While car rental companies are enjoying unexpectedly high used car values, rental fleet allocation remains tight and new car prices are high. This has forced rental operators to plan fleet more conservatively and buy opportunistically, with local car dealers increasingly holding the cards.
Wholesale High Flying
In the first half of this year, the big story was the used car market and how it had not backed down from historic highs brought on by the disasters in Japan in March 2011. The average price for rental risk units sold at auction reached a new record in April, according to Manheim data. Tight OEM production levels, and low off-lease supply and returning demand continue to prop up wholesale prices. “The wholesale market has been stronger than everyone thought it would be,” says Ricky Beggs, managing editor of Black Book.
As a result, the three public car rental companies reported stronger than expected residual values in the first quarter and an unexpected decrease in depreciation per vehicle. Franchised and independent car rental locations reaped the benefits as well.
“I never thought 2012 would be as strong as 2011,” says Frank Colonna, founder and president of Triangle Rent A Car. “For the first four months of this year, we were seeing used car prices above ‘ridiculous’ prices. In the normal course of doing business in this industry, a used, 1-year-old pickup truck with 30,000 miles on it should not bring within $1,500 of what we paid for it.”
While the Manheim Used Vehicle Value Index peaked in March and declined only marginally in April and May, it is on its way down. The pattern is seasonal, though values peaked earlier than last year, when aftereffects of the earthquake and tsunami buoyed prices into summer.
“Demand isn’t quite as strong (today) as it was in the first quarter,” says Rob Dau, vice president, Western Region of Payless Car Rental. “You can’t name your price, like you could before.”
But that doesn’t mean the sky is falling.
“I don’t think prices will drop dramatically but I think they’ll drop at a clip that’s more than seasonal,” says Tom Kontos, chief economist for ADESA. “Prices have gotten so high relative to new car prices, they have almost nowhere else to go but down.”
In May, the average price for rental risk units sold at auction fell by more than 3% from the previous month, but it was still the highest May price ever, according to Manheim, which has also reported that auction volumes for rental risk vehicles continue to run well above year-ago levels.
Last year some speculated that the unprecedented used car supply shortages would lead to a bubble bursting for wholesale prices as supply came back online. That didn’t happen, and no such phenomenon is expected moving forward.
Lease returns — which dried up during the Recession — will start to come back to the market in earnest in January 2013. “But it won’t be an overnight sensation where those cars will be dumped into the marketplace,” Beggs says. “I think in 2013 we’re going to have a good used car market because the supply is not going to be overabundant.”
“The first quarter of 2013 might be the first time in a while we see a year-over-year decline in wholesale values,” says Alec Gutierrez, manager of vehicle valuation for Kelley Blue Book. “We’re not looking at a significant decline — maybe 2-3% from where we’re at today that could be the beginning of a stabilization period from what we see at auction.”[PAGEBREAK]
The Fuel Effect
Used car values can be correlated to fuel prices. Last year, fuel prices peaked around Memorial Day. This year, after picking up steam and peaking on April 6 at $3.94 a gallon, the national retail average pump price has been steadily dropping — and is pulling some car segment prices with it.
“The most significant drops will come with vehicles that increased most aggressively at the beginning of the year,” Gutierrez says. He points to softening values in compacts, hybrids and late-model (2009, 2010 and 2011) vehicles, which jumped as much as $4,000 from January to the market peak.
While compacts face tough comps compared to last year’s highs brought on by the production disruption, “Sellers are still achieving prices that they wouldn’t have dreamed of three years ago,” according to Manheim’s analysis of its May Index.
Fuel prices will continue to moderate. The U.S. Energy Information Administration (EIA) has lowered the average regular gasoline retail price forecast for the current April-through-September summer driving season to $3.79 per gallon — 16 cents per gallon below the level in the previous outlook.
Looking further out, fuel prices are not expected to spike or swing dramatically. EIA expects regular gasoline retail prices to average $3.71 per gallon in 2012 and $3.67 per gallon in 2013, compared with $3.53 per gallon in 2011.
Steady pump prices are good news for fleet planning, though the long-term effect of higher fuel prices is putting pressure on rates and revenue per unit.
“What we’ve seen over the past several years from the retail customer is a migration away from bigger, more expensive rental vehicles to cheaper models,” says Mike DeLorenzo, executive vice president of Rent-A-Wreck and Nextcar. “I call it the migration toward the compact car. It’s been a challenge because of the price of gas.”
Painful New Car Prices
Though wholesale values will normalize while staying strong, new car costs for rental fleets aren’t expected to moderate. Expect higher costs in the midsize segment as popular models such as Ford Fusion, Nissan Altima, Chevrolet Malibu and Honda Accord get redesigns this year.
Another issue for rental fleets is the contenting of rental vehicles. The days of the base trim level with rollup windows are largely gone as manufacturers force cars with more content into rental fleets.
