Good Luck Finding a Cheap Rental Car This Summer
(Bloomberg Opinion) -- Thinking of booking a European holiday this summer? If virus testing, vaccination rules and border restrictions seem difficult, wait until you try to find a rental car.
As countries reopen following the pandemic, disrupted supply chains have created shortages of a host of products and services, fanning fears about consumer price inflation. Rental cars are a case in point. They’re now in such short supply that if everyone opts for a foreign beach vacation this year, they’ll end up paying a fat premium for a vehicle — if they can find one at all. The market leader on this side of the Atlantic, Europcar Mobility Group, says leisure pricing could be “quite healthy” this year. Translation: Prices are going up.
While holidaymakers’ budget misery means happiness for the recovering rental giants, this situation is almost certainly temporary. Pricing will return to normal at some point.
The price mechanics are pretty straightforward. When the pandemic started, rental-car companies’ revenues collapsed and they offloaded vehicles to protect their balance sheets. Europcar and Hertz Global Holdings Inc. filed for creditor protection in order to restructure their debts. Most big operators have about a third fewer vehicles than they did a year ago and some international fleets have shrunk even more.
These companies are accustomed to adjusting their fleets to match demand. They usually start buying more cars around this time of year to cater to the summer surge in the northern hemisphere.
However, getting hold of new vehicles has become far more difficult because of the semiconductor shortage affecting the auto industry. Some carmakers are prioritizing deliveries to retail customers rather than rental-fleet buyers because they make more money that way. After a year of setbacks, the rental firms are also wary of adding back too many cars and getting stuck with too much capacity again.
People booking trips at short notice are also making it difficult for the rental industry to get the supply-demand balance right. Europcar says customers are reserving just three days in advance on average, so there’s little visibility on future demand. When the company places a vehicle order, it usually takes about three months before the cars are delivered. It’s that lag time that spells potential misery for holidaymakers.
While there are already reports of soaring rental prices in Majorca, where Germans have been able to travel to since March, in most parts of Europe cross-border travel is only now starting up again. For a glimpse of what might happen, though, just look at the U.S., where vaccinations took off more quickly and the rental car price apocalypse is already in full swing. Vacationers in Hawaii have reportedly resorted to renting cheaper U-Haul trucks.
The industry turnaround has been so dramatic that Hertz’s shareholders will receive a payout when the company exits Chapter 11 — unusual in these types of situation. Avis Budget Group Inc.’s shares have surged 10-fold since last year’s low, and its domestic profitability is at a record level for this time of year.
Rental firms are trying to catch up by buying second-hand vehicles or holding on to their existing fleets for longer (their vehicles haven’t been driven much in the past year, so this doesn’t necessarily mean compromising on quality). Expanding the range of vehicle suppliers is another option. Last summer Corsica took delivery of dozens of electric rental vehicles produced by little-known Chinese manufacturer Aiways.
The question for investors is whether a profit recovery can be sustained. While the pandemic forced these companies to tackle bloated costs, and a handful of brands controls the vast majority of the market, price wars are a perennial risk once car supply is no longer constrained.
The advice for customers is simple: Book as early as you can (some price-comparison sites offer free cancellation), check availability before you purchase flights or consider a taxi. If not, be prepared for a long line at the rental counter.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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