Car rental companies often maintain a large fleet of cars for several rational reasons but also less tangible ones. Here how WeYield tres to bust some of these myths and ‘truths’!
- Customer Preferences: To accommodate a variety of customers’ preferences, car rental companies provide a wide array of vehicle types, from economy and compact cars to luxury and sports utility vehicles.
> false : most of the demand is not driven by the car type but by the prices. And this is valid for both the retail or the corporate side of the car rental business. Except for a small demand for specific cars (like the 7 seaters during the Summer season or SUV during Winter), 90% of the demand is directed by the price.
Due to this, if the car manufacturers would match the demand with the production, they would need to produce 30% of Mini, 30% of Economies, 20% of Compacts and the rest for the other car types.
Problem: they start to make money only at the Compact and above (mostly SUV’s now which are super profitable). So, when the car rental operators want a specific mix, the car manufacturer will sell what it wants to optimize its direct margin and its future profit on the used car market after the holding period. This is one of the only markets in which the buyer has less power than the seller!
- High Demand Periods: There are peak times, like holidays, weekends, or during popular events, when demand for rental cars surges. To meet this demand and avoid turning away customers, companies often keep a surplus of vehicles.
> partially true: for traditional car rental operators or small ones with a strong local demand, it is true. But for players which have set proper revenue management optimization processes, they have realized that it is more profitable to deny some customers than trying to accept them all. For sure, it requires to know precisely the exact financial contribution of every market segment and customer, (a customer is a company that will give the order in the WeYield terminology ; it is different than the driver that will effectively get the service) and to sort the demand to keep the most profitable at the best possible time of rental.This might even mean restricting demand from a less profitable source in order to maintain availability in a more profitable one!
- Unexpected Circumstances: Cars may need maintenance or repair, which could reduce the number of cars available for rent. Having additional cars helps ensure that they can always serve customers.
> false: idle ratio is usually less than 3% but yes it would need to be taken into account
- Turnaround Time: The process of cleaning and prepping cars for the next customer takes time. Having extra cars means a company can provide immediate service to the next customer while other cars are being prepared.
> true. especially for long haul destinations that are served by the same aircraft. If it lands early PM and leaves 4 or 6 hours later, new customers require cars that are technically not available because they are still in use by current customers that will bring them back two hours before take off. Operationally, there is a scissor effect that requires more cars to manage this overlap. Alternatively utilization could be reduced by a couple of percentage points in order to help create this space to minimize the impact on the customers, without the need to incur the cost of more fleet
- Strategic Locations: Car rental companies have various branches, often in locations such as airports, cities, and popular tourist spots. To serve all these locations effectively, they need a large fleet.
> true. But there are some possibilities to reduce the stock allocated to smaller locations. First, is to limit the availability to its minimum and transfer cars when needed. Flexible but expensive in terms of cost of transport. Second, it is to have a second network of agents or sub-franchisees that will manage their fleet themselves and use your support to drive some reservations to them. It is cheap as fleet is paid by the agent, flexible, and enables your operations to be present in some other territories
- Business Agreements: Some companies have business agreements with corporations or insurance companies to provide vehicles when needed. To honor these agreements, they must have enough cars available.
> true. Especially large rental operators (like the international brands) are battling to get the largest Corporate or Assistance business (IMA, Axa Assistance, Adac, etc). These contracts generate high volumes that cover the fleet cost but most of the time at a cheap price, triggering a lot of hidden costs like: minimum car category to respect their travel policy, immediate availability, on site delivery to enable the staff to get the car at his/her company instead of coming to the car rental station. Most of the time, these costs are not totally integrated into the contribution model of each client before they participate in the RFP (request for price). After a couple of months of operations, the station or the car rental operator realizes that they lose money on each. They sometimes fight for these contracts to reach their market share or image goals.
- Resale Value: The car rental business model is not only about renting vehicles. Companies often sell their used vehicles in the second-hand market, which can be a significant part of their business. So, having more cars could mean more potential for revenue when those cars are sold.
> True : some operators like the one in the south of Europe (OK Mobility, Centauro in Spain but not limited to them) have a profitability model built on the resell of the cars. Thus, they will buy the maximum fleet possible, run them at any price and then give them back to the car manufacturers (buy back model is less profitable but guaranteed) or resell them at risk (less guaranteed but much more profitable). In a car market under tension like we have had since the end of the Covid in 2021 (-20% of car production, +25% in cost), the used car market is strong. If the market declines, their business could disappear if they don't have a solid car rental reservation system that relies on effective yield management optimization.
- Protect from higher cost: car rental operators intend to keep their car longer into their fleet (more than the classic 6 to 12 months depending on the market regulations to manage tax deduction)
> true : in 2022, some car manufacturers facing production difficulties, delivered new cars later in the season, sometimes at the end of it (a big Italian operator got some at the end of August when the summer demand started to decrease). So, due to low mileage, they decided to keep them till the end of the following summer, even though there is less demand in winter. In addition to this technical factor, the impact of the interest rate increase needs to be taken into account. As it mostly went up from 1% in 2021/2022 to 5% in 2023, financing cars at a known rate vs waiting for a future deal with the bank or the lease company at an unknown but potentially higher cost is a strong driver to manage a higher fleet in stock.
- Fear of missing out: when a season has been good, most of car rental operators trigger new purchase orders to increase the fleet for the next season and continue to increase their rental revenues
> false: it is a huge yield management mistake to process this way. Because at the time the purchase orders are confirmed with the dealer (around Autumn for the European market), the car rental operator has absolutely no vision of the future activity. More and more, the future gets uncertain. Over the last 3 years, so many variables impacted the business such as (but not limited to) :
- 2020 : Brexit
- 2020-21 : Covid with 3 major world lockdowns ; climate change impacts
- 2022 : Ukraine war
but remember also 2008 financial crisis or 2010 Icelandic volcano eruption blocking most of the western Europe air space for days.
So, engaging the company cost (70% of the cost structure is the fleet) 8 to 10 months before the season is an expensive and risky bet for future profitability. At WeYield, we have two clients (both franchisees from an International brand) on the same market: one made its best performance ever in the last 40 years of history not only because 2022’s prices went high but also because they have reduced their fleet, while their competitors did the opposite way: the first made 9000€ revenue per unit per year with -9% of cars while the second did 6000€ with +23% of fleet. Guess who did the best in profit?
That being said, car rental companies try to balance the number of cars they have to minimize costs associated with depreciation, maintenance, and inventory management. This balance can be a complex process, given the factors listed above. But they may appear to have “too many cars” when demand is low, while during peak periods they may seem to have just enough or even too few.
When a proper revenue management process is in place, based on a strong yield optimization tool to pilot all the dimensions in clarity, we at WeYield prove that the performance improves and the profitability increases.
And in tough situations, the overall performance remains better for the company with revenue management processes in place managed by qualified revenue managers.