U.S. automakers have long relied on sales to car rental agencies to boost sales and raise cash, but as rentals have slowed with the weakened economy, it will be harder for the Big Three to unload their excess vehicles.”For a long time fleet sales have served as a pressure valve for U.S. automakers,” said Michael Kane, president of Vehicle Replacement Consulting Group. “These sales gave the automakers an easy place to unload inventory and smooth out their herky-jerky production.”
“Now they have been hit by a triple whammy,” he added.
The economic downturn means fewer people are traveling, translating into lower rentals, especially at airports.
“Business is down for everybody. It’s just a matter of degree,” said Patrick Farrell, vice president of corporate communications at privately held Enterprise Rent-A-Car Co, the largest U.S. car rental agency. “The airport business is being hurt, which has an impact on people who rent cars.” Enterprise, which cemented its place as a colossus in the industry last year when it bought the National and Alamo chains, reported revenue of $10.1 billion in 2007.
The credit crunch also makes it harder for the rental agencies to sell their used cars to consumers, who are struggling to obtain car loans. And as the resale value of many of the vehicles of U.S. automakers has plunged, when the rental agencies do sell their used vehicles, they get less cash for them.
As a result, rental agencies are likely to need fewer vehicles from Detroit.
That’s a bit ironic since just last year, the three U.S. automakers - in an effort to return to sustainable profitability - decided to cut back on fleet sales to the rental chains. Selling the cars en masse at reduced prices had undercut their value.
REOPENING VALVE
As car sales plummet to 25-year lows and General Motors Corp, Ford Motor Co and Chrysler LLC run short on cash, they may be forced to reopen that fleet-sale valve wide.
But the agencies may not be interested — as they extend the lives of their fleets to ride out the downturn.
“They will look to stretch out vehicle lives to maximize the return on their investment,” said consultant Kane.
If U.S. automakers are forced to unload vehicles - especially 2008 models before 2009 cars hit dealerships around the United States - rental agencies can likely name their price.
The slowing U.S. economy already has taken a toll on car rental companies.
When Dollar Thrifty Automotive Group Inc reporting third-quarter results on Wednesday, it warned that full-year rental revenues would be down 4 percent to 5 percent and forecast a fourth-quarter loss “significantly in excess” of its loss a year earlier.
Avis Budget Group Inc and Hertz Global Holdings Inc report quarterly results later this week.
In late October, Avis said it had cut 700 jobs in the third quarter and expected a pretax loss of up to $1.2 billion as declining travel forced fleet adjustments.
But that doesn’t mean car rental agencies will stop buying cars. They’ll just scale back.
“They are going to be more conservative, buying less cars and holding them longer,” said John Healy, a senior analyst at FTN Midwest. “They have to operate with a keener eye on their purchases and lower the overall cost of their vehicles.”
Rental agencies have increased the average time they hold cars in their fleets to between 12 months and 13 months, from 10 months to 11 months, and could stretch that to up to 15 months in a prolonged downturn, Healy said.
FLEET SALES RISE
Although the rental agencies have need for fewer cars, there are signs the automakers may be trying to use rental fleet sales to weather the downturn.
Fleet sales jumped to 3.4 million on an annualized basis in September, from an average of 2.8 million in the nine months to September, according to auto sales tracker J.D. Power and Associates.
“This might just be an effort by the manufacturers to make things look not as bad as they are,” J.D. Power economist Bob Schnorbus said. “It is possible that they are doing everything they can to get those vehicles out there and using some pretty good deals to get that done.”
Jesse Toprak, executive director of industry analysis at auto tracking firm Edmunds, said pressure is likely to mount on automakers to get rid of this year’s models as year-end nears, leaving the rental agencies in a position of strength.
“Vehicles, where demand is low, have probably been sold to rental agencies for the best price they’ve ever paid,” he said. “The rental agencies are probably able to name their price.”
