It was a dark and stormy night at Ajax Rent A Chariot. Brutus and Cassius were meeting in the backroom.
“We’ve been putting off our fleet plan long enough,” Cassius said. “If we don’t order our chariots this week, we will not have enough chariots for the Feast of Dionysus. You know how those Sicilians get if we can’t fill their reservations.”
“So do we order ‘risk’ or ‘repurchase’?” Brutus said.
“It looks like the chariot makers will do anything to sell a few more chariots these days. That doesn’t bode well for used chariot prices,” replied Cassius.
“I think it’s time to look at repurchase again.”
“Sounds good. Now let’s get back to that conversation on Caesar.”
While your rental company might not have not been in the fleet business at the time of Ajax Rent A Chariot, some things never change. When you look over your rental fleet, you see your biggest asset and your biggest liability.
If you buy right, depreciate right and sell right, you make money. If you depreciate wrong or buy wrong, you’ll end up selling wrong and losing money.
Changes to the Ecosystem
The car market is an ecosystem made up of sub markets that nourish each other. New cars flow into franchise dealers, car rental companies and commercial and government fleets. Franchise dealers sell and lease new cars, take trade-ins and buy and sell used cars at auctions.
Car rental companies sell their risk cars to wholesalers, auctions, dealers and end users. Cars flow from one market to another as they age and accumulate miles.
But the ecosystem faces new challenges this year, which will affect how you operate your fleet. The challenges are both new and old. Here’s what to watch out for:
A Chase for Market Share
For the last few years, buying risk cars was a good decision. Reduced new car availability and a lack of lease car returns — combined with an improving economy — made for a strong used car market.
Sales of new cars into rental fleets by the manufacturers have returned to normalized levels after the supply disruptions from 2008 to 2011. One would hope that the manufacturers have learned that the race for higher market share by over fleeting the rental industry does not work to anyone’s advantage.
Nonetheless, some manufacturers have announced a corporate goal to increase market share. In the past, this meant increased incentives to the retail customer and increased volumes to the rental car market. This, in turn, reduces residuals and hurts the rental car company’s profits.
Return of Off-Lease Vehicles
The used car market is bracing for an influx of off-lease vehicles.
Manufacturers restarted the leased car market in 2011. Those vehicles are starting to enter the wholesale market and will continue to over the next few years.
Since many rental fleet managers have gotten used to leaving their vehicles in service longer, those higher mile vehicles will be competing directly with this growing inventory of off-lease vehicles.
Changes in Subprime
Another area of concern is the Buy-Here-Pay-Here market, which had been aided by easy financing. Hedge funds and other financial providers in search of good returns on their capital discovered the high rates paid by the Buy-Here-Pay-Here customers. This, in turn, increased the market for higher mileage used cars.
A report released in April by Moody’s says that U.S. subprime auto lenders are exercising more caution in granting loans to increasingly risky borrowers.
Experian reported a 42.8% increase in repossessions in the fourth quarter of 2013. While the subprime market is still viewed as viable, 2008 taught us how quickly a market can turn, especially one based on chasing high yields. These trends are bound to affect the market for used cars.
Recall Numbers Grow
Last year, vehicle recalls reached a nine-year high with 21.9 million vehicles affected. The first five months of 2014 alone have seen recall announcements from Toyota and General Motors covering more than 12 million vehicles globally. If this pace keeps up, 2014 would break the record for number of recalled vehicles in a calendar year.
Pending legislation would require all rental cars to be grounded immediately upon a recall notice. While presently not a federal requirement, it is only a matter of time.
Meeting the Challenges
Now that you know the forces at work, how do you adjust? Here are five fleet-planning tips to help you meet these new challenges:
With increasing vehicle availability — and an uncertain used car market — it’s time to reconsider manufacturers’ repurchase programs. Manufacturers are offering attractive repurchase programs to ensure that they have enough stock for their dealers at factory sales.
While repurchase programs come with time and mileage requirements, most manufacturers offer non-return allowances in their repurchase programs, giving the fleet manager the option of keeping the vehicle.
If the used market is strong, the smart fleet manager can sell the vehicle for a profit, or just return the “program cars” for no loss.
Diversify Your OEMs
With the threat of recalls, now is not the time to go “all in” with one manufacturer. If you don’t have a diverse mix of makes and models, you could have a good portion of your cars grounded or at the dealer waiting repair. Some manufacturers have reimbursed their rental customers for time out of service, but this can’t be counted on.
Recalls also represent liability time bombs to the rental company. This has become such a concern that we have heard that one of the major car rental companies is selling its units as soon as a hint of a recall comes up.
The influx of lease returns will bring used cars to the market with 30,000 to 50,000 miles. On top of that, one major car rental company is running its cars for 18 months and up to 40,000 miles.
Because it’s a crowded market in this mileage range, consider getting out of your vehicles sooner, especially before the manufacturers’ warranties expire. Consider shuffling your fleet so that the cars nearing the manufacturers’ warranties are only used for local rentals.
Understand Your Customer
In this case, your customer is the used car buyer, whether a dealer at an auction, a broker or a retail buyer. You should treat this aspect of customer service with the same attention given to your rental customers.
Ask your buyers what they want before you order your cars. Understand the colors that sell (and don’t sell) and the options that return value.
If you’ve got extra-clean units ready to front line, tell them. Some dealers are forced to put auction-bought cars through their service departments for refurbishing and are charged for it internally. If your cars are clean and free of dents and chips, dealers will pay to have one less hassle.
Consider your communication method, too — some operators use Twitter to keep their buyers informed.
While you can’t control these external market factors, no one knows your fleet’s history better than you.
You know that every May you have three church groups that will need vans at a time — when it’s hard to find vans, new or used. You know you will be booked out for Memorial Day. You know the calendar of major events in your city.
You should understand your basic fleet requirements for every month of the year. Why not use your history and order the vans in the fall for late April delivery, and order appropriately for other high utilization periods?
Call your fleet supplier and find out what is available for the coming year. Even if the manufacturer has not released pricing for the next year, this year’s pricing is a good guide.
Sit down with your financial sources and tell them what you need and when. Order your base cars early. You can still use opportunity buys and used cars to fill additional needs as they arise.
Adapt and Prosper
With a plan in place and an understanding of the changing market conditions, you can deal with your other business needs, such as why the chariot washer can’t seem to show up on time.
Like any another ecosystem, change happens, and those that adapt will prosper. This is why successful car rental companies manage their fleet by planning for and adjusting to these changing market forces.
About the Authors
Mark Eckhaus is CEO of Eckhaus Fleet LLC, one of the largest independent fleet suppliers representing Hyundai, Volvo, Toyota, Volkswagen and other manufacturers to the corporate fleet and rental car industries, as well as a principal in several new car dealerships.
He can be reached at [email protected]
Tim Yopp is chief technology officer of Eckhaus Fleet ([email protected])