How uncertainty benefits the car rental bottom line – Auto Focus
I am generally wary of good times. One need only look back to February 2000, when the dot-com bubble was about to burst, and November 2007, the precipice of the Great Recession, to validate. Last year the US car rental industry had arguably the most profitable ever. Am I worried that we will soon see a similar crash? I’m not.
These moments in time were characterized by an “irrational exuberance” that fueled the expansion of the market on substantive speculation. Back then, no one could see the end of the good times. Businesses were so big and happy that they rented stadiums for corporate picnics and wasted $ 2 million on a Super Bowl commercial. No one is saying that businesses are big and happy these days, even those with increasing profit margins.
All businesses, especially those that travel, are plagued by daily uncertainties brought on by waves of pandemic closures, disruption to staff and massive cracks in the automotive supply chain. In response, the car rental companies are crouching in lean and careful mode. I will be slim and wary any day.
This mindset takes into account the tumultuous market conditions and takes a conservative approach that emphasizes profit margins over growth at all costs. We recognize that car rental companies have been largely constrained in this position by under-production of vehicles. But their ability to manage successfully under these conditions is the real story.
With an expected overall turnover of $ 28 billion in 2021, it will take a few years for the US car rental industry to return to the record highs of $ 32 billion in 2019. But this year, the industry has achieved a record average revenue per unit, per month (RPU) of $ 1,320 on just 1.8 million cars in service, an increase of over 11% from the average RPU of $ 1,174 in 2019, our last normal year.
That’s a huge leap, considering the industry has seen only marginal percentage point gains in SPS over the past 10 years. Operators are doing more with less, now more than ever.
Here is what some independent operators and franchisees are saying:
- â2021 will be our best year. From afar.”
- âThe T&M environment is very strong at the moment. We are at an all-time high in use. The operating environment exceeds my expectations.
- Regarding 2022, “I expect locusts or other invasions”.
- “I am on a growth curve and demand continues to support growth until the end of the year.”
The commentary on “locusts” highlights the irony of operators achieving strong results while keeping their eyes wide open for the unprecedented challenges behind and ahead.
The industry is in desperate need of more cars to renew its fleet. The industry has only floated 693,998 vehicles through November 2021, down 57% from 2019. The mileage of removed risk units has reached all-time highs.
Some manufacturers extended production of the MY-21 until December, resulting in a much shorter MY-22 manufacturing schedule. Order banks for the MY-22 fleet are already closed for many makes and models, including US domestics. The major manufacturers still have more orders than the production capacities of factories and the availability of parts from suppliers. That said, operators expect a small number of domestics in January and February.
Some operators are sourcing more inventory directly from dealers, although it is only five to ten units when there were only two to five previously. And these are just replacement vehicles to help wash out older units.
Some operators have over-ordered knowing that they will get significantly fewer units than they ordered. Those who ordered their normal quantities now receive much less.
At the very least, there appears to be light at the end of the tunnel, whereas there was none just two months ago.
âWe seem to have reached the point in the supply crunch that we can at least say conditions aren’t getting worse,â said Jonathan Smoke, chief economist for Cox Automotive. “However, we don’t expect big changes in deliveries and sales until entering the second half of 2022.”
Even when production of new vehicles returns to near capacity later in 2022, according to Smoke, it will take time for supply to get significantly closer to normal levels. âWith delayed retail purchases, extended leases, more made-to-order retail sales and of course hungry rental sales, the market will absorb every additional unit that manufacturers can supply for months on end,â he says.
Fortunately, rental demand is still high, even if supply constraints become even more difficult in this environment. Travel this Christmas season appears to be even stronger than historical levels, keeping rates 25 to 30% higher than normal, according to data collected by John Healy of partners at Northcoast Research.
Tenants are prepared to pay these rates. Other forms of ground travel (especially Uber and Lyft) do not appear to be able to capture this excess demand, as they even manage high prices and labor constraints.
Will this strong demand continue into the peak season of 2022? New variants of covid could ruin everything, but the continuing shortage of cars should keep rates at a sustained level.
New vehicle prices
Operators should expect little or no incentive for the fleet for the 2022 model year. This year, a major automaker had not published any rental incentives or pricing as of Dec. normally no later than July.
Net prices are always adjusted to reflect manufacturers’ margins and profitability. This cycle will continue until the factories’ production capacities exceed demand, which is not expected until the end of 2022.
The silver lining of these machinations? Record returns for units withdrawn from the fleet.
âThe tailings are still on the moon,â writes one operator. “I would have thought we would see them withdraw now.”
These strong values ââwill continue over the next 24 to 36 months. This will be due to a combination of new and used supply shortages, increases in the price of new vehicles and weaker incentives for new vehicles. Rental fleets will continue to lengthen replacement cycles, which will evaporate the fleet of low-mileage used vehicles.
While many sectors are experiencing a labor shortage, such as restaurants and hotels, some rental companies are feeling it while others are relatively unscathed. They do more with less, with senior employees stepping in when needed.
Smart operators are getting more and more aggressive with bonuses and perks for staff, which makes financial sense. âAnyone who pulls out will cost a lot more to replace, if you can,â says one operator.
Says another operator: âIf you’re having trouble hiring, pay more. ”
Supply chain issues extend beyond the vehicles themselves. Without carriers to deliver them to rental lots, vehicles linger in rail yards, costing thousands of dollars in lost rental revenue.
The shortage of replacement parts extends downtime for routine maintenance and dealer warranty work, leaving more revenue on the table. Operators with ownership ties to body shops and those able to handle certain mechanical work in-house fare better.
With future orders mostly on hold, lenders find it difficult to set credit limit amounts for their customers.
High car rental rates mask most inflation concerns. But if inflation persists, operators could see interest rate hikes that would cause them to pay even more for their fleet.
âWe are very likely looking at the calendar year 2023 before there is a clear light at the end of the tunnel,â says a major fleet dealer. “Even then, I wouldn’t expect a return to normal in the auto industry in the United States – I would expect to see a new normal.”
This dealership expects a continuation of the âday-to-dayâ allocation processes, a reduced supply of days, continued increases in new vehicle prices and reduced incentives, as well as a limited supply of vehicles. rental.
A “new normal” is a hackneyed phrase that also expresses restlessness, as it causes disruption and requires adjustments to operations and mindsets that are not yet known.
But that’s exactly what drives this lean and cautious attitude. A little agitation does you good; this will keep you on your toes.
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