“Can you even get a reservation?” “How long are you willing to stand in a line?” Those are some of the questions business travelers may have to ask this summer if car rental suppliers don’t have enough vehicles available to service them, according to DK Consulting Group CEO David Kilduff. If travel resumes faster than expected, some car rental companies—managing already reduced fleets—may come up short due to ongoing small fleet orders and a global shortage of semiconductors, which are critical components in car manufacturing.
Suppliers are starting out 2021 with smaller fleets due to the cost-cutting measures they took last year. “When demand dropped by 90 percent in the spring, the industry was able to immediately lay off its staff in the tens of thousands as well as de-fleet by canceling orders,” said car rental consultant Neil Abrams. Not taking in new cars while aggressively taking out cars likely slated to be de-fleeted anyway unloaded “hundreds of thousands of cars,” for struggling suppliers, he said.
Avis Budget Group, for one, in 2020 sold more than 22,000 vehicles to consumers, according to the company’s fourth-quarter earnings report.
National Car Rental SVP of business rental sales and global corporate accounts Don Moore told BTN, “The market will be smaller in regard to car availability. There are certain companies that have had to constrict their fleets to stay viable.”
Changing rental patterns and increasing demand could challenge these smaller fleets if the corporate market awakens in the latter half of 2021.
Business travelers, many of whom during the pandemic have been driving more than flying, also are holding on to their rentals for longer periods of time and over longer distances. “We have noticed a significant increase in customers willing to drive further. They are definitely driving further than they used to,” said Moore. “Our length of business rental has gone up. Typical business rental is between four to six days, depending on the types of rental. Now it’s closer to six days. I think that trend will not change much over the next couple of quarters.”
Avis Budget Group CEO Joe Ferraro noted the same trend this month during the company’s fourth-quarter earnings call. “What we are seeing is our commercial clients are keeping their cars a whole lot longer,” he said. “If you look at our fourth quarter, our commercial customers kept their cars almost 80 percent longer than they did in the previous year.”
In the second half of 2021, it’s very likely more travelers will rent vehicles, compared with 2020. “Road warriors are saying, ‘I want to get out and travel,’ especially if we keep up the pace with vaccines,” said Kilduff said. Leisure travelers, he said, will drive the rebound more so than business travelers. “This summer, there will be a lot of leisure travel,” he said.
Some car rental companies have ordered very few cars going forward, enough where it can be an issue for availability for corporate travelers when renting during the summer and in the future when travel starts back.”
– DK Consulting Group’s David Kilduff
Moore said he cautiously expects the third and fourth quarters to “be reasonably good.”
Avis Budget and Enterprise Holdings each have said they are still signing up corporate accounts and maintaining high retention rates, with Ferraro noting a retention rate “somewhere in the area of 98 to 99 percent, which is very good.” Kilduff, meanwhile, said he’s seen an increase in corporate requests for proposals for car rental suppliers.
Financially challenged car rental companies, however, have not increased their car orders, according to Kilduff. “Some car rental companies have ordered very few cars going forward, enough where it can be an issue for availability for corporate travelers when renting during the summer and in the future when travel starts back,” he said.
“We have thousands of vehicles already ordered all the way through the end of the calendar year,” Moore told BTN. Kilduff said Enterprise Holdings, the parent company of National Car Rental, has ordered more new cars than have other car rental firms.
On top of the fewer industrywide orders, there’s a semiconductor shortage that may delay the delivery of the few orders that were made. In North America, General Motors, Ford, Stellantis, Toyota, Volkswagen, Honda, Nissan and Subaru are being forced to adjust their production schedules due to a scarcity of semiconductors, according to Car and Driver. Some financial analysts expect the shortage to continue into next year, according to MSN’s MarketWatch.
“The semiconductor shortage is going to have an impact on new cars in general and our industry,” said Ferraro. “We do believe this will have an impact on fleet delivery and availability in our industry,” he said
“As for Hertz, we have long-standing close relationships with our OEM [original equipment manufacturer] partners and we are working closely with them to receive fleet orders as soon as possible but do anticipate some delays,” a Hertz spokesperson told BTN.
Stemming a Shortage
On Wednesday, President Joe Biden signed an executive order mandating a 100-day review of supply chains for semiconductors and other critical materials in order to formulate policies that ramp up domestic production. The White House said the order won’t solve the semiconductor shortage in the near term and is intended to support long-term plan formulation. In the meantime, car rental providers will vie for their share of fewer vehicles in the market.
If there aren’t enough cars to meet customer demand, both leisure and business travelers will feel the consequences. “Leisure prices will most likely skyrocket because fleets are currently very reduced and there are some rental car companies ordering very little fleet for delivery at this time,” Kilduff said. “Whereas corporate accounts are locked in long-term on their pricing. What will happen will be availability issues if travelers start traveling starting this summer and beyond.”
A car rental shortage can lead to mounting inconveniences for travelers, according to Kilduff. “Location closures are also problematic—a traveler with a company books a car, and when they land the location is closed,” Kilduff said. “In other words, [the car rental company] had not taken the rate out of the system but had closed the location earlier. The person gets there, and there’s no car.”
Car rental suppliers said they are confident that their logistics, staff and relationships with car manufacturers are strong enough to weather any potential shortage. “Based on our discussions, we believe we have the logistics and internal sophistication within our team to manage our fleet size appropriately,” Ferraro said during the earnings call when asked about the semiconductor shortage.
“We can grow our fleet by adding new cars, and we can also grow our fleet by not selling cars that we were supposed to sell,” Moore said. “At any given month, because we own a billion vehicles, we sell thousands of vehicles, but if we decided that we can’t, we’ll get our new cars that come in, but we’ll keep the ones we were going to sell for an extra month or two.”