Rental Car Market Outlook Spans Strong Macros and Mixed Micros

Northcoast Research's John Healy (L) joined ICRS/ARN's Chris Brown for a rental car market overview on April 15 at the International Car Rental Show in Las Vegas.  -  Photo: Martin Romjue / Bobit

Northcoast Research’s John Healy (L) joined ICRS/ARN’s Chris Brown for a rental car market overview on April 15 at the International Car Rental Show in Las Vegas.

Photo: Martin Romjue / Bobit

The big picture economic and market forecast for auto rental should give operators confidence for growth and at least some direction in confronting the challenges of a post-pandemic environment shaking out.

That was a key takeaway from the annual session updating the state of rental fleet and automotive industry markets on April 15 that officially started the International Car Rental Show in Las Vegas.

John Healy, the managing director, and equity research analyst covering the business services sector for Northcoast Research, joined moderator and Auto Rental News publisher Chris Brown for a wide-ranging run-through of key industry metrics and insights.

State of Car Rental Industry

Starting with some positive macro-factors, Healy cited how TSA screenings at airports are still strong with a 7% increase year-to-date in mid-April, despite GDP up only 2-3%. That points to a higher-than-normal correlation between travel and the economy.

“Travel dynamics with consumers are strong with more people out there daily,” Healy said. “We’re still getting close to all-time highs on TSA screenings.”

On the fleet side, the rental car industry in mid-2023 started seeing more consistent rental vehicle purchases with 130,000 cars added into the industry in March 2024 alone, a total higher than expected. Healy predicted more vehicles will become available to the industry this year and on better financial terms.

In the rental car sector, pricing dictates profitability, said Healy, referring to one of the more micro factors. “Your industry is very profitable or a tough business depending on fleet levels. We had a tough Q1 with rates per day down in the high single-digits and profits narrower than a year ago.”

Rates should firm up in May, suggesting the industry fleet is getting tighter and signaling higher profitability for the summer, Healy said. “Tax returns are hitting folks and we’re seeing strong retail trends in March and early April, with the auction guys getting good business,” he said. “If there are too many cars now and they don’t want to carry them, then it’s not a bad time to sell. Recent times in the auction industry have been the best of the calendar year.”

On a related note, Healy pointed out that COVID was expected to be harmful for Hertz and Avis financials, but Avis’s stock has performed well beyond expectations while Hertz’s stock performance has been choppier and more volatile.

“Their business had a lot of leverage in it given their fleet structure, lending, and pricing being incremental to profits,” he said. “The demand in business is unpredictable.”

Healy has been providing big picture rental car market updates since 2008, and specializes in analysis of hedge funds, mutual funds, private equity funds, automotive lenders, auto dealers, mobility, automotive remarketing, and power sports.

What’s Ahead in 2024 and Beyond

For 2024, Healy predicts rental demand to grow at a moderate pace. Electric vehicles will once again be a factor in helping define the rental car market.

“EVs are becoming the new compact entry level car, getting consumers who are struggling with affordability and payments to embrace EVs and to afford a new car or an upgrade,” Healy said.

While the industry has focused on Hertz more than Avis, Hertz and investors have learned some lessons on how to navigate the EV market, Healy said. The company, which has a strong reputation for managing inventory, this year hired a new CEO and COO who will steer Hertz through the EV fleet downsizing.

Avis has been more measured in its EV strategy, keeping its acquisitions steady, Healy said. “The area I’d be watching for them is on the remarketing side. They are building an online retail strategy to compete with Carvana. RubyCar by Avis is on par with CarMax and Carvana and there some impressive things they are working on.”

Generally, the industry will see mixed data points in related sectors, with travel, hotels and airlines showing positive trends upward, whereas leisure experiences will see less sales and activity including RVs.

A Quick FYI List of Car Rental Dynamics

In a wide-ranging audience discussion following the presentation, Healy and Brown drew out and discussed other market conditions, pulses, and tidbits to watch for in the near- or long-term:

  • Given the outsized returns in the car rental industry in 2021 and 2022, more rental car providers will enter the industry to compete and seek business. With pricing more pricing pressure, profit margins could range lower.
  • Pricing remains the biggest challenge for rental car operations given a segment of lowball rates in the industry. An operation cannot make a profit or break even on $10 per day rentals, for example, even at theoretical usage rates exceeding 100%.
  • New car prices will be higher, but rate increases are leveling off.
  • Buying newer used vehicles for a rental fleet doesn’t work out well financially because the residuals are too high, and supply remains tight. It’s better to buy new cars and depreciate them down. Despite some easing in the market, used vehicle prices are still up 37% from March 2019 to March 2024, and up 31% compared to March 2020.
  • Given inflation, interest rates, and economic headwinds, the weaker the consumer segment, the more stimulus manufacturers will put into the auto market. That will impact the residual values of late model rental and off-lease cars, which will compete with new cars.
  • Interest rates could reduce sales conversions if consumers purchasing vehicles cannot leave a dealership with a better payment or better overall value than what they have with current vehicles.
  • While the market won’t see many 1-3-year lease returns in the next year, late 2025 and 2026 for the rental car industry will bring more off-lease returns competing with rental cars.
  • That means the outlook for residual values for rental cars is stable for the next 12-18 months, but then the market will get more crowded with vehicles.
  • Remarketing strategies will determine volatility for vehicle resales. A car that cannot be sold at retail or to a dealer will have to be blown out at an auction, which is the most expensive place to sell a fleet vehicle.
  • One of the best approaches for rental car operators is to focus more sharply on forecasting demand, and then make fleeting decisions as flexible as possible. A nimble remarketing strategy should avoid shedding too many vehicles at once but also avoid having to make payments on depreciating cars while waiting for demand to improve.
  • Auto auctions are seeing dramatically different resale values for used vehicles in different states. Rental car operators should know where they plan to sell cars and closely watch and plan for an unpredictable market.
  • Rental car operators should monitor the consumer backlash against EVs and recognize that many customers will resist renting one if they ask for or reserve a lower-rate rental car and find out it’s an EV. EVs now are often priced like compact cars.
  • The appeal of EVs varies among geographic markets depending on the ease and availability of charging and weather conditions. Many customers don’t want the added stress of having to find chargers in an unfamiliar area.
  • The used market for EVs is not yet fully developed because of uncertainty surrounding EV battery valuations and the expected performance of used EVs.
  • If the rental car industry buys 30% of its total fleet as electric vehicles, the future used market may not be deep enough to absorb all the used vehicles that will be cycled out of fleets each year. Questions linger about used vehicle market capacity in terms of added supply, battery valuations, and consumer interest.

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