Though this has the intended consequence of producing a used unit that’s better contented for the retail market, without the “rental car” stigma, it’s driving up capitalized costs. “[The manufacturers] are throwing a lot of stuff on there that you really don’t want to buy,” Colonna says. “It runs the cost of the car up, and it’s not going to come back to you when you sell the vehicle.”
Sometimes, extra content works in the operator’s favor.
Charlie Mullen, vice president of ACE Rent A Car, says that ACE buys a higher trim level on the Toyota Corolla and adds a sunroof. “Those will cost 10% to 11% more, but it’s a rarer model and the sunroof really sells,” he says. While, for instance, leather on a Chevy Sonic won’t return at resale, “the right extra equipment on the right car does work,” Mullen says. “But it’s pretty model specific.”
Higher prices on the front end are fostering a conservative approach to fleeting up.
“The worst thing that any operator could get caught in the middle of is to think that 2013 residuals will bring what they did in 2012 and buy cars based on the manufacturers’ programs that might be more than they can afford,” Colonna says. “And then they really get hammered on both ends.”
Mullen concurs. “We’ve never been greedy to sell a car and replace it with something that doesn’t make sense because it’s too expensive,” he says. “We have to replace at a reasonable cost. Our fleet plan is conservative, even though the future probably holds pretty good used car residuals.”
Tighter fleets rule the day. “I’d rather turn away a few customers than have more cars than I know what to do with and have to discount them to sell them,” Colonna says.[PAGEBREAK]
OK with Older Cars
Prognosticators are forecasting 14.2-14.5 million units in light-duty vehicle sales for 2012, compared to 12.8 million units in 2011. Beggs points out that at today’s new car selling rates, some 900,000 more used vehicles are coming back into the marketplace as trade-ins.
One consequence of the higher number of trade-ins, according to Kontos and others, is that franchised dealers aren’t as hungry for off-rental program cars from the auction. “Franchised dealers are more and more open to keeping older cars on their lot or posting them online,” Kontos says.
“Nearly new used cars have priced themselves out of the market,” says John Maus, a fleet broker specializing in rental. “A 6-year-old trade-in with 120,000 miles is a lot of times more desirable than a 1-year-old rental car.”
One reason is the changing demographic of the dealer’s customer. Post-recession, subprime buyers make up 30-40% of retail car buyers, and franchised dealers are getting more comfortable with this type of buyer. Bad credit specialist dealers such as Drive Time are making subprime financing programs available to mainline dealers.
And more dealers are looking to buy from rental companies directly. “We’re doing more direct sales,” says Mullen, who has cultivated a network of dealers and mega-dealers looking for groups of 10 to 20 cars. “We don’t use the auctions nearly as much as we used to.”
While total new car sales into rental fleets topped last year’s sales through May (see table on page 19), the pace of sales has slowed steadily since January. “We’re delivering only what’s been ordered,” says Joe David Pacifico of Pacifico Marple Ford Lincoln in Broomall, Penn. “We have inventory to cover retail needs, but not much else.”
“We’ve already sold out on 2013 (model year) for a couple of manufacturers,” says Tim Yopp of Eckhaus Fleet, a nationwide fleet supplier. Yopp also points out that manufacturers want their commitment from rental fleets earlier in the season.
One large rental fleet buyer complained that his allocation from a Detroit manufacturer was cut from 7,000 units to 2,000 for the 2013 model year.
“Manufacturers are holding out for their retail lots,” Dau says. “When you ask for allocation, it’s cut back.” That means instead of buying 100 units from one source, Dau says he will often buy 10 units from 10 different sources. “Getting the product you don’t want is real easy. The product you want, not a lot of it is out there.”
With allocations shrinking, rental companies are also turning to dealers on the new car side for “opportunity buys” brought on by limited allocation from the manufacturers and higher prices.
This may indicate a shift to a more strategic selling model and is happening in concurrence with dealer stair-step programs, allowing manufacturers to avoid retail incentives and juice sales through more opaque channels, which protects residuals and brand image better than cash on the hood.
“Manufacturers are giving more allocation to dealers to do local fleet sales to accounts in their areas, along with incentives to make the deals more attractive,” says Jim Anderson of Jim Anderson Fleet Sales in Boca Raton, Fla. “Sometimes the deals are better than fleet deals.”
Anderson says these days many rental fleets are holding off on ordering all their fleet at the beginning of the year and saving a certain percentage for strategic buying later. Specifically, Toyota, Nissan and Volkswagen are giving their dealers additional inventory with incentives to do local fleet sales, Anderson says.
But even those deals may be hard to come by. “The end-of-month deals at the local dealers haven’t been too plentiful in the past six to 10 months,” Mullen says. “You have to hustle to find new cars to purchase.”