How car rentals explain the 2021 economy

Few markets better crystallize the upside-down nature of the US economy during the pandemic than the rental car industry.

The industry shows how the economic decisions made in 2020 continue to have serious implications in 2021. While most other industries have experienced less severe fluctuations, the same basic dynamics apply. This dynamic explains why inflation and commodity shortages increased earlier in the year – and why they are are starting to decline but are not yet close to pre-pandemic norms.

In the spring and summer of 2020, the industry collapsed as people stopped traveling. With a glut of cars – a supply of rentals much higher than demand – prices have plummeted; the big car rental companies have sold hundreds of thousands of vehicles; and Hertz went bankrupt.

The price of renting a car or truck was 23% lower in May 2020 than it was before the start of the pandemic.

Fast forward a year, and millions of vaccines later, and Americans were ready to travel again – but the rental car industry was stuck with its shrinking fleets. And it faced challenges in quickly rebuilding those fleets, as automakers faced their own supply constraints due to production cuts in 2020.

In the second quarter of this year, for example, the combined fleet of Hertz and Avis, the two largest car rental companies that report publicly, was 312,000 cars smaller than in the second quarter of 2019, a decrease by 30%. (Enterprise Holdings is larger than either, but is privately held).

“In the spring of 2020, no one really knew what to expect,” said Neil Abrams, president of Abrams Consulting Group and former Hertz executive. “In my 45 years in this industry, no one has ever seen anything like it. I’ve seen cycles, recessions, peaks and troughs, but nothing like it. The guys who had to make the big strategic decisions really had no precedent.

But ultimately, “demand came back a lot faster than I think anyone expected, especially on the leisure side,” he said.

With demand rising sharply and the supply of cars still depressed, car rental companies have raised their prices. At the height of June 19 of this year, the average rental car price excluding taxes and fees was $ 123 per day, according to the Hopper transport app, down from less than $ 50 at the start of the year.

But high prices have a funny way of being set, at least to some extent. Those who are considering renting will play around with different modes of transportation if rental cars become very expensive. Some may decide to optimize their route by using a mix of Uber or public transit to get around. Others may turn to alternatives like Turo or even U-Haul for a car.

This is especially true for leisure travelers, who tend to be more price sensitive than business travelers.

“If people can’t afford it, they will adapt,” said Ani Malkani, ground transportation manager at Hopper. “Money is not infinite; you have to make decisions based on the money you have.

The calculation consumers make for their vacations could be the relief valve of back pressure on prices.

Meanwhile, the arrival of the Delta variant may have curtailed some planned trips, especially business trips, reducing demand. And the end of the busy summer travel season and the gradual rebuilding of rental car fleets have brought the market back to something closer to its normal balance, albeit slightly closer.

“We’re going down from an altitude of 13,000 feet to 10,000 feet – it’s always extremely expensive time to hire a car,” Hopper’s Mr. Malkani said.

The drop in prices varies widely across the country. Cities that tend to receive a lot of summer travel – like San Diego, Miami, and Tampa, Florida – saw the biggest drops. At the end of June, an average rental in these cities was costing over $ 100 per day. Now they can be purchased for as little as $ 50. Cities like New York, Los Angeles and San Francisco have seen their prices drop by about a third.

On the supply side, automakers have struggled to ramp up production due to chip shortages. Ultimately, rental companies compete with regular drivers for a limited supply of new cars, and new cars are scarce.

Mr. Abrams, the car rental industry consultant, expects some of the changes that have taken place in the industry – including higher prices – to be lasting. Companies are finding the new equilibrium, with higher prices and smaller fleets, to be profitable. And the experience of the pandemic will leave companies reluctant to make themselves vulnerable to bankruptcies such as the one experienced by Hertz. (Hertz found buyers and came out of bankruptcy in early summer.)

“When an industry goes through this kind of trauma, it comes out smarter and more efficient than it was before the trauma,” said Abrams. “The industry has learned to do business in a different way, and I think the customer will get used to this paradigm shift in how cars are leased and how they are billed.”

The history of rental car prices, while unique in its own way, is a vivid example of the dynamics that apply to many other goods. The shortages of 2021 were largely caused by a combination of supply decisions made over a year ago that cannot be reversed, and demand conditions that have returned to normal with a speed that few people were waiting.

The markets are efficient enough to do their job of balancing. When prices are as high as they were for car rentals in June, it destroys demand. People will find another plan. But just because the prices are moderate doesn’t mean they have to return to their pre-pandemic level, and some of the changes that have taken place can be surprisingly long-lasting.

About Kevin Strickland

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