Following the terrorist attacks on America, there has been a great deal of attention focused on the dire consequences that this terrible atrocity will have on air travel.
Several American and European airlines have already announced major reductions in transatlantic flights, coupled with staff cutbacks. No one can yet be certain how far travel demand will fall, but these problems are bound to have negative effects on both the rental industry and their suppliers.
What then are the likely consequences for the European rental industry?
On the demand side, many European rental operators rely heavily on inbound tourist and corporate demand from America. Following the Gulf War, transatlantic demand slumped and this pattern now seems certain to be repeated in the coming months, but probably on a much bigger scale.
Further redundancy programmes seem certain to follow those already signalled by the airlines.
In turn, this economic downturn will reduce rental demand from domestic corporate customers for short-term replacement vehicles. Most customers will find it relatively easy to cut back on rental – unlike contract hire, the customer is not normally penalised for early returns!
It is also likely that we will see a further move towards downsizing as rental customers seek to minimise their rental and fuel costs, allied to more demand for diesel-engined cars.
In turn, this will dilute average daily revenue. Any threat to fuel supplies arising from a conflict in the Middle East would severely aggravate the position. Some operators may not survive through this crisis, and those that do are likely to be seriously weakened.
Turning to the suppliers (for which read manufacturers), they will be faced with rental operators running smaller fleets under massive cost pressures.
Across Europe, rental companies are projected to acquire about one million cars this year, representing about 7% of total registrations.
A 15% drop in demand from rental companies would equate to 150,000 fewer new car sales in 2002. Other sectors of the market could also be hit as consumer confidence falls and rising unemployment shrinks fleet demand.
Manufacturers who have previously restricted rental supply may suddenly find that the industry looks a lot more attractive. However, rental operators will certainly be looking for the smallest possible holding costs and, probably, a weaker, less profitable fleet mix.
Further down the food chain, residual values could be also under pressure. Most used cars are bought by private individuals from personal income. If consumer confidence remains low, these buyers will tend to defer the purchase of another car.
In the current environment, the hardest hit sector is likely to be the large petrol engine car, with small well-specified models least affected.
Gloomy though all this undoubtedly is, there may be a silver lining in the dark clouds now gathering above us. The first priority for rental operators must be shrink their costs sufficiently to remain profitable.
Those who can achieve this aim should find themselves in a stronger negotiating position with their suppliers.
Hopefully, this dialogue will extend beyond the familiar area of depreciation into such areas as return vehicle conditions and longer term supply contracts. Demand will eventually improve, and the industry may then be better placed to charge a proper rate for the service it provides. (October 2001)