Making a Business Case for 200 Hybrid Rental Cars

With the recent news that a company called Ecologic Transportation has entered into a letter of intent to buy Ace Rent A Car and turn it into a “pure environmental” car rental company, the idea of green car rental is back squarely in the industry’s consciousness.

One independent car rental company has just made a big move down the green road. VERC Car Rental, serving eastern Massachusetts through six neighborhood locations, purchased 200 Toyota hybrids (150 Priuses and 50 Camry hybrids) about six months ago. By September, hybrids will constitute close to 60% of the VERC fleet.

What prompted the company’s move toward hybrids, and what are management’s expectations for success?

The large hybrid buy was motivated first by a desire to stand out to the local renting public. “We’re battling Enterprise and Hertz every day,” says owner Jack Vercollone. “We wanted something to make us stand out in our marketplace.”

Reason two was an eye toward resale. “We’ve done pretty well with our hybrids in the past,” Vercollone says. “If you hit the [used car] market just right, especially on the East Coast when gas has gone over $4 a gallon, that’s a great time to sell these.”

Furthermore, Toyota came to them with availability and decent pricing, and so the deal was made.

For the VERC customer, the desire for a hybrid rental is based more on fuel savings than on saving the environment. “Some people brag about it,” Vercollone says. “One renter was pretty proud of the fact that he went all the way to Maine on $20 in gas.”

Vercollone says that four or five years ago, a number of customers would not even take a hybrid rental if offered one. Today, “We do have customers requesting hybrids,” he says; however, “we haven’t gotten to the point that we’re a magnet for people that have to have a hybrid [rental]. Maybe that will happen when gas prices rise another 50 cents.”

Indeed, when the deal was made, pump prices were approaching $4 per gallon. But when VERC started to cycle the hybrids into fleet a few months later, fuel prices took a full 75-cent dive per gallon. “It wasn’t as big of a splash as we wanted,” he says.

The company hasn’t marketed its hybrid initiative in any new areas, such as to environmental groups, but they have made a push on Facebook, Twitter and the company’s blog. The also ran with the green theme on its website, adding to the company logo a green road and a leaf along with a banner advertising its hybrids.

VERC does not charge a rate premium for its hybrids, but its major car competitors in the area do. Vercollone contends that most of his customers would not opt for a hybrid if they had to pay $10 more a day. Larry Sullivan, VERC’s CFO, noticed that when pump prices spiked in the spring their competitors were able to boost their hybrid rates. Sullivan doesn’t know what the exact fuel price tipping point would be to raise hybrid rates over and above their normal fleet, but that will be an option, he says.

Absent a rate premium, keeping holding costs in check is where the rubber meets the road. Vercollone and Sullivan say that the capitalized costs for their hybrids are about 10% higher for the Camry hybrid and 20% higher or more for the Prius over a midsize, regular gasoline model.

That makes VERC’s market timing for de-fleeting all the more important.

Anyone that follows Black Book’s weekly reports knows that auction prices fluctuate on a week-to-week basis. And seemingly, as fuel prices go, so goes the used car market for hybrids. Following the ups and downs can be as maddening as playing the stock market.

Vercollone remembers the days of peak gas when rental operators were able to sell hybrids for more than they paid for them. “We’ve done well in the market when gas prices have been high,” he says.

VERC is required by contract to hold its cars a minimum of nine months or 15,000 miles; after that it will sell based on market conditions, fleet utilization and opportunity buys. Sullivan says the company holds most of its smaller and midsize cars until 20,000 to 30,000 miles. “The only difference with the hybrids would be that if market conditions are suddenly outstanding then we will probably sell sooner,” Sullivan says.

While there are no longer federal tax incentives for hybrid vehicles, Sullivan notes that the company will recoup a little extra in overall tax relief with a 50% depreciation bonus allowed on capital investments put into service in 2012.

In general, Vercollone admits that the company is in the midst of figuring all this out. “We recognize that it’s a risk; we recognize we’re early into the game, and we’re hopeful,” he says.

Today, gas prices are moving toward $4 a gallon again. There may be dips in the future, though no one projects that fuel prices will go down over the long haul. “As gas prices climb, we hope people will look at us as standing out in the market place, because we offer this product,” he says.

VERC is taking a calculated chance that its hybrid initiative will benefit its bottom line. We’ll follow with interest, especially to see how the public reacts to hybrid rentals in relation to rising or falling gas prices.

VERC embodies the spirit of the car rental independent. Started in 1979 by renting vehicles out of a gas station and a car wash, VERC is family owned and entrepreneurial — and surviving. Let’s commend VERC for doing what all independent car rental companies need to do — break out from the commoditization of a rental car and find a viable niche from which to grow a business.

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Originally posted on Business Fleet