Falling rental profits, rising new car prices and a squeeze on supply will see short-term rental rates rise for fleets this year.
Avis has warned fleets to expect a 10% rise in rates from Easter, while Sixt, Thrifty and Europcar have also said rates will have to increase this year.
Rental companies have been hit by manufacturers’ decisions to withdraw in part from their market, blaming lack of profitability.
In a double whammy, manufacturers have also been raising prices in the UK to offset the losses caused by the drop in the value of sterling.
But arguably the biggest issue has been the cut-throat environment in which rental companies operate, an environment that has seen prices kept artificially low.
Some rental companies are now facing a stark reality: raise prices or face collapse.
1car1 has become the first casualty after calling in the administrators last week. Although trading at a profit, the rental firm is believed to be the victim of its lending banks changing their credit rules, an issue that is affecting hundreds of companies both within fleet and in other industries.
Experts claim several rental companies are facing a similar fate.
Europcar UK sales director Lorraine Farnon believes the recession could result in “the dawn of a new era” in vehicle rental.
“We need to remember that the basic cost of rental has changed very little in the last 10 years as the rental industry has driven cost out of every aspect of the business to become as efficient as possible,” she says.
“While rates must go up, we are working closely with our customers to mitigate these costs as much as possible.”
Traditionally, rental companies have several ways of acquiring vehicles:
- Manufacturer buy-back – buying a car from a manufacturer who buys it back at the end of the contract.
- Dealer buy-back – buying via a dealer business and the dealer buys it back.
- Outright acquisition – the rental company buys the vehicle and remarkets it, taking all the residual value risk.
- Contract hire and lease.
Companies like Thrifty and Enterprise Rent-a-Car prefer outright purchase; others, like Sixt, lean towards buy back. Hertz has a mix of the two.
However, manufacturers are turning away from buy-back deals. “Manufacturers are cutting back on the number of guaranteed buy-backs they offer because they don’t want to take the residual value risk on their balance sheet,” says John Lewis, chief executive of the BVRLA.
The exchange rate is also to blame, as Tim Bailey, fleet director of Europcar UK Group, explains: “Typically the manufacturers buy cars in euros and due to the foreign exchange rate last year, the cars they are buying now are roughly 20% to 22% more expensive than a year ago.
"This is exacerbated by the slowdown in people buying cars, and the fall in residual values.”
Rental companies are finding that if they are offered buy-back deals from manufacturers it usually comes with increased holding costs.
“There’s less inclination to do buy-back deals. Or, they’ll do them but they become more expensive in terms of holding costs,” says Ian Lawrence, Sixt’s managing director.
But there is no uniform response from manufacturers to the situation, according to Bailey.
“Their response differs. Some are saying they are going to ride out the financial storm and maintain relationships with daily rental companies, others say they can’t handle it and they will have to stop supply altogether.”
Roger Hancock, managing director of Thrifty, has a different take: “They are now supplying to us out of choice rather than necessity.”
It means that rental companies are running their fleets for longer.
Manufacturers have agreed to take them back at a later date, with the rental firm paying an additional depreciation cost.
The average replacement cycle of six to nine months could soon rise to a year. As long as they are properly maintained, it will have little impact on fleets.
Of far greater significance is the rise in daily rates.
“The customer needs to pay more rather than the manufacturer supporting us,” explains Lawrence. “Our plan is to run fewer vehicles at a better rate rather than chasing volume.”
Lawrence suggests fleet customers are looking at a 5% increase, but he is still reviewing the situation and has yet to put prices up.
Hancock says Thrifty has already increased prices but would not say by how much as they are “constantly under review”.
Europcar announced last November that it would have to put prices up but Bailey explains that fleets shouldn’t expect a blanket increase.
“We’re not suddenly saying to fleet customers you’ve all got to pay more from this date on. We’re saying it at the point of renegotiation and then working with them to minimise the impact,” he says.
“It also depends on their business profile – there will be less impact for those companies that rent cars more, because it means less idle time for us.”
Some fleets are resigned to the higher costs.
Phil Redman, fleet manager at IBM UK, says: “If all the rental suppliers put their rates up, customers would have to accept it, given the current market.”
Fleets do have options to offset the higher prices.
“We’re advising our customers to be more open to menu pricing,” says Hancock. “That means pricing each element of the transaction separately and then just paying for the elements they use.
"They could choose to collect vehicles rather than have them delivered, for instance.
Bailey recommends that fleet managers should try to book cars during the rental companies’ downtime, and try to combine meetings on the same day.
