When gas moved above $4 a gallon in May, the industry felt an accelerated shift in demand toward smaller, more fuel-efficient vehicles. In their second-quarter earnings calls, the public car rental companies—Hertz, Avis Budget and Dollar Thrifty—provided analysis into how they are coping with this new reality.

Switching to Small
Hertz, Avis Budget and Dollar Thrifty say they have all been negotiating with the manufacturers to obtain more fuel-efficient, smaller vehicles.

Although there is a reported lack of availability at retail level for compact cars, Hertz reports it is not having any issue with supply. “If we wanted to find more compacts, we could,” CEO Mark Frissora said in the company’s earnings call.

Hertz also plans to reduce the number of models and configurations to help reduce its fleet and operating costs.

Avis Budget reported similarly: Access to cars is very good.

About two-thirds of Avis Budget’s current risk fleet is mid-size or smaller, and that percentage will increase, the company says.

In the U.S., about 14 percent of Hertz’s fleet is made up of compacts, 32 percent are mid-size, 16 percent are full-size, 13 percent are regular and large-sized SUVs and about 15 percent are smaller SUVs, crossovers and vans.

Though Hertz says it will continue to drop its SUV mix, Frissora calls the shift to subcompacts and compacts “relatively small.” The company will keep some large and luxury SUVs and minivans on a seasonal basis to satisfy customers who need them for vacations.

RPD Declines
A consequence of the industry shift to smaller car bookings is the decline in revenue per day, as smaller vehicles tend to have lower time and mileage rates. All three experienced decreases in RPD.

This decline was offset somewhat by an increase in rental length.

Program vs. Risk
The move toward risk fleets continues, though at smaller percentage increases than previous years.

As of June 13, Hertz had increased its non-program cars in the U.S. year over year, from 62 percent to 65 percent. The average age of Hertz cars sold jumped from 14.5 months to 15.6 months.

Avis Budget’s risk fleet will remain flat this year at about 50 percent. About 60 percent of Dollar Thrifty’s fleet is risk; the company plans on increasing that percentage and lengthening hold times.

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Residual Woes
Both Avis Budget and Hertz have diversified their fleet to mitigate residual value risks to any one manufacturer.

Only 3 percent of Hertz’s fleet is Chrysler vehicles, while Ford (26 percent), GM (20-22 percent), Toyota (13 percent) and Nissan (10 percent) account for most of the balance. Hertz is increasing its Japanese buy, which includes Honda as well. Hertz says this diversification has helped keep fleet costs down in the quarter.

Dollar Thrifty’s present supply agreement requires it to purchase 75 percent of its fleet from Chrysler. Primarily because of Chrysler’s residual value woes, the company’s vehicle depreciation expense increased about 28 percent in the second quarter year over year.

“Our efforts to diversify supply will fit with Chrysler’s strategy to sell fewer cars to the rental car industry,” CEO Gary Paxton said in Dollar Thrifty’s call.

Like the rest of the auto industry, the public majors are suffering through a 25 percent drop-off in residual values of large SUVs and minivans.

However, all three say the great majority of their SUV fleets are still bought on a program basis, thereby limiting their exposure to the used car market.

Used Car Challenges
The used car market continues to be volatile. Overall, used vehicle prices were down about 6 percent in the quarter year over year. Prices for mid-size cars were essentially flat, while prices for compact cars were up nearly 13 percent.

Dollar Thrifty sees further erosion of residual value on large vehicles, while values are increasing on fuel-efficient vehicles, but at a slower rate.

While Hertz originally expected U.S. car rental depreciation expense per car to be 2 percent to 4 percent, the company is now forecasting an increase of only 1 percent to 2 percent in 2008.

In the second quarter, Avis Budget’s actual depreciation costs on model-year 2007 vehicles were within 3 percent of initial expectations. Dollar Thrifty estimates vehicle depreciation cost on a per-vehicle basis will be about 15 percent higher for the full year 2008 compared to 2007, “assuming no disruption in vehicle deliveries from our suppliers and a stable used car market.”

For the coming year, Avis Budget estimates a per-unit model-year increase of 2 percent to 3 percent. Hertz expects cost increases for model year 2009 to be flat or down overall.

Chris Brown is executive editor of Auto Rental News. He can be reached at chris.brown@bobit.com.

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