The rental car apocalypse has a terrible sequel
Bloomberg Opinion June 7, 2022
If you’re itching for a dream vacation this summer after two years of travel restrictions, then you might end up paying more to rent a car than you spend on a plane ticket. And when you reach the front of the queue at the rental counter, don’t be surprised if you’re handed keys to an older vehicle or an unfamiliar brand.
Your inevitable frustration reflects a shortage of new cars amid the post-pandemic travel rebound that’s helping big listed lessors like Avis Budget Group and Hertz Global Holdings rack up windfall profits. Analysts expect Avis to earn almost $2 billion of net income in 2022, which is more than it made in the years 2010 to 2019 combined.
The companies hope to retain higher pricing even once supply and demand rebalance, which now probably won’t happen before next year. But the rental firms risk a backlash if they gouge consumers, and investors should ponder if this historically very competitive and low-margin industry has really changed its spots.
To recap, in 2020, rental-car companies slashed costs and shrank their fleets when COVID emerged and Europcar Mobility Group and Hertz ended up filing for creditor protection. When leisure trips roared back last year and pricing soared, cars were hard to come by and there was talk of a “rental car apocalypse.” Amid the hullabaloo, Avis and Hertz became meme-stocks and announced multibillion-dollar share repurchases.
Halfway through 2022, and some rental firms still don’t have enough cars because of a shortage of automotive chips. Manufacturers haven’t built as many vehicles, and they have prioritized production of high-margin models (rather than the small, cheap vehicles holidaymakers typically rent). Automakers have also allocated a smaller proportion of their production to rental firms. In the past, these accounted for 7%-12% of a manufacturer’s sales, but the rental proportion has shrunk to between 4% and 7%, according to Europcar. Rental sales are lower margin and carmakers can make more money selling to dealers.
Car-hire firms are having to be nimble so as not to leave customers empty-handed. One approach is to keep cars for longer than normal: Hertz’s U.S. business retains them for more than two years on average, compared to 18 months pre-COVID. (This doesn’t necessarily portend an inferior service because such cars haven’t been driven as much lately).
Another tack is to acquire secondhand models, instead of new ones, or tap a broader list of suppliers: Europcar is sourcing vehicles from Asian carmakers such as China’s Great Wall Motor, for example. (The French rental firm may find it easier to source cars once Volkswagen’s takeover offer closes later this month).
But I doubt the rental firms mind that fleets are on average about one-fifth smaller than in 2019 because it means they can charge more.
In the short term, high used-vehicle prices are also delivering profit windfalls when rental firms offload them above the depreciated value, and the high cost of new cars is tempering the overordering habit that frequently sabotaged the industry in the past.
“We don’t view inflation as necessarily a bad thing for us as this creates more discipline across the industry in terms of pricing and asset allocation,” Hertz Chief Financial Officer Kenny Cheung told investors in April. I doubt customers feel the same way.
Executives defend price hikes by emphasizing that rates failed to keep pace with vehicle costs in the years preceding the pandemic, due in part to internet price comparison sites and oversupply.
Price increases are “due to a general catch-up effect in the car-rental industry and therefore of a long-term nature,” argues Germany’s Sixt, whose shares have more than tripled from their pandemic low. Avis is aiming for “structurally higher earnings” in the years ahead, while Hertz thinks the shift to electric vehicles, like the Teslas and Polestars it ordered, will allow it to charge a premium.
However, the industry’s new-found discipline is yet to be really tested. Though consumers will probably stomach a summer or two of high prices — “screw the cost, I’m going anyway” — their price sensitivity will increase in time. Soaring fuel prices may deter road trips, and once more cars are available, the temptation for rental firms to slash prices to grab market share is likely to return.
Another capital-intensive and historically low-margin oligopoly, the container-shipping industry, faces similar uncertainty: For now, shipping groups are swimming in cash due to supply-chain upheaval, but investors worry high freight rates won’t last.
As in shipping, car-rental firms need to avoid stoking a political backlash. Instead, Hertz has scored a public relations own goal by having police arrest customers for not promptly returning vehicles; some of those wrongly detained are suing.
Sticking customers in an old car and charging them more also isn’t good customer relations. My advice is to check car-rental rates before you book a plane ticket and consider public transportation or an Uber for your summer vacation. Or else be prepared for a price shock.
Bloomberg Opinion columnist Chris Bryant covers industrial companies in Europe. Previously, he was a reporter for the Financial Times. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.