Few markets illustrate the upside-down nature of the American economy during the pandemic better than the rental car business.
The industry shows that economic decisions in 2020 will continue to have serious implications in 2021. While most other industries have seen less volatility, the same basic dynamics apply. These dynamics explain why inflation and product shortages rose sharply earlier in the year – and why they are are starting to decline, but are not yet close to prepandemic norms.
In the spring and summer of 2020, the industry was in a state of collapse when people stopped traveling. With a flood of cars – the supply of rental vehicles much higher than the demand – prices collapsed; large car rental companies sold hundreds of thousands of vehicles; and Hertz went bankrupt.
The price of renting a car or truck was 23 percent lower in May 2020 than it was before the pandemic began.
A year later, and millions of vaccinations later, Americans were ready to travel again – but the rental car industry was stuck with its shrinking fleets. And the challenge was to replenish these fleets quickly, as automakers were faced with their own delivery bottlenecks due to production declines in 2020.
For example, in the second quarter of this year, the combined fleet of Hertz and Avis, the two major car rental companies reporting public data, was 312,000 cars smaller than in the second quarter of 2019 – a 30 percent decrease. (Enterprise Holdings is larger than both but is privately held).
“In the spring of 2020, nobody really knew what to expect,” said Neil Abrams, President of the Abrams Consulting Group and former Hertz manager. “In my 45 years in this industry, nobody had seen anything like it. I’ve seen cycles, recessions, ups and downs, but nothing like it. The guys who had to make the big strategic decisions really didn’t have any precedent. “
But ultimately, “demand came back much faster than I think anyone expected, especially on the leisure side,” he said.
As demand rose sharply and the supply of cars was still weak, car rental companies increased their prices. At its peak on June 19 this year, the average rental car excluding taxes and fees was $ 123 a day, according to the Hopper transportation app, up from less than $ 50 at the beginning of the year.
But high prices have a weird way of repairing themselves, at least to some extent. Anyone considering renting will play around with different modes of transport when rental cars become very expensive. Some may choose to tweak their itinerary by using a mix of Uber or public transportation to get around. Others may turn to alternatives like Turo or even U-Haul for a car.
This is all the more true for private travelers, who tend to be more price-sensitive than business travelers.
“If people can’t afford it, they will adapt,” says Ani Malkani, Head of Ground Handling at Hopper. “Money is not infinite; You have to make decisions based on the money you have.
Consumers’ holiday calculations could be the valve for the pent-up price pressure.
Meanwhile, the arrival of the Delta variant may have curtailed some planned trips, especially business trips, which has reduced demand. And the end of the busy summer travel season and the gradual rebuilding of rental car fleets have brought the market a little closer to its normal equilibrium – if only a little closer.
“We’re descending from 13,000 feet to 10,000 feet – it’s still an extremely expensive time to rent a car,” said Hopper’s Mr. Malkani.
The fall in prices is very different across the country. Cities that tend to travel a lot in the summer – such as San Diego, Miami and Tampa, Florida – have seen the largest declines. At the end of June, the average rent in these cities was more than $ 100 a day. Now they can be had for as little as $ 50. In cities like New York, Los Angeles, and San Francisco, prices have fallen by about a third.
On the supply side, automakers are struggling to increase production due to the scarcity of microchips. Ultimately, rental car companies compete with normal drivers for a limited supply of new cars, and new cars are in short supply.
Rental car industry advisor Mr. Abrams believes some of the changes in the industry, including higher prices, will be permanent. Companies are finding the new equilibrium with higher prices and smaller fleets profitable. And the experience of the pandemic will deter companies from leaving themselves vulnerable to bankruptcies like Hertz’s. (Hertz found buyers and went bankrupt in early summer.)
“When an industry goes through trauma like this, it’s smarter and more efficient than it was before the trauma,” Abrams said. “The industry has learned how to do business differently, and I think the customer will get used to this paradigm shift in car rental and pricing.”
The history of rental car prices, while unique of its kind, is a vivid example of the dynamism that applies to many other goods. The bottlenecks in 2021 were largely caused by a combination of supply decisions made more than a year ago that are irreversible, and demand conditions that have returned to normal at the pace few expected.
Markets are very effective at doing their job of finding equilibrium. If prices get as high as car rental companies did in June, it will destroy demand. People will find another plan. But just because prices are moderate doesn’t mean they have to return to their pre-pandemic levels, and some of the changes that have occurred could prove surprisingly long-lasting.