Vehicle allocation is finally trickling back into rental fleets, while used prices started to decrease in the fall of 2022.
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It’s been a turbulent last few years for rental operations to say the least. While the industry weathered an unprecedented supply crisis — and enjoyed record profits as a result — we may finally be seeing the light at the end of this long tunnel. Yet we’re now in a whole new environment with new challenges and demands.
To gauge how the industry overall fared and is moving forward, Auto Rental News caught up with various experts in the space. Here’s what they said about vehicle availability and sales, the path to electrification, incorporating technology and telematics, the changing customer experience, new business models, and more.
Addressing the Vehicle Shortage
Over the past year, most operators graduated from asking “Where are all the cars?!” and adapted to the new tight-supply environment that left rental fleets in short supply.
As replacing vehicles became hard, if not impossible, operators were forced to hold on to vehicles longer than usual. The era of flipping cars at 35,000 miles officially ended.
“Last year, a lot of operators understood the challenges around the lack of vehicles, which included 2021 orders that were cancelled,” Mark Novak, chief revenue officer at Zubie, said. “Operators had to start thinking about how to manage their current fleet more efficiently while figuring out how to take advantage of the used car market and the high rates they got from selling off assets. They were very strategic in terms of what vehicles they sold off and which vehicles they were willing to maintain longer.”
Through 2023 at least, limited vehicle availability will continue. However, most experts report some recovery on the horizon. There were finally early signs of increased allocation to rental fleet channels in fall 2022.
Operators still need to be clever in how they source cars as we inch toward supply recovery, though.
Fleet Sales Trends
Despite the continued supply strain, the silver lining is that demand stayed strong despite a robust pricing environment.
“Car rental pricing has been the highest I have ever seen in the 35 years I have been doing this,” David Bond, national sales manager for GMI Insurance, said. “For decades, it seemed car rental rates were stagnant, and with the car shortage, rates skyrocketed.”
Michael Muehlenfeld, GM of fleet operations at Walser Automotive Group, said that there’s traditionally been a 3% to 5% increase in vehicle costs year over year in production, but this past year has seen numbers much higher.
Muehlenfeld said the challenge moving forward is that rental companies had been paying over MSRP for vehicles, which is no longer the case. But with used prices softening, it will be a challenge to depreciate those higher priced vehicles correctly.
However, the future looks bright. “As we get past this shortage, we’re going to have a year where we have a [sales] number that’ll exceed any number I’ve ever done in the past, I have no doubt about that,” Muehlenfeld said.
The Wholesale Market
Rental companies have always bought vehicles at auction opportunistically, though in the past 18 months it became much more of a necessity — even as wholesale prices tracked proportionately higher than new cars.
As far as the number of off-rental vehicles that came to auction in 2022, Tom Kontos, chief economist at ADESA, said there was moderate growth. “We’re off bottom at least, but we remain well below pre-pandemic levels.”
There were only 513,169 units sold into rental fleets through October 2022, compared to 1,494,687 units over the same period in 2019, according to Bobit sales data. That’s about 1 million fewer vehicles ending up in the wholesale market, Kontos said.
Used vehicle prices did finally soften from historical peak levels in 2021 and spring 2022. Kontos said they came down faster this year than they normally would between spring and fall, though the rate of decline is starting to moderate.
“The year has seen continued strong inflation in new vehicles, but declining values of used vehicles and especially declines in wholesale values,” Jonathan Smoke, chief economist at Cox Automotive, added.
High vehicle prices and higher interest rates combined to dramatically reduce affordability, especially constraining subprime demand in both the new and used market, Smoke said. This weakening demand notably impacted used vehicle values. Through October 2022, wholesale values declined for five straight months and were down by more than 10% year over year.
However, Smoke noted that, “As new-vehicle demand in retail slows, we believe an opportunity for the fleet market may emerge as OEMs shift focus to the depleted fleet market, and by doing so will prevent new vehicle inventory from growing too quickly on retail dealership lots.”
Rates & Pricing
As the world changed, so did the window to book vehicles. Andrew Pascoe, CEO of MarginFuel, noted that most reservations now happen in the 30-day window, with over 50% in the 14-day window.
According to Michael Meyer, president of Rate-Highway, there’s been an awakening for rental fleet managers in regard to managing rental rates. He said taking a proactive approach is where the bigger fish and better reservations lie. “A sophisticated operation will try to farm leisure renters that make reservations 60 or 90 days out, because they’re usually willing to pay more,” he said. “Companies are starting to recognize that and manage their rates further out.”
Pascoe agreed and stated that there’s been a swarm of interest in forecasting technology during and after COVID.
