How Car Rentals Explains the Economy of 2021

Few markets better crystallize the hardest-hit nature of the US economy during the pandemic than the rental car business.

The industry shows how economic decisions made in 2020 have serious implications in 2021. While most other industries have experienced less severe volatility, the same basic dynamics apply. These dynamics explain why inflation and product shortages rose in the first year – and why they are. Have begun to decrease but are not yet close to preendemic norms.

In the spring and summer of 2020, the industry was in a state of collapse as people stopped traveling. With a glut of cars – a much greater supply of rentals than demand – prices plummeted; Major rental car companies sold hundreds of thousands of vehicles; And Hertz went bankrupt.

Car or truck rental prices were 23 percent lower in May 2020 than before the pandemic began.

Fast-forward a year, and millions of vaccine jabs later, and Americans were ready to travel again – but the rental car industry was stuck with its diminishing fleet. And it faced challenges filling those fleets quickly, as automakers themselves were facing supply constraints due to a production rollback in 2020.

In the second quarter of this year, for example, the combined fleet of Hertz and Avis, the two major rental car companies reporting public data, was 312,000 cars smaller than in the second quarter of 2019 — a 30 percent drop. . (Enterprise Holdings is larger than any, but is privately held).

“In the spring of 2020, no one really knew what to expect,” said Neil Abrams, president of Abrams Consulting Group and a former Hertz executive. “In my 45 years in this industry, no one had ever seen anything like this. I’ve seen cycles, recessions, peaks and valleys, but nothing like it. The people who had to make big strategic decisions really had no precedent. “

But eventually, “demand came back much quicker than I think anyone had anticipated, especially on the holiday side,” he said.

With demand increasing and the supply of cars still declining, rental car companies increased prices. According to transportation app Hopper, on June 19 of this year, the average rental car price excluding taxes and fees was $123 per day, down from $50 at the start of the year.

But higher prices have a strange way of fixing themselves, at least to some extent. Those considering renting will mess with different modes of transportation if the rental car becomes too expensive. Some people may decide to customize their itinerary by using Uber or a mix of public transportation. Others may turn to alternatives like Turo or U-Haul for the car.

This is even more true for leisure travelers, who tend to be more price-sensitive than business travelers.

“If people can’t afford it, they’ll adopt it,” said Annie Malkani, head of ground transport at Hopper. “Money is not infinite; You have to make decisions based on the money you have.

The value that consumers calculate for their holidays may be the release valve for pressure.

Meanwhile, some planned travel, especially business travel, could dampen demand with the arrival of the Delta version. And the end of the busy summer travel season, and the gradual rebuilding of the rental car fleet, have brought the market closer to its normal equilibrium – though only somewhat closer.

“We’re coming down from an altitude of 13,000 feet to an altitude of 10,000 feet — it’s still a very expensive time to rent a car,” said Hopper’s Mr. Malkani.

The drop in prices varies greatly across the country. Cities such as San Diego, Miami, and Tampa, Fla., have seen the most significant declines in summer travel. At the end of June, the average rental price in those cities was over $100 a day. Now they can be had for as little as $50. Cities like New York, Los Angeles and San Francisco have seen prices drop by about a third.

On the supply side, automakers are struggling to ramp up production due to microchip shortages. Eventually rental companies compete with ordinary drivers for a limited supply of new cars, and new cars are rare.

Mr. Abrams, a rental car industry consultant, expects that some of the changes in the industry – including higher prices – will be permanent. Companies are finding new balance with higher prices and smaller fleets to turn profits. And the experience of the pandemic will make companies more vulnerable to bankruptcies like the one Hertz experienced. (Hertz found buyers and emerged from bankruptcy in the early summer.)

“When an industry goes through a trauma like this, it tends to be smarter and more efficient than it was before the trauma,” Mr. Abrams said. “The industry has learned how to do business in a different way, and I think customers are going to get used to the paradigm shift in how cars are rented and priced.”

The story of rental car prices, though unique in its own way, is a vivid example of dynamics that apply to many other goods. The 2021 shortfall was in large part due to a combination of supply decisions made more than a year ago that cannot be undone, and demand conditions that returned to normal with some expected momentum.

Markets are quite effective in doing their job of finding equilibrium. When prices go as high as car rentals in June, it destroys demand. People will figure out another plan. But just because prices softened doesn’t mean they have to go back to their pre-pandemic levels, and some of the changes that have taken place could be surprisingly long-lasting.

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