As automakers battle back from a health crisis that has ripped the economy, the fleet sales to car-rental companies won’t be there to accelerate the recovery.
Struggles in the rental market during the pandemic, highlighted by the bankruptcy filings of Hertz Global Holdings Inc. and the parent of Advantage Rent A Car, have cut off a key volume destination for automakers to help smooth out dips in retail demand. Rental companies normally account for 8 to 10 percent of U.S. new-vehicle sales each year.
TrueCar’s ALG subsidiary expects May fleet sales to drop 78 percent from a year earlier. For all of 2020, ALG projects that fleet sales will be cut in half.
Automakers typically sell about twice as many vehicles to be used as rentals as they do to commercial and government customers, ALG said.
ALG projects total U.S. new-vehicle sales in May to be 1,080,075, down 32 percent from a year earlier. Some automakers plan to report May sales Tuesday, June 2.
“The lack of fleet demand does mean that more production can be sent directly to the retail channel,” Tyson Jominy, J.D. Power’s vice president of data and analytics, told Automotive News. “But, that said, there are a lot of automakers that do rely on that channel. It provides a lot of steady volume — a lot of cost-absorbing units.”
Hertz said it doesn’t plan to buy any more vehicles this year, and Avis Budget has reduced its planned purchases this year by 80 percent.
Losing those sales could cause a significant hit to the bottom line for automakers, even as retail demand for new vehicles continues to recover, Jominy said.
“Even though they’re not highly profitable sales, they do enable the other vehicles to be much more profitable that are sold at retail because you do have that base that’s absorbing the cost,” he said.
Rental companies could end up holding onto their vehicles for longer stretches, said Zo Rahim, Cox Automotive’s manager of economic and industry insights, perhaps replacing current inventory after two years instead of the current average of 12 to 18 months. Continued sluggishness in the travel sector will put downward pressure on rental companies, but Rahim said they will be able to survive with the inventory they have on hand.
“There’s still going to be need for transportation, especially in markets that don’t have robust public transportation networks,” Rahim said, “so there’s still going to be an inherent need for rental-car companies, even with uncertainty regarding travel.”
Plunging fleet sales are among the reasons forecasters expect total U.S. sales this year to be about 20 percent lower than the 17.1 million sold in 2019. J.D. Power is forecasting 2020 sales of 13 million to 14.4 million vehicles, down from a pre-virus baseline of 16.8 million.
However, retail demand has been on the rebound since early April. LMC upped its 2020 forecast to 13.3 million vehicles from 12.9 million because the market has performed better than expected in April and May.
The full-year outlook does face some risks, said Jeff Schuster, president of LMC’s Americas operation and global vehicle forecasts, if production is further hampered by parts shortages or frequent plant shutdowns because of sick workers. He said the industry could get back to 16 million vehicle sales by 2022.
LMC expects retail sales to be down about 20 percent in May. “Fleet, on the other hand, is another story,” said Schuster, who projects a 65 to 70 percent decline in the fleet market. “We’re seeing a pretty significant drop.”
Eric Lyman, chief industry analyst for ALG, sees an opportunity for dealers who are lacking inventory of certain models to connect with rental companies that may have an oversupply.
Lyman said he knew of a Florida dealer who was short on the Toyota RAV4, a nameplate that has seen its fleet penetration increase in recent years.
Vehicles that would normally be rented to travelers, Lyman said, are likely just sitting on lots. That doesn’t have to be, he said.
“The challenge is going to be connecting those individuals or those interested parties to optimize the inefficiencies that we’re seeing in the market right now,” Lyman said. “If the industry can collectively do that, we can really minimize some of the damage associated with the inventory issues for the dealers and the oversupply from the rental car companies.”