The car rental market seems to be a Rube Goldberg machine of sorts, where one change produces a series of lever pulls, ball drops and windmill turns that affect all other moving parts. Next year’s mechanics hinge on plentiful new car supply and a softening used car market.
Rates will stay strong, but will this new fleet discipline hold?
Though we’ve seen a slight softening in the last few months of car rental rates year over year, pricing should remain robust in 2015. Why? In part, a softening used car market will increase holding costs, which should push higher pricing. Used car market jitters seem to be forcing a new fleet discipline, as the major car rental companies (RACs) are buying fewer cars.
Demand is strong — the airlines are increasing capacity in 2015 — so holding the line on supply should buoy rates. While Hertz is on a buying spree, its massive fleet updating campaign, along with completion of its integration with Dollar Thrifty, should also have a positive effect on pricing.
Some say fleet capacity can be shed by 8% to 10%. Let’s hope this newfound discipline holds.
Program cars rise again.
While rental fleet consignors looked like geniuses in the years coming out of the Recession, the days of depreciating rental cars at 1% are long over. A hedge against next year’s deflating used car market is manufacturers’ guaranteed depreciation programs (GDP).
It doesn’t hurt that some manufacturers are using GDPs to move metal. Shorter fleet periods and mileage caps associated with GDPs will help alleviate this year’s phenomenon of high-mileage rental cars.
Welcome to the new recall reality.
No one could have predicted the sharp rise in recalls this year, just as the auto rental industry pledged to ground all recalled vehicles until they’re fixed. Certainly, there may be fewer recalls next year, but then we thought 2013 was a bad recall year. Could the situation get any worse?
There are fundamentals in place that suggest we’ll need to live with an elevated number of recalls. The manufacturing trend to universal sourcing of parts and consolidated vehicle production lines have caused recalls to spread across more models and in greater numbers. Moreover, the liability exposure environment isn’t expected to ease.
At the very least, both manufacturers and RACs are working on improving parts and service logistics to minimize downtime; 20 days out of service can’t be tolerated. To mitigate recall exposure, it’s a good time to diversify your fleet buys.
Vans are sexy and small cars aren’t — at least for now.
If you’re renting trucks and vans, the immediate future looks good, as those segments are better protected against deflating values in the used car market. Auto manufacturers are transitioning to newer (and more expensive) European style vans, leaving a dearth of the old school, lower-priced truck-based vans. Fleets of all kinds are scrambling to get their hands on the old vans, both new and used. Of course, this phenomenon won’t last forever. Pickup trucks are faring similarly well as the economy improves, propelling new construction.
On the flipside, Black Book forecasts will tell you that values in the popular rental segments — economy, compact and full-size cars — will depreciate on a steeper decline than average. Low fuel prices and uninspiring full-size models are having a negative effect.
The 2015 used car market hinges on the third and fourth quarters.
Hertz has pledged to update its fleet by purchasing 350,000 model-year 2015 vehicles, 60% more than 2014. While there is plenty of inventory to satisfy Hertz’s accelerated buying schedule, the question is how these cars will return to the market late next year.
Hertz is stepping up its GDP purchases and increasing its retail sales lots, which will hopefully stem a flood of those vehicles back into wholesale channels in the second half of 2015.
True, the used car market is still undergoing its correction from historical highs. But a strong overall demand environment will ease the blow.
The key is to use this market to your advantage. With plentiful new car supply, some auto manufacturers are willing to deal, which leaves room for spot opportunity buys. A softer used car market marks a good time to fleet up with deals found at auction. With Hertz’s massive fleet updating, you might see lower mileages on de-fleeted units not seen in years.