Car rental operators have been on a rough ride during the past three years. The obvious impact of 9/11 and the recession took its toll. The remarketing side of the business has also been challenging.

In past years, the industry generally experienced a strong used-car market during economic recessions, but not so during this anomalous period. Historically, used cars were a good value for consumers to purchase on the retail side, and car rental companies supplied much of this inventory. Car rental companies could fleet-up with additional risk cars and make money on the back-end when the units were remarketed.

(To clarify, risk cars are purchased by car rental companies with a fleet incentive and remarketed completely by the car rental company; repurchase cars are sold to car rental companies under a depreciation schedule and then bought back by the manufacturers, which then remarket these units at closed factory auction sales.)

Manufacturer new-car incentives have made it economically unwise for consumers to buy used cars, reducing the demand for late-model used cars. The commercial fleet segment has done better in this environment. Dealers and wholesalers put more value on a three-year-old car with 50,000-60,000 miles, compared to a one-year-old car with 25,000-30,000 miles, the point at which the typical used rental car comes in for remarketing.

Conditions are gradually improving for the car rental industry in terms of resale values on units sold at auction and other channels, but this improvement varies depending on the region in which vehicles are remarketed and other factors. Bill Lanier, president of Automotive Fleet Resources, a Memphis, Tenn., company that manages fleet purchases, financing, and remarketing for car rental operators, says that conditions overall have been challenging for their clients. Some operators, especially in Florida, California, and certain Southern states, are doing fairly well in risk-car remarketing. Other clients, primarily in the Northeast and Midwest, are struggling to find healthy resale values for remarketing units.

The 2005 Outlook
Car rental operators and analysts expect market conditions to stabilize in 2005, with some downward pressure still exerted from new car incentives. According to industry experts, three primary factors will shape the state of risk-car remarketing in 2005: the amount of manufacturer new car retail incentives and rebates, manufacturer rental car company sales volume, and the overall economic climate of the car rental industry.

Retail Incentives
The car rental industry is still concerned about the impact of retail incentives. Enterprise Rent-A-Car, based in St. Louis, Mo., is the world’s largest fleet buyer, and the majority of its fleet are risk cars. So the company represents an accurate gauge of activity in the risk car area. “We anticipate continued downward pressure driven by large manufacturer incentives,” says Greg Dart, vice president of remarketing. “If manufacturers are able to reduce production and lower incentives, prices should stabilize in the spring.”

Tom Kontos, vice president, industry relations & analytical services for ADESA, Inc. of Carmel, Ind., believes that new-car incentives could play a reduced role in the market in 2005 compared to 2004. “With retail sales ‘bought forward’ for so long now, manufacturers may find it harder to maintain output in ’05 and ’06,” he says. However, auto manufacturers have been working overtime to gain market share against competitors, and this trend isn’t likely to go away in 2005, Kontos concludes.

If consumer demand for new cars has been saturated by years of low incentives, manufacturers may continue to overbuild and sell excess units through rental and other fleet channels. This practice would negatively impact risk-car residuals, with more used rental cars clogging the remarketing channels. However, the manufacturer overproduction issue has been a part of the auto industry for so many years, rental remarketers now build these conditions into the equation. In the near future, new contracts between the manufacturers and the United Auto Workers are expected to lower the industry’s new-vehicle production; however this impact probably won’t be felt in 2005, according to auto industry sources.

2005-MY Car Rental Allocation
In the past two years, manufacturers and car rental companies have reached a relatively stable level in the volume of new cars sold to the industry - approximately 1.6 million units. For the 2005-model year, according to Auto Rental News, domestic and import manufacturing volume should be similar.

General Motors may increase its volume to 100,000 units, though much of this increase will probably be in short-term rental fleet programs - or what’s typically called “summer cars” in the industry. This may put some pressure on fall remarketing, if the additional rental car volume coming out of service is sizable.

The auto industry has learned to adjust rental-car sales volume to a comfortable level over the years, Kontos says. While the volume of rental cars could increase if new-car sales soften, auto manufacturers have seen the impact of rental car glut on buyback program residuals and will be careful to manage used-car market conditions as much as possible.

Car Rental Industry Conditions
The overall economic health of the car rental industry also plays an important role in risk-car remarketing. This influence is primarily reflected in the level of confidence car rental companies feel about rental revenue growth prospects and how much they can comfortably forecast risk-car residuals. Overall, car rental operators tend to be moderately confident about overall market conditions. The Car Rental Operator Benchmark Survey, produced by Abrams Consulting Group, Inc. of Purchase, N.Y., has reported mostly confident forecasts from operators during 2004. Major car rental companies have experienced positive financial results and expect that the travel industry is resuming a normal growth pattern.

“Business continues to be very good at Enterprise,” Dart says. “Last year, Enterprise opened an average of two new branches every business day; we now have 5,400 in the U.S.” Enterprise Rent-A-Car benefits from growth in the local market, serving replacement and retail needs, and it continues to open up locations at North American airports.

Risk-Car Fleet Planning
Lanier expects his clients to continue normal fleet planning patterns in 2005. Most local market operators emphasize economy and compact cars - Dodge Neons, Chevrolet Cavaliers, and similar models. Operators serving local retail and airport markets acquire more SUVs and minivans. Smaller cars are doing well with resale values, while SUVs, trucks, and minivans are experiencing significant resale value reductions.

ADESA’s Kontos sees this trend tied to the rising cost of fuel. “Having more fuel-efficient vehicles in your fleet is a good idea,” Kontos says. “$2-a-gallon gasoline may be here for a while.”