If coronavirus concerns continue to negatively affect demand for travel into Q2 and Q3 2020, this could create challenges for rental car companies as these quarters account for a substantial portion of their annual profit. - Photo via Depositphotos.

If coronavirus concerns continue to negatively affect demand for travel into Q2 and Q3 2020, this could create challenges for rental car companies as these quarters account for a substantial portion of their annual profit.

Photo via Depositphotos.

Concerns over the spread of coronavirus will likely affect business operations at rental car companies as they generate a large portion of revenue via on-airport rentals to both leisure and business customers, accoding to an analysis by DBRS Morningstar.

If coronavirus concerns continue to negatively affect demand for travel into Q2 and Q3 2020, this could create challenges for rental car companies as these quarters account for a substantial portion of their annual profit.

To date, both the business and leisure segments of the market have been affected — as coronavirus becomes more widespread, many companies are already banning employee travel while social distancing practices and additional government-mandated travel restrictions have cut into leisure travel as well. 

One of the key challenges facing rental car companies is to right-size the fleet in the face of uncertain demand, the company says. In the weeks following 9/11, the precipitous drop in air travel resulted in rental car companies dramatically downsizing their fleets. Since that time, rental car companies have constructed flexible fleet financing plans that allow them to rapidly adjust fleet size to reflect changes in demand and to upsize or downsize their fleets on the order of 20% in approximately one to two months.

According to Morningstar, astute fleet management, combined with a cost structure whereby up to 70% of costs are variable or semi-variable, should allow rental car companies to withstand the impact of coronavirus in the near term. However, the overall uncertainty regarding the spread of coronavirus and the resulting volatile and unpredictable demand may trump rental car companies’ ability to adroitly manage fleet size while maintaining acceptable utilization levels. 

Rental car companies’ fleets comprise program vehicles that benefit from repurchase obligations from the corresponding original equipment manufacturer (OEM) and risk vehicles that are purchased directly from the OEM and for which the rental car company bears residual value risk. The percentage of program versus risk vehicles is different for each rental car company and also varies depending on the time of year.

Historically, program vehicles were predominately used in the summer months as their flexible terms made them ideal for meeting peak seasonal demand while mitigating residual value risk. In recent years, OEMs have generally reduced the number of program vehicles made available to rental car companies and, as a result, approximately 70% to 80% of major rental car companies’ fleets consist of risk vehicles. 

In the short term, the company expects rental car companies to downsize their fleets through a combination of program-vehicle returns and risk-vehicle dispositions. In addition, to the extent that vehicles were previously ordered and scheduled for delivery, it expects rental car companies to work with the OEMs to postpone delivery. 

In general, DBRS Morningstar expects rental car companies to err on the conservative side while de-fleeting. Somewhat constrained fleets should help pricing and utilization and companies can add fleet back incrementally and profitably as demand re-emerges. 

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