Have there ever been more vehicles — hundreds of thousands of them — just sitting on blacktops, sports stadiums, grassy fields, dealer lots, auctions, or auto manufacturing plants? No, there hasn’t. What are we going to do with those cars, and when will they start moving again?
A lot depends on how the country will open, which will be in stages. While there are many macro unknowns, car rental operators can look to a few signposts to on the road to recovery. The first place to look is air travel.
On April 8, the U.S. Transportation Security Administration screened 94,931 passengers compared to some 2.2 million on the same day last year, which is more than a 95% drop in flyers compared to the same time last year.
One leisure operator said he’s renting 15 to 27 cars a day at a major airport, where 350 to 400 rentals per day is normal. Yes, it’s gotten that bad.
Even as stay-at-home restrictions are eased and demand returns, getting planes back into action doesn’t happen overnight. More than 40% of the world’s commercial aircraft fleet is grounded. The logistics of putting planes back into service, onboarding furloughed staff, and recertifying pilots is a months-long process.
“If we knew that the planes were going to start flying in June and be full of people for the summer, this industry would know what to do,” said the leisure operator. “But nobody knows that.”
Regarding international travel, we won’t be even close to normal capacity until the first quarter of next year. For car rental, it’s going to be a tough summer without that swell of high-margin international tourists.
And let’s not forget basic economics: Cash-strapped airlines will be hesitant to reinstate domestic routes that don’t have an immediate path to profitability, which necessitates at least 75% of seats sold on average for domestic flights.
For car rental, some of this lost airport demand will be replaced by leisure travelers who decide to rent a car rather than fly. (With this in mind, look for a lot of vehicles shuttling from airports to local stores.) This will indeed be sorely needed revenue but may only replace some 20% of lost volume.
On the other side of the car rental customer fence, the return of corporate travel will depend on when large gatherings such as conferences and conventions are allowed again and when corporations ease their no-travel restrictions.
The former will come first. Major trade events are being rescheduled for mid-September at the earliest, though corporations may willingly ban their employees’ travel months longer, for health and safety ostensibly, but in reality to rein in spending. Facebook announced it’s canceling all gatherings with 50 or more people through June 2021.
Now to the supply side.
It’s not a revelation to say that car rental buying is finito for the rest of the year. While this is normal summer fleet-up season, orders with the OEMs are cancelled.
Even with an unexpected surge in demand, think about it — if you’ve lost money on every unit you sold as the crisis hit, replacing those units in 90 days at a much higher capital expense is ludicrous. Therefore, this massive mothballed fleet will need carry the car rental industry through to 2021, regardless of a return to semi-normalcy.
Cash-strapped rental companies large and small were able to fire-sale some fleet earlier in March. But the big dealer groups have slowed their buying and the auto auctions have closed, the physical ones, anyway.
The auctions are still selling through their virtual portals, though volume was down 84% nationwide from the first week of March through the last full week of March, according to Auction.net data.
In that timeframe wholesale values dropped 12.2%, but it’s closer to 15% if adjusted to account for fewer lower-priced trade-ins, according to data provided by Tom Kontos, chief economist for KAR Auction Services.
(With later data specific to car rental, Manheim reported the average price for rental risk units sold at auction in the first 15 days of April was down 17.1% year-over-year, and down 18.5% compared to March.)
Kontos expects it’ll get worse before it gets better. “I'm telling people who are selling cars at the auction to take today's dollar because even though you’re facing 15% (in lost values), it's not going improve to 10% anytime soon,” he says.
How much worse? Kontos doesn’t expect values to drop 20% below seasonal averages, but it could be close.
One signpost looming on the immediate horizon will be the reopening of physical auctions, which should happen in weeks, not months. However, auctions won’t come back online across the country all at once, owing to the staggered lifting of stay-at-home orders by state.
But when and where they do, the lanes will be flooded with cars. In fact, Adesa is preparing extra land for the overflow, Kontos says.
Says John Healy, equity analyst following car rental with Northcoast Research: “I think once physical auctions are open, you're going to see sellers trying to wash out of their cars. I think it'll be a sharp move lower (in values).”
As the economy comes back online in moderating degrees, so will values. Healy believes the bottom will happen in May or early June, “And then you're going to have sequential improvement, probably beginning in June or July.”
Kontos says another signpost is unemployment: When new filings dip from the millions closer to pre-pandemic averages of about 250,000 claims a week, values should improve. The correlation is only directional, Kontos warns.
“It’ll be a U-shaped curve, not a V,” says Kontos. “We’re looking at a flattened curve, so to speak, regarding wholesale values.”
Yet another marker is the summer de-fleeting cycle, which starts at the end of August and lasts until mid-September. Because of current low fleet levels, this cycle shouldn’t see the usual churn. Values may not take their usual dip then as operators hold onto the cars out of necessity.
There are other factors that could stimulate values, including deferral of payments for new car buyers and a new version of a Cash for Clunkers program. The former is in place and most likely will be extended, while the latter is only a conversation at this point.
For car rental companies preparing for the rebound, fleet may not be the primary worry. If you’re laying off almost a third of your global workforce, as Hertz just announced, the massive effort to rehire and train simply won’t be aligned to meet immediate demand.
None of this is easy, but the uneasiness is driven by the many unknowns of a global health crisis than in a usual recessionary environment.
It feels like a decade ago, but market dynamics were pretty good before the pandemic. “January and February were two of the best January and February's we’ve ever had,” said the leisure operator.
When the crisis is over, whether those dynamics will reemerge satisfactorily or not, there is one certainty: Personal travel will still be a necessity. Car rental will be there to meet that need.