Partnering with outside vendors has risen in the wake of the labor shortage. “With many companies having reduced staff compared to pre-pandemic, and a market that is difficult to predict, such tools lead to greater efficiency and significant revenue increases,” Pascoe said.
Meyer agreed, noting that it has been rare for rental operators to work directly with a supplier, but that is changing. “It’s a new approach, where brands embrace a third party to support their licensees,” he said.
Dealerships Reconsider Retail Rentals
Another new trend of the past few years? More OEMs taking the mobility play at dealerships. “Some of the manufacturers are starting to ask, why are we not augmenting our internal rental operations in our dealerships? There’s a local market demand, it’s a great way to highlight our product, and is the best way to serve the customer,” Ken Stellon, partner and EVP at Frontline Performance Group (fpg), said. “When capacity comes back … more of these OEMs will be creating programs that encourage dealers to rent to retail and not just service their loaners.”
Speaking to the evolution, Matt Carpenter, Dealerware CEO, added: “As vehicle availability improves, we see more automakers and their franchise dealerships working together to service the traditional car rental market with branded offerings. More and more traditional car rental customers will take advantage of these offerings and be serviced by this network.”
More data is available than ever, and smart fleet operators have tapped into telematics to gain insights on vehicle health, fuel readings, and maintenance needs, sell vehicles for higher profits, and reduce downtime from stolen vehicles.
Photo: Canva
Connected Cars & Telematics
For the major car rental companies, connecting vehicles with telematics is almost ubiquitous: Hertz’s U.S. fleet is nearly 100% connected, while Enterprise Holdings and Avis Budget Group aren’t far behind.
Independent and franchised operators are starting to realize the benefits, too. What was once thought of as simply GPS location, telematics has transformed into a robust vehicle data platform that offers actionable insights.
“Utilizing mobility data has been able to find operators in a position where they’ve been able to reduce their check-in and check-out times, even cutting it in half in some cases,” Novak said. “They don’t have to worry about the odometer, fuel, or do lot inventory audits every day. Now they can do all that digitally and speed up their entire operational process and efficiency. Operators have even noticed they can sell their vehicles for higher profits when they manage their vehicles better, especially around mileage thresholds.”
Ron Minton, head of connected car business development at Geotab, mentioned that longer vehicle lifespans make harvesting telematics data even more important. “Accurate odometer information is critical; in many cases it’s the yardstick to decide when to defleet a vehicle,” he said. “Getting odometer reading via telematics also takes the human element and error out; it’s already in the system.”
Minton added that telematics also plays a critical role in knowing the overall health and maintenance needs of older vehicles that we may not be used to monitoring that closely in fleets.
Another operator benefit is more precise fuel-level readings beyond what the gas gauge shows. With telematics, it can tell down to a tenth of a gallon. And for operators wanting to automate systems even further, they can set up a geofence so that when a car enters the property, you get a fuel-level notification before it’s even parked.
What is also accelerating adoption is the move away from an aftermarket hardware installation to an OEM-installed modem at the factory.
“There are new opportunities coming up with manufacturers that have connected car capabilities, without the need for a dongle,” said Andrew Rodriguez, VP of automotive solutions for fpg.
For instance, rental companies can also access vehicles’ locations even before they reach the lot, a fleet management benefit particularly in this era of supply chain disruptions.
Customer Service & Contactless Operations
While contactless rentals have been talked about for years, it was the pandemic that forced many operators to find ways to automate the rental process with digital keys and other technologies that made renters feel safer and kept cars in service while streamlining operations.
Contactless rental experiences are still evolving and differ in each region, according to Naomi Virgo, managing director at Rentall. “We’ve got quite a lot of U.S. clients wanting more unmanned rental as opposed to contactless in the sense of unlocking the vehicle,” she said. However, “There are still big gaps in the market with unlocking vehicles and getting all the manufacturers linked up. The technology still has to catch up with the concept.”
“Automated customer credentialing, mobile contracting, and insurance form automation are examples of core capabilities that modern fleet management solutions need to deliver so customers can have some of their precious time back,” Carpenter said. “We feel vehicle and customer pick-up and delivery options are game changers to win market share in the evolving car rental market.”
Pascoe also mentioned that higher emphasis is now being placed on a more streamlined customer experience, reflected in customer service ratings for operators.
Culture & People
While there is still a talent shortage felt in rental, Stellon acknowledged that some of the best ways to keep top performers are through incentives and benefits, coaching and development, and recognition programs.
Novak believes the labor shortage will continue over the next two to three years. However, he also thinks that technology can pick up the slack with new tools coupled with the right data sourcing and analysis. “We believe that there’s going to be a major shift over the course of the next few years where operators are going to leverage the right technology using data versus having to rely on human capital,” he said. “Inventory, vehicle recovery times, check-in and check-out, all improve multiple times over with the right partner.”
