreciation
As TSD’s development team began to work with our customers on these features, a new view on depreciation emerged, and we were able to pinpoint the three types of depreciation that banks seek out:
1. Straight-Line Depreciation: Still the most common form, straight-line depreciation requires you to enter a percentage once and that percentage is carried through for the car’s life in the fleet. Any changes to that amount are retroactive and will affect the vehicle’s entire tenure.
2. Declining Balance Depreciation: A declining balance depreciation takes into account the car’s ever-decreasing value by calculating depreciation on the new, lower number each month and giving a more accurate picture of the total depreciation over time.
3. Sum of the Years’ Digits: This type of depreciation assumes that your car depreciates quicker at the beginning of its life and then sees slower depreciation later. This method allows car rental operators to enter one rate of depreciation for, say, the car’s first two months in the fleet, another for the next two months, and so on.
Perhaps the most important piece of having options for fleet depreciation reports is the fact that it can lead you to more effective fleet management and better knowledge about when to turn vehicles over.
Setting Aside ‘Normal’
Having accurate vehicle depreciation values readily available is essential to effective fleet management. “As a general rule in today’s market with primary risk cars being used for the base fleet, my suggestion is to ladder the fleet so cars mature in miles and value exceeding the loan balance, ensuring that you have vehicles to sell at a cash gain,” Opferman says.
He also suggests setting aside what’s “normal” in a fleet cycle and selling cars when the market is good for them. “If you can make an extra thousand dollars a car by selling out of the normal cycle, you should probably do that rather than rent the car and forgo that additional money,” Opferman says.
These types of judgment calls become increasingly important as the used car market heats up, according to Ricky Beggs, managing editor of Black Book.
“I’ve been a proponent for years of the front end of a car rental business working with the back end for vehicle resale,” says Beggs, adding that while lending sources begin to loosen up again, the strong used car market and lack of supply from manufacturers adds a challenge for car rental operators — making it all the more important they have an accurate view of their vehicles’ value.
While car rental companies have to hold onto cars for longer than they’d like due to lack of new car supply — therefore putting older cars with higher mileage back into the used car market — Beggs points out that the sellers still get a great return for vehicles in these conditions.
Opferman agrees, noting that high residual values are a boon for many car rental operators. “It appears that the longer holding terms for risk cars has not been a burden financially since cars in the 40,000 mile category have held up well in terms of auction values,” he says. “That, coupled with the positive position most cars held for more than 16 months or more lowers the principal owed on the vehicle, which reduces its net cost.”
Of course, making decisions about your fleet can be difficult without timely, accurate information. You can make informed decisions by being realistic in calculating depreciation values and utilizing the strategy that will give you the most accurate reading of your assets.
“Buying your fleet correctly is the cornerstone to success in auto rental,” Opferman concludes. “Buying vehicles with the lowest holding cost overall is the answer.”
TSD is a leading provider of software and technology solutions for fleet management, rental operations, counter management, reservation delivery and more. More information about TSD and TSDRental.net is available online at www.tsdweb.com or by emailing [email protected].