Rental car companies shake up used-vehicle market as demand resumes

If you were to rent a car today, your options are more limited and the price you pay more closely resembles a car payment than a rental fee. Rental car companies have contributed to increasing used-vehicle prices for more than a year as they work to balance pent-up demand with low new-vehicle inventory in the wake of the pandemic — inventory that has traditionally been the main pipeline for rental fleets. When shutdowns halted business and personal travel in 2020, rental companies faced potential bankruptcy and were forced to liquidate their fleets. However, 2021’s relaxed travel restrictions were met with a spike in rental car demand, forcing companies to turn to used vehicles to replenish their fleets amid new-vehicle inventory shortages, Black Book President of Data Science Alex Yurchenko told Auto Finance News . Traditionally, rental companies such as Avis Budget Group and Hertz have purchased vehicles for their fleets from OEMs and offloaded a portion of their used cars into the wholesale market every one or two years. While Avis was able to source much of its new vehicles from its OEM partners in Q4 2021, other companies are continuing to rely on purchasing used cars from auction and dealerships to pad their fleets. “Last year, instead of selling vehicles at auctions, [rental car companies] actually became major buyers at auctions. They were trying to buy those newer used vehicles anywhere they could,” Yurchenko said, noting that was one of the factors driving up prices, especially on models 2-years-old or newer. Still, even with rental car companies selling more inventory than last year, dealers and rental companies are seeing little relief in used-vehicle pricing as they compete for newer used models, Black Book Vice President of Automotive Valuations Laura Wehunt told AFN . Pricing pressure continues While limited supply is the main driver behind skyrocketing wholesale prices, rental companies’ purchasing activities are “part of the equation,” Aileen Smith , vice president of equity research at Bank of America Merrill Lynch , told AFN . "Rental car companies are historically sources of used-vehicle supply into the secondary market, but they're holding on to as many vehicles as they can physically get, both on the new-vehicle side as well as within their existing fleet, because they're trying to meet recovering demand,” Smith said. To increase their fleet sizes, some rental companies are purchasing directly from dealerships as consumers, often paying more than the manufacturer’s suggested retail price (MSRP), Black Book’s Wehunt said. “If you have a manufacturer lane or dealer lane where they've got some newer used units with some lower mileage on them, there would still be some useful life to them in the rental space, [rental companies] are in there bidding just as fast — if not faster — than the dealers are.” It’s a trend that is likely to hold steady as COVID-19 cases continue to decline and rental demand continues to rebound. What’s more, the practice of rental car companies turning to “more aggressive buying” in the used market is expected to contribute to another round of price increases in the spring, Jonathan Smoke , chief economist at Cox Automotive , told AFN . At the same time, rental companies faced with a challenge to find newer vehicles to fill their fleets are working with smaller fleet sizes and keeping cars longer. Rental companies’ fleets are sitting at about 1 million units industrywide, half their pre-pandemic sizes, Black Book’s Yurchenko said, noting the inventory those companies are selling off are typically older vehicles with higher mileage. “The fleet channel is really dying to have some more inventory; they haven't been able to get their hands on vehicles because the industry has been focused on keeping the retail channels fulfilled,” Cox Automotive Senior Economist Charlie Chesbrough told AFN . As a result, rental car companies are having to invest in maintaining the fleets they have rather than liquidating vehicles within two years, Brian Allan , president of car-sharing marketplace HyreCar , told AFN . “They're keeping cars longer, and to a surprising delight finding out that they work well for their business model,” he said. “They're seeing that there's a secondary market where they can offer another tier at lower rates instead of wholesaling vehicles. But it's a little distorted because they still can make a lot of money wholesaling their cars right now.” ‘Vehicles starting to flow’ For pricing to normalize, inventory will first have to recover, Bank of America’s Smith noted, adding that likely won’t happen until at least 2023. “The linchpin of all of this for the industry is new-vehicle production. You have to get production back to normal to get automakers to start restocking inventory in a more robust manner, to have them start filling all the channels of demand, including fleet demand,” Smith said. “Once that starts to happen, then you get vehicles starting to flow and turn in a secondary market in a more robust manner. You start to get a matching of supply and demand, and then you start to see used-vehicle pricing fade back to more normal levels.” Auto Finance Risk Summit, the premier event for risk ad compliance management in auto finance, returns April 25-26 in San Diego. This event is the central resource for education and networking focused on best practices in risk management and will prepare your team for the dynamics of the evolving auto finance market. To learn more about the 2022 event and register, visit www.AutoFinanceRiskSummit.com .

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