Another result of the higher margins from higher rental rates is that rental agents are receiving wages never before seen, according to Stellon, with some companies moving from salary plus commission to a time-and-mileage formula. “The best-kept secret in the U.S. economy is their earning potential,” he said.
Virgo, however, noted that some operators scaled down their operations and realized they could get by with fewer employees and reap higher savings. Those operators are now hesitant to scale back up even as their fleet size grows again.
Electric Vehicles & Infrastructure
Electrification still has much chatter around it — as well as speculation — with many in the business saying they’re still “watching” the EV trend.
Despite government mandates and growing consumer interest in EVs, much work remains in building enough infrastructure to support a robust electrified environment.
Photo: Canva
More than 1 million battery electric vehicles will be sold in the U.S. in the year ahead, bringing increased opportunities for fleets to shift toward electrification. “We believe consumer interest in electrified vehicles continues to grow,” Smoke said. “Recent shopping research from Cox Automotive’s Kelley Blue Book indicates that one in four shoppers is considering an electrified vehicle.”
An October 2022 Dealerware report said that more than half of customers would prefer an EV as a dealership service loaner as they’re hungry for ways to try before they buy — a sentiment that extends to rental vehicles too.
But for EVs in rental to be viable, the charging network must be broadened. Publicly accessible chargers did increase to 1 million globally in 2021 — up from 640,000 in 2020, according to Autonomy. But while the Bipartisan Infrastructure Law aims to install 500,000 public chargers nationwide by 2030, if half of all vehicles sold are zero-emission vehicles by then (per government targets), McKinsey & Company believes that America would require almost 20 times more chargers than it has now.
“As remarketers of cars, were trying to understand the nuances of remarketing EVs, but need more information on battery life, repairs, and charging facilities,” Kontos said.
ADESA reports less than 5% of all cars that sell at auction are pure EVs now, though that number will grow in the coming years.
Minton said another hurdle in the shift to EVs is increasing renter confidence in operating them because in some EV models, basic functions like turning on the AC or rolling down a window isn’t always intuitive. And if renters can’t figure out basic functions, they may wonder if the vehicle will even be able to get them to where they need to go. A lot of training and education will need to happen with rental staff to get these cars in the hands of customers, he said.
One thing that surprised Stellon is how the industry is readying for the coming wave of EVs. “I’m starting to see more dealerships and off-airport rental situations book capacity for EV charging,” he said. “You’d think airports are leading this, but it’s the local markets.”
P2P Platforms
People are looking for new ways to get in cars without the commitments of ownership, and alternative rental models have emerged. In fact, an entirely new association dedicated to the support of independent hosts and peer-to-peer (p2p) operators emerged last year.
Dealerware’s report said that among its survey respondents, 46% still rent from traditional off-airport rental locations through national rental providers, 15% use dealership rentals, 9% use peer-to-peer carsharing, and 8% use carsharing services.
Meyer said that the most interesting change he’s witnessed recently is the emergence of operators on Turo’s and Getaround’s p2p platforms who have been dipping their toes in car rental, found success, and want more.
However, they’re entering a market that is rapidly changing. Sky-high rates and high profits are starting to come back down to Earth. “Right now, demand outpaces availability, but that will change, and when we’re in abundance again, rates will soften and availability will exceed demand, which will be new to a lot of the people just coming into car rental.”
Insurance
As p2p became more popular, insurance providers had new opportunities to offer coverage.
Bond said that GMI Insurance saw a huge increase in small operators putting their vehicles on p2p platforms to fill the void of the vehicle shortage. This allowed them to form a new entity, put their vehicles into that entity, and get a proper commercial insurance policy.
Likewise, some p2p operators moved their business off these platforms and set themselves up as a traditional car rental operator to do direct rentals, according to Teresa Quale, executive director of Sonoran National Insurance Group. This also required additional commercial insurance and allowed operators more control and a larger piece of the daily charge for the renter, she said.
Quale also noted that on the supply side, insurance carriers are increasingly unwilling to offer $1 million liability limits. Rather, they’re offering $500,000, $300,000, or less. “This is true both in rental fleet liability and the supplemental liability counter product,” she explained.
This is in part due to smaller fleets generating less premium, she said. However, claims and costs are rising. “This is particularly acute in states like Florida and metro counties in New Jersey, Illinois, Texas, and California, with high concentrations of vehicles and courts that heavily favor plaintiffs in commercial automobile liability claims,” Quale said.
