Transitioning to a lean paradigm: a model for sustainability in the leasing and rental industries.

Author:Seay, Sharon
 
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INTRODUCTION

The automobile rental and leasing industry in the U.S. encompasses approximately 5,000 companies with aggregate annual revenue of $40 billion. This industry is highly concentrated with the 50 largest companies generating more than 80 percent of the total revenue. Major companies include Enterprise Holdings, Hertz Global holdings, Avis Budget Group, Ryder, and U-Haul International. Companies in this industry rent and lease passenger cars, recreational vehicles, trucks (without drivers), and trailers. Many U.S.-based car rental companies have also expanded to include international operations, primarily at international airports and usually through local franchisees. This industry's health is highly correlated to the health of the U.S. economy. Most customers are business or vacation/leisure travelers whose numbers can rapidly decline in an economic downturn.

Approximately 60 percent of the industry's revenue is generated by the rental and leasing of passenger cars. The typical car rental operation has to acquire, maintain, clean, fuel, and repair its fleet cars, and dispose of older cars as well as operating and maintaining a reservation system for acquiring customers. Since the value of the rental asset is high, lean, efficