Rental car agencies rush to build back fleets — by buying used cars
Rental cars stored in the parking lot of Dodger Stadium in Los Angeles May 2020. They were sold when the pandemic hurt the travel industry. (AP)
The semiconductor shortage has reduced vehicle production so much that rental companies cannot get the new cars they need and have resorted to buying used vehicles at auctions.
This is new territory for companies like Hertz Global Holdings Inc. and Enterprise Holdings Inc., who made their profits by buying new vehicles cheaply in bulk, renting them for a year, and selling them at auction. In the past they have bought some used vehicles to support an occasional unexpected surge in demand, but rarely for the mainstays of their fleets.
"You would never go to auction to buy routine sedans and SUVs," said Maryann Keller, an independent consultant who previously served on the board of the Dollar Thrifty Automotive Group, now part of Hertz. “These are special circumstances. There is a shortage of cars. "
Demand is causing used car costs to rise. The Manheim Index, which measures prices at wholesale auctions, shows that they are 52% higher than a year ago.
"We expect records in the Manheim Index by June before demand drops so much that it coincides with supply trends," said Jonathan Smoke, chief economist at Cox Automotive, which owns Manheim, the country's largest used car auction. "We expect retail prices to continue rising into the summer as retail trends tend to follow wholesale trends with a six-week lag."
Despite the upfront cost, the auto crisis is a boon for landlords who are likely to make big profits as they rent out every car they own at much higher rates than they were charged prior to the Covid pandemic. But consumers will get a hit if they want to rent a car for the vacation, Keller said.
Hertz is adding as many cars to its fleet as possible to aid in the recreation of the trip, including used cars, spokeswoman Lauren Luster said in an email.
"The global shortage of microchips has impacted the ability of the entire car rental industry to get new vehicle orders as quickly as we'd like," said Luster. "Hertz complements our fleet by purchasing used, low-mileage vehicles from a variety of channels including auctions, online auctions, dealerships, and cars sourced from leasing programs."
The same applies to the closely managed company, the largest rental company in the country. Avis Budget Group Inc. did not immediately respond to a request for comment.
"Our fleet acquisition team is working hard to secure additional vehicles - both new and used, low-mileage vehicles - across all channels in order to meet the continued rise in demand," said company spokeswoman Lisa Martini via email. “Overall, however, both the number of new and used cars remain low. Our teams will continue to do their utmost to assist customers with their transportation needs. "
The problem started a year ago when the pandemic decimated travel. Landlords have sold hundreds of thousands of cars, said Neil Abrams, president of Abrams Consulting Group Inc., which operates in the rental industry. Then the journey bounced back when auto production was hit by a shortage of semiconductors.
Ford Motor Co.'s production declined 17% in the first quarter and could decline as much as 50% in the second quarter, the company said in its April 29 earnings call. Other companies have a similarly foreboding message.
"This is one of those rare occasions where we have more customers and not enough cars," Abrams said.
The supply is becoming increasingly scarce, said Manheims Smoke in an email. Manheim started the year with a record low supply, but further increases in demand would have reduced that even further, he said. Vehicle wholesale values have risen for 13 consecutive weeks and prices have accelerated to the highest weekly level in recent weeks.
Landlords need to keep cars longer. In Manheims mid-April, it said the rental cars up for auction had an average of 79,000 miles, up 54% over the previous year and 18% over the previous month. In normal times, rental companies like to sell cars before they reach 40,000 miles, Keller said.
Meanwhile, consumers pay the highest price when they can find cars, said Jonathan Weinberg, CEO of AutoSlash, which is helping consumers find the lowest rental prices.
"We're seeing some conspicuous numbers. We're seeing average prices in Florida of $ 100 per day, $ 200 per day in Hawaii and $ 600 per day in Puerto Rico," Weinberg said. "We think things will get worse in the next few weeks Vehicle traffic has increased and the number of vehicles has decreased. "
Avis saw rates jump 3% to $ 59.43 per day in the fourth quarter, said Hamzah Mazari, an analyst at Jefferies & Co. He believes Avis could report that its daily revenue increased at least 4% in the first quarter up to 1% is up around $ 60. The company publishes earnings on Monday after close of trading.
Consumers may hate it, he said, but after a year that Hertz went bankrupt and Avis lost $ 569 million, landlords will enjoy some fat margins.
"We haven't seen prices like this for a long time," said Mazari. "You will have very good profits."
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