Haywire gas prices, the collapse of the economy and the credit market, plummeting new car sales and OEM bankruptcies: Has there even been a more tumultuous period in which the car rental industry had to react so quickly and decisively to market forces?
When 2009 finally shakes itself out, total revenue for the U.S. car rental market will have dropped for the first time since 2002. Revenues have dipped to 2006 levels, though that's when the industry had 1.8 million cars in service, substantially more than this year's 1.6 million total fleet (the lowest since about 2003).
A drop in revenues isn't a "good" thing, but these figures show that the industry is squeezing the highest average monthly revenue per unit out of its fleet-at $1,042-in more than 10 years.
As we close out the year it's a good time to check the health of the car rental industry. Here's a quick hit of issues affecting the industry and driving those numbers, along with questions that need answers.
Overall volumes for car rental for 2009 declined about 10 percent year over year. Travel demand is improving but still sluggish. The airlines say the worst of the slump is over. The good news is that RACs have been successful in matching fleet with demand.
Bigger destinations will be less affected, though can rental car companies in smaller markets weather airline rate hikes and route consolidations, which are likely to put downward pressure on travel demand?
Constricted fleets produced a healthy rate hike this year. Rate discipline will be as important as ever, as the industry operates on the lowest fleet levels in years.
Will car rental companies stay focused on RPU and not market share?
With less flexibility to de-fleet risk vehicles, can rates stay high in softer travel months?
The old incarnation of Advantage as a rate bottom feeder is no longer. Hertz expects to have more than 50 Advantage locations in 2010. Will Hertz use its characteristic pricing discipline to keep its new low-cost provider out of the rate gutter?
Car rentals are no longer a mechanism to keep product on the road to keep factories open. Yet how will domestic manufacturers treat new car pricing? Will a return to heavy discounts push fleet sales but drive down rates?
New and Used Car Markets
Last year, sky-high gas prices wreaked havoc on the wholesale market, sending values haywire. This year residual values are holding up, not a function of consumer demand but instead of tight inventory triggered by OEM bankruptcies, factory shutdowns and Cash for Clunkers.
New car sales will pick up next year, but only slightly. Wholesale market inventory is projected to remain tight. Rental companies continue to restrict new car purchases. Off-lease supply will be thin moving forward, a result of domestic captives temporarily getting out of leasing last year.
Yet as the full product line of 2010 model year vehicles hit dealer lots, dealers will be more desperate to move existing 2009 models. Again, will manufacturers resort to employee pricing and other forms of subsidized sales, which will erode residual values?
The beginning of this year saw the worst credit market in years. RACs held fleet through this storm. The majors managed to refinance successfully at favorable rates. Nonetheless, some RACs are reporting that they need as much as a 47 percent enhancement to gain a low interest rate on new vehicle purchases. This will be a real impediment to growth if travel demand picks back up, especially for independents and franchisees.
As Dollar Thrifty lessens its commitment to Chrysler, the days of brand loyalty are waning. Brand loyalty was traditionally driven by hitting a volume target for heavy discounts, and those days are over. Fleet diversification is a good thing. It allows RACs to be more specific in ordering, it lowers per unit vehicle costs, it hedges risk against a potential financial or production problem at any given manufacturer and it is good for resale values.
Though seemingly not an immediate concern, what will happen when cheap Chinese and even Indian cars land on our shores?
In one of the most closely watched excise fee votes in years, Wisconsin's Southeastern Regional Transit Authority board voted down-for now-a move to reinstate a $2-a-car rental car fee for 2010 to pay for a commuter rail line.
While this does not end the issue, the case shows a glimmer of hope that state and local governments are seeing the detriments to this type of predatory taxation. The Milwaukee County Board supervisor said fees from car rentals "are too inconsistent compared with a more steady sales tax."
In early 2010 the U.S. Travel Association is expected to announce an advisory board to "make policymakers more discerning and informed of the pros and cons of taxes," according to Geoffrey Freeman, USTA senior vice president. Having these big guns join ACRA and the Coalition Against Discriminatory Car Rental Excise Taxes will offer powerful new resources to the fight. If anything, it shows how big the problem has gotten.
Much ado has been made about Avis Budget's announcement that it is readying its system to accommodate no-show fees. This could be an important first step toward gaining consensus on guaranteed reservations.
Will this experiment gain traction? Will those that realize a smaller percentage of no shows go along for the ride?
Overall, car rental companies have done well this year in managing costs in a difficult operating environment. Revenues are down, yet the public majors all reported quarterly year-over-year gains in profit. The strength of the overall economy is the biggest challenge moving forward. Will major RACs' cost-cutting and pricing disciplines exercised this year continue? We hope so, as this "rising tide will lift all ships."