He also suggests treating a rental car like a pool car in order to get higher utilisation of the vehicle.
Neil Cunningham, Hertz managing director UK and Ireland, agrees. “A number of fleet managers are looking at ride sharing, and we’re diversifying with the launch of a car share club last year,” he says.
Nigel Trotman, fleet manager at Lloyds TSB Autolease, advises persuading people not to travel unless they have to.
“Our travel policy says about using public transport where possible,” he says. “And you could also look at tele or video-conferencing.”
IBM has been looking at the need to travel too. Redman says: “Last year we put a policy regarding travel restrictions in place and we ask whether a journey is necessary.”
While many manufacturers have reduced their rental volumes, most are not “stepping away” from the market altogether.
They will always need rental companies, particularly as a ‘shop window’ for their vehicles, which is pulling in relative newcomers like Kia and Hyundai.
“We’re staying friends with the manufacturers; we see them as partners,” Bailey says.
“This situation is cyclical and it will get better. It’s just a question of when.”
Cut fuel costs to cut costs
Fleets can clawback some of the imminent extra cost of rental by driving more economically.
“A key part of the rental cost is how the vehicles are driven,” says Tim Bailey, fleet director of Europcar UK Group.
“We did a test last year where, with careful driving, we improved economy. This could actually save the cost of the rental.”
Most rental companies encourage fleet managers to ensure the appropriate vehicle is being rented.
Choosing smaller vehicles reduces costs, for instance.
Nigel Trotman, fleet manager at Lloyds TSB Autolease, says: “You may see the headline costs going up but if you choose smaller cars the actual spend may not go up as much. You need to spend more cleverly.”
Manufacturers cut supply and raise prices
Manufacturers are cutting back on the number of vehicles they supply to daily rental companies.
Peugeot’s fleet director Phil Robson recently said: “We are reducing our exposure in this sector – we will have 25% fewer vehicles in short-term rental compared to last year and that will be on the back of a 50% reduction in 2008.”
Ford is also continuing to reduce its volume to rental companies, following
a reduction of 20,000 units in 2008.
And it’s a similar story at Volkswagen. Nick Berry, rental and direct sales manager, says: “We have reduced our numbers in line with the total car market reduction.”
At Renault the cutback is even more dramatic. Fleet and LCV director Keith Hawes says that so far this year “zero cars have been sold to the major rental companies”.
Renault told Fleet News that most of its 1% drop in market share last year was due to the withdrawal from short-term rental and Motability sales.
It has no intention of returning to that sector.
The French carmaker is also looking to raise prices this year.
It believes a 10% increase is needed to return its UK operation back to profit.
Ford and Vauxhall have already announced price rises, while Peugeot, which raised prices at least four times last year, is expected to follow suit.
Even carmakers at the value end of the market, such as Kia, are putting their prices up.
Everyone has been affected by the drop in the value of sterling, in particular against the euro.
Hawes says the euro exchange rates are part of the reason for the reduction in supply to rental companies, along with “forecast RVs” and “the holding costs rental companies are prepared to pay for buy-back vehicles”.
Berry, Volkswagen’s rental and direct sales manager, adds that in today’s business climate reducing the supply “makes good business sense”, while Matt Slater, manager of rental operations at Ford, points out that the reduction in volume “is assisting the stability of residual values”.
The bad news for fleet operators is this means only one thing: rental companies will have to put their rates up.
It's not just rental cars
Van rental prices are also set to rise, according to John Fleet, UK asset director at Northgate.
“Our business model is outright purchase and the decline in residual values is forcing rental prices up,” he says.
“Last year, residual values on vans dived, with long wheelbase vans suffering a colossal decline.
“Values have stopped declining now and some are on the way up, but it’s from a very low base.”
]He points out that although vans are now selling, the price they are fetching is considerably lower than a year ago.
For instance, certain models that fetched £16,000 last year may currently fetch only £11,000.
“Our costs have gone up 20% over the last 12 months,” Fleet continues. “We’re looking to put our rates up to cover the increase.”
However, Northgate believes the residuals issue is encouraging more fleets to consider rental solutions.
It has converted more than 1,000 vehicles to its Norflex solution from fleets that traditionally contract hired their vehicles and is also pushing its sale and rentback offer.
“Rental has historically been viewed as a stop-gap transport solution,” says Northgate managing director Phil Moorhouse.
“But the recession is changing that perception and more companies are waking up to the fact that it is vehicle usership and not ownership that is key.”