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23 Mar 20

COVID-19: short-term rental grinds to a halt

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The coronavirus has plunged the whole world in an unprecedented situation. The car rental industry in particular is hard hit. If this whole thing blows over in the next few weeks, leasing companies should get through this crisis relatively unscathed. But much will depend on how long the current lockdown goes on.

The number of countries that have introduced some form of lockdown is growing every day. Air traffic has all but come to a halt in many places while many car rental companies rely for well over half their revenue on airport rentals.

Bovag, the Dutch mobility trade association, reported a 70% drop in revenue for car rental and carsharing companies.

Downsizing

“What’s happening now is probably worse than with the financial crisis,” said Michel Taride. He is a consultant in Travel, Transportation and Mobility and former Group President at Hertz International. At the end of 2019, he joined the International Fleet Hall of Fame. “It’s much more precipitous and much more dramatic.” What also sets this crisis apart is that it affects the whole world and all industries – literally everyone is affected.

Nevertheless, car rental companies have a relatively easy way to deal with the early stages of a crisis: they downsize their fleets by cancelling orders and by accelerating efforts to turn back or sell used vehicles.

According to Mr Taride, the key question is to know how long this crisis will last. “Typically, vehicles are kept in fleets for 4 to 8 months in Europe, so that gives you the possibility to resize your fleet in around 90 days.”

Beyond that timeframe, reducing the cost structure becomes far more complex and costly in its own right.

Effect on residual values

In theory, flooding the market with rental cars sooner than anticipated could lead to a drop in residual values. At this time of the year though, explained Mr Taride, car rental fleet levels are relatively low. For that reason, he expects there to be little pressure on the remarketing industry.

“Traditionally,” continued Mr Taride, “the used car market is overwhelmed with rental cars and leased cars in Q4. This year, Q4 might actually be more relaxed.”

OEMs

As most OEMs have closed down all or part of their assembly lines and the supply chain is under pressure worldwide, they are at this point unable to produce new cars. So in the short term, cancelled rental car orders might actually suit them. On the longer term, though, this is not sustainable.

“Large car rental companies and carmakers will try to accommodate their issues as much as they can,” continued Mr Taride. Indeed, both industries rely on each other and they have no interest in the other going under.

And leasing?

Delays for new car deliveries will lead to longer delivery times, also for leasing companies. Most likely, said Pascal Serres, Fleet Europe expert and former deputy CEO at ALD. that will lead to contract extensions, which is not a bad thing financially for leasing companies.

A bigger risk resides in residual values. “However,” said Mr Serres, “they are typically set at a lower level since the last crisis, which should make these effects manageable.”

Mr Serres points out to another risk. “As leasing companies have been growing their SME and private lease portfolios, they have also been opening up to new risks. If this health crisis were to be more persistent than we hope today, this could lead to an increase in customers defaulting on their leases.”

Reasons for optimism

Are there lessons to be learnt from this crisis? Mr Taride believes there are. “It is important for car rental companies to try and be even more nimble and flexible than they already are today. You should always try to come out of a crisis stronger. This requires strong leadership, always keeping a focus on the long-term objectives and always keeping customers and employees in mind.” Tough decisions will need to be taken and communicated.

“For the first time,” points out Mr Taride, “governments are responding in a powerful and coordinated way, which inspires hope. Another first is that governments are looking at ways to help car rental companies through various ways. Contrary to airlines, that has never happened in this industry before.”

There are reasons to be optimistic. In China, life is slowly returning back to normal and order books appear to be filling up again. If that trend continues and if Europe contracts not only the virus but also the swift economic recovery from China, this whole experience might only be a dimple and not a full-blown recession.

Image copyright: Shutterstock

Authored by: Benjamin Uyttebroeck