The rental car apocalypse has a terrible sequel

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If you’re craving a dream vacation this summer after two years of travel restrictions, you might end up paying more to rent a car than for a plane ticket. And when you reach the start of the queue at the rental counter, don’t be surprised if you’re handed the keys to an older vehicle or an unknown brand.

Your inevitable frustration reflects a shortage of new cars amid the post-pandemic travel rebound that is helping big, publicly traded lessors like Avis Budget Group Inc. and Hertz Global Holdings Inc. rack up windfall profits. Analysts expect Avis to make nearly $2 billion in net income in 2022, more than it made in 2010 through 2019 combined.

Firms are hoping to hold on to higher prices even after supply and demand rebalance, which is unlikely to happen until next year. But rental companies risk a backlash if they rip off consumers, and investors should ask themselves whether this historically highly competitive, low-margin industry has really shifted.

To recap, in 2020 car rental companies cut costs and reduced fleets when Covid emerged and Europcar Mobility Group and Hertz ended up filing for creditor protection. When leisure travel roared last year and prices soared, cars were hard to come by and there was talk of a ‘rental car apocalypse’. Amid the fuss, Avis and Hertz became meme stocks and announced multibillion-dollar share buybacks.

Halfway through 2022, and some rental companies still don’t have enough cars due to a shortage of automotive chips. Manufacturers did not build as many vehicles, and they prioritized producing high-margin models (rather than the small, inexpensive vehicles vacationers typically rent). Automakers also allocated a smaller proportion of their production to rental companies. In the past, these represented 7 to 12% of a manufacturer’s sales, but the share of rentals has fallen to between 4 and 7% according to Europcar. Lease sales have a lower margin and automakers can make more money selling to dealerships.

Car rental companies must be nimble so as not to leave customers empty-handed. One approach is to keep cars longer than normal: Hertz’s US business keeps them for more than two years on average, compared to 18 months before Covid. (This doesn’t necessarily portend inferior service as these cars haven’t been driven as much lately).

Another avenue is to acquire used models rather than new ones, or to appeal to a wider list of suppliers: Europcar sources vehicles from Asian car manufacturers such as the Chinese Great Wall Motor Co., for example. (The French rental company may find it easier to source cars once Volkswagen AG’s takeover bid closes later this month).

But I doubt rental companies care that fleets are on average about a fifth smaller than in 2019, because that means they can charge more. Here is a selection of car rental rates offered in different countries for the summer of 2022 compared to the summer before the pandemic:

In the short term, high prices for used vehicles also generate windfall profits when leasing companies offload them above depreciated value, and the high cost of new cars tempers the habit of overordering that has frequently sabotaged the industry in the past.

“We don’t view inflation as necessarily a bad thing for us because it creates more discipline in the industry in terms of pricing and asset allocation,” Hertz chief financial officer Kenny Cheung told investors. in April. I doubt customers feel the same.

Executives defend the price hikes by pointing out that rates have not kept pace with vehicle costs in the years before the pandemic, in part because of internet price comparison sites and oversupply.

The price increases are “due to a general catch-up effect in the car rental industry and therefore long-term in nature”, argues Germany’s Sixt SE, whose shares have more than tripled from their pandemic trough. Avis is aiming for “structurally higher profits” in coming years, while Hertz believes the shift to electric vehicles, like the Teslas and Polestars it has ordered, will allow it to charge a premium.

However, the new discipline of the industry has not yet been really tested. Although consumers will likely endure a summer or two of high prices – “fuck the price, I’m going anyway” – their price sensitivity will increase over time. Soaring fuel prices may deter car travel, and once cars become increasingly available, the temptation for rental companies to cut prices to grab market share is likely to return.

Another capital-intensive and historically low-margin oligopoly, the container shipping industry, faces similar uncertainty: for now, shipping groups are swimming in cash due to the supply chain disruption. supply, but investors fear high freight rates will last.

As in shipping, car rental companies must avoid provoking a political backlash. Instead, Hertz scored its own public relations goal by having police arrest customers for not promptly returning vehicles; some of those wrongfully detained file complaints.

Sticking customers in an old car and charging them more isn’t good customer relations either. My advice is to check rental car rates before booking a plane ticket and consider public transit or an Uber for your summer vacation. Or get ready for a price shock.

More from Bloomberg Opinion:

• Hertz took the wrong customer for a ride: Tim O’Brien

• Hertz-Tesla deal will help standardize electric cars: Liam Denning

• Hedge funds love expensive rental cars: Chris Bryant

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.

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