Claims & Risk Management
Fleeting older, higher mileage vehicles brings increased maintenance costs. “In a world of penny pinching, everyone’s trying to find more ways to be efficient,” Virgo said. “Operators are suddenly more interested in depreciation and maintenance. When running an older fleet, there will be more issues, so they want more visibility and control over that. There’s been more interest than ever for analytics. They’re trying to squeeze every last dollar out of the cars they have.”
Virgo also said Rentall has seen more fraud lately. “In desperate times, you see desperate measures,” she said. “Some of our clients are now more focused on license scanning, validations, and security, to try and protect themselves better. Risk management will definitely become more of a focus over the next year.”
Claims volume and accidents are up over the past year, too, reports Rodriguez of fpg, which has an ownership stake in Alternative Claims Management (ACM). Loss of use claims have grown as well, as body shops struggle to repair cars in a timely manner. What would have taken two weeks now can take 30 days to repair, he said.
Rodriguez also noted a decrease in ancillary sales products, which used to be a valued source of incremental revenue for many operators when daily rates were suppressed. But now that daily rates have increased, the training that went into ancillary sales fell off. As things normalize, it will be critical to refocus on selling ancillary products, he said.
Similar to the sentiments expressed by Meyer, Stellon believes rental companies should also outsource their claims operations to third parties for the extra focus the outside company brings. “You’re in the business of renting cars; you’re not in the business of collecting third-party damages,” he said. “If it’s not your core competency, outsource it!”
Legal Landscape & Regulation
Legal and regulatory activity of note involve qualifying drivers, records compliance, and privacy laws.
Leslie Pujo, partner at Plave Koch, and Wes Hurst, senior partner at Polsinelli, bring up two cases in West Virginia and California that address the importance of qualifying an additional driver — not just the primary renter — and maintaining rental records confirming compliance in the event of accidents caused by additional drivers.
In the same case involving the additional driver in West Virginia, the court became involved to determine if fatigue contributed to an accident. It eventually decided there was no evidence regarding the driver’s behavior to suggest he was not fit to drive.
Lastly, the Colorado Federal District Court recently found that an RV rental company did not have a duty to require renters to have prior RV driving experience or to confirm that a foreign renter could read and follow English road signs. According to the court, the “reason to know” standard for finding negligent entrustment does not create a duty to seek unknown facts at the time of rental, such as inquiring about a driver’s experience or English language skills.
Other issues Pujo and Hurst recommend staying in tune to are privacy laws and telematics. “Before using telematics systems, rental operators should consult with privacy counsel to determine the do’s and don’ts under developing privacy laws,” they said. “This is especially important in view of recent legislative activity regarding privacy.”
What’s Next?
While everyone wishes they had a crystal ball to truly know the future, our experts felt comfortable predicting a few trends.
“We expect more and more passenger miles traveled in the U.S. to be traveled in fleet vehicles,” Carpenter said. “The combination of generational shifts, remote work, and rising vehicle prices have many Americans rethinking vehicle ownership. That said, we also feel personal transportation including car rental will continue to grow. The winners in this market will be the fleet operators that can deliver flexible, on-demand access to high-quality fleet vehicles in daily, weekly, and monthly increments.”
Kontos believes that we will continue to see price correction in used car prices going forward, noting that there’s probably a limit to how far down prices will go considering the short supply.
Minton is excited about the convergence between contactless operations and telematics, and how data can shape the future of transportation. “I think the power of [connected car and telematics] data is only going to grow in importance to the rental car industry,” he said. “It’s those companies that know how to make decisions based off data that will be the ones that are really successful.”
What is Meyer watching? “I’m really interested in what happens to mainstream distribution channels like Expedia,” he said. “OTAs are the lifeblood of car rental in the U.S., but we’re entering a much bigger ecosystem. We’re now in brackish waters, and someone’s going to win. I don’t know what that’s going to look like, but new life will emerge from this mixture of environments.”
What about the economic climate? Cox Automotive predicts there is a 50/50 chance of a recession still coming. “We see demand for both new and used vehicles impacted by a declining economy and corresponding loss of more than 3 million jobs. The recession is not likely to be severe by historical standards, and the timing could be advantageous for fleet buyers given the expected improvement in new vehicle production in 2023, just as retail demand could be cooling,” Smoke said.
One way operators will see continued success in any environment is through top-notch customer service. “Being customer centric is paramount for a successful future,” Rodriguez said. “Building loyalty in these times is crucial, especially when customers are paying a higher dollar amount for vehicles.”
And as interest in EVs grows, Smoke added that “electrified vehicle options in rental fleets are a smart, forward-looking solution.”
What are your predictions for the coming year? What issues are you watching? Share your take in the comments!