The most painful decisions involve staff, as operators aren’t exactly sure when they’ll be forced to start layoffs. One large franchisee is considering paying employees from his personal savings.
Photo courtesy of Brian McGloin/U.S. Air Force.
By the time you read this, much of the information enclosed may have changed. Things are that fluid right now. These are unprecedented times indeed.
Less than a week ago, business was down a manageable 30% in the typical leisure destinations. But as the Florida and Southern California amusement parks have closed along with the ski areas, rentals are grinding to a halt. “Orlando was the last to go for leisure business but it’s dropping like a rock,” said one independent operator.
“Business travel was the first reduction but with this week’s closures it’s now every segment,” said a rates analyst. She added that local markets were holding steady with replacement and dealership rentals. “However, this week’s residential restrictions should impact (local rentals). We could see that trend surface next week.”
So how is the car rental industry dealing with this new normal? It depends on who you talk to. One thing everyone agrees on, there will be a return to business at some point, though we don’t know when. When it comes, be prepared to be overwhelmed. But there will be a lot of pain in between.
The majors are finding places to park cars, understanding that a massive de-fleeting will result in a fire sale that everyone will take a bath on. “They’re under no pressure to do anything because it sucks everywhere,” said one major brand board member.
Yet one large franchisee has begun to de-fleet as much as he can, right now. He realizes he won’t be able to fleet up fast enough to take advantage of the ramp up when it comes. “I’d much rather have the problem of how to ramp up than losing $3 million a month,” he said.
He’s got a head start on de-fleeting, though he realizes it’ll get tougher moving forward: The largest auctions have moved to online sales only, while the smaller ones are shutting down entirely. Even then, state DMVs have closed, so anyone not in possession of titles can’t sell their cars. Yes, dealers are still buying cars, though the in-store traffic has slowed to a trickle.
Right now, there seems to be a lot of asking for forgiveness, and a lot of forgiveness granted.
Some manufacturers are allowing car rental operators to cancel orders and they’re relaxing the rules on selling 2020 model-year units that are less than a year in fleet. (Prudent operators are de-fleeting the oldest units first.)
Airport operators are going to the airport authorities to ask for a delay in minimum airport guarantee (MAG) payments. Lenders are allowing operators to defer payments or make interest-only payments. Said one Florida affiliate: “I went to my lender and said, ‘I’ll pay interest only for a few months. Me filing bankruptcy won’t be good for any of us.’”
But will this be enough to keep businesses from going under?
The most painful decisions involve staff, as operators aren’t exactly sure when they’ll be forced to start layoffs. The large franchisee is considering paying employees from his personal savings. “I worry about them,” he says. “I lose money for a year, I can survive. They can’t.”
Asked one independent in the Northeast: “When do I close my office? Why are we open right now? How long can I pay 40 people?”
“Furlough staff by asking volunteers first,” advised one Midwestern franchisee. “Shorten everyone’s hours but try not to lay anyone off. Nobody wants layoffs so if you can spread any hurt among all employees, that helps and keeps the team intact for the rebound.”
Some make parallels to 9/11, in the sense that an unexpected event disrupted travel for months. But that was when the Yellow Pages were still a major advertising source and more manufacturer repurchase programs allowed for easier de-fleeting. Back then folks actually made money on rate, not on manufacturing a used car.
However, the key takeaway from almost 20 years ago is still relevant — prepare for the rebound. Some operators admitted to having been caught flatfooted when business returned.
The operators that already had solid business practices will survive. Those are the ones with multiple credit lines and great relationships with each of their lenders. They have history with the fleet departments at the automakers and know their local dealers.
“We have an edge because of our 40 years in business and relationships with the manufacturers,” said that large franchisee.
They’re the ones who don’t finance 110% of their vehicles and are conservative on depreciation. They already have in place agreements with parking providers to park overflow fleet, and they’re renting space to other rental companies.
They’re making deals to buy used cars — not new — to prepare for the rebound.
Said Rahm Emanuel, infamously: “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”
Smart operators are out hunting for new types of business, calling on the National Guard and local governments. Yes, the majors have most of the contracts with the larger government agencies, but there will likely be spill off business if you look for it. You’ve got vans? The Northeast independent is looking to rent his to Amazon contractors.
“The key to staying alive until we see this pent-up demand is cash and cash management,” said the Midwestern franchisee. “The companies that survived in the past had cash in the bank and were able to hold onto their cash.
“Everyone needs to take a deep breath, let it unwind, it’ll come back in a big way,” said the board member. This is admittedly harsh, but true: “This (crisis) will clean house of the car rental companies that shouldn’t be operating anyway,” he said. “(The result) will be the best environment for residual values and making money and pricing right.”
“By next summer, car rental will be perceived as a good investment.”