Most US residents are fully vaccinated against COVID-19, which means people are back to traveling for work and fun. As the number of flights continues to increase, the demand for rental cars is also going up. That means we’re starting to see some rental car shortages.
A number of major rental brands have reported some frustration with the lack of profits. In many cases, used cars are depreciating faster than they have been due to rising new car inventories and increased interest rates. Rental cars love it when used cars do not depreciate as quickly.
The economics is simple: as used car prices come down, depreciation goes up. Smaller profit margins are the last thing that car dealerships and rental car companies want. On the flip side, shoppers love seeing the price of used cars come back down. During the height of the pandemic, used cars often had higher price tags than their brand-new counterparts. This flip-flopped pricing was due to the lack of new car inventory. Without a supply of new cars, the demand for used cars went through the roof.
Where shoppers can really save is if they can pay cash or get a near 0% interest loan. The average interest rate for a used car loan for those with credit scores higher than 750 is 9.23%, a number that puts buying a car out of reach for many buyers. Those who can avoid getting a loan can take advantage of dropping used car prices without emptying their wallets on interest.
In terms of car rental companies, however, things are shifting. For example, Avis’s revenue dropped 22% year over year in the first quarter of 2021. By November, the third quarter of the same year, things we moving back in a forward direction.
Hertz didn’t have the same outcomes as Avis. In the first quarter of 2021, Hertz’s revenue dropped by 33% year over year. That’s after Hertz had to pay $608 million in interest on its dept. While the company is back in growth mode, there’s still plenty of room to go.
In reality, things aren’t as bad as they seem. While year-over-year comparisons show revenue loss, they don’t tell the whole story. When the price of used cars skyrocketed during the pandemic, rental car companies made some serious bank. In some cases, they were the only entities with a stock of available cars. Comparing current revenue to revenue earned during a 100-year pandemic isn’t always a fair way of judging the market.
Rental car companies are seeing an uptick in their stock prices and revenue, which is a good sign. The problem, for them, is that it’s not rising as fast as they would have hoped. As more used cars become available at dealerships, it’s hard to say what will happen to the rental car industry, but time will certainly tell.
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