Purchasing Cars For Daily Rental

Whether it's the result of careful thought or just plain old luck, good timing is an essential element of the most successful fleet transactions. Nowhere is timing more important than in the purchase of new cars for a major daily rental operation, where decisions can have a direct effect on the company's daily-rental rate structure - and on its overall profitability.

"It is important that a rental company hold down its ownership costs in order to provide quality cars at good rates in a very, very competitive market," says John Forsythe, vice president of fleet and car sales for Avis Rent A Car Systems, Inc. "That's one of our primary considerations in the purchase decision. And it's one of the basic aims of the daily rental industry."

To see how purchase, timing, and profitability are linked, consider the case of Forsythe's firm, the second largest daily rental company in the world.

By this summer, Avis expects its fleet to peak at 125,000 units - a 20 percent increase over the figure for '84. Since the firm attempts to retain most of its cars for a little more than 12 months - just long enough to qualify for ITC benefits - Avis is constantly in the market for replacement product that will satisfy not only the daily rental consumer but the car-sales customer as well.

According to Forsythe, both of those segments are seeking the same thing. "The rent-a-car customer is looking for a good-looking, low-mileage car that is the right size, that runs well, that has all the right options," says the Avis vice president. "Those are all qualities the sales customer wants, too - in addition to a good price."

To meet these demands, Avis buys some 70 percent of its fleet-cars from General Motors. Forsythe contends that GM residuals are higher than those for other American automakers, who contribute about 20 percent to the rental company's annual mix; fewer than 10 percent of Avis cars are imports. "We buy from GM because we want those cars with the lowest overall holding costs," Forsythe explains. "We figure holding costs as a combination of the price we pay for the car and its ultimate residual value."

These days, at least, Avis' best overall performers are GM's intermediate-sized G-and A-body models: Buick Regal and Century, Chevy Celebrity, Pontiac Bonneville, and Olds Cutlass Ciera and Supreme. Working with zone and fleet managers in each of nine districts nationwide, Forsythe oversees delivery of these new cars each fall, when the daily-rental business typically starts to decline.

"We begin each year with a fleet plan, but it's subject to lots of change depending on such factors as car availability and price," the executive says. "In general, the goal is to build up the fleet in the summer - during peak rental demand - and then to bring it down during October and November, when vacations end and people go back to work and school. The trick is to recognize the end of the heavy rental season; if you peak with too many units," it's hard to achieve those low overall holding costs.

For maximum flexibility, some of Avis' cars are acquired through short-term, "buy-back" arrangements with manufacturers and local dealers. While the company forfeits ITC benefits on short-term units, it gains the ability to "peak a fleet" as necessary, returning the autos after a period of service lasting five or six months.

Under the ideal plan, new cars are delivered to the rental company during September and October - as promptly as possible. "Early delivery is very important to us," Forsythe stresses. "One reason is that we want to have a new car for our rental customer. Residuals are a factor, too, though. When we go to sell a car after keeping it for 12 full months, it will have been a year-old car for only about one month. But if the car isn't delivered to us until, say, June, it will be considered a year-old car in just four months. Then, when we go to sell it 12 months later, it will have been a year-old car for nine full months. And there will be less value."

If planning for new-car purchase is often a crap shoot in the daily-rental game, a major reason is the difference in demand from market to market. Though overall demand for Avis cars declines 25 percent from October to December, regional markets vary widely. While much of the North is still frozen, for instance, rental business in Florida enjoys a surge from Washington's Birthday through Easter. But from March to June - just as the North begins to thaw - rental demand in the Sunshine State drops 50 percent.

To some degree, Forsythe says, regional variance also affects car selection. "Avis operations in Hawaii, for example, want a lot of smaller cars. There are differences in which options are wanted, too. In Texas, rental-car drivers like cruise control for those open highways. But in New York the roads are so crowded, you never get going fast enough to use cruise control."

As one responsible for purchasing vehicles on such a massive, market-responsive scale, Forsythe is asked to sketch current trends in driver preference. "We see them starting to switch more to front-wheel-drive cars," the Avis vice president says. "They are turning back toward bigger vehicles. The A-bodies seem to be growing in acceptance, particularly for their value on the used-car marketplace."

But that outlook could change overnight, Forsythe might have added. In the daily rental game, most everything's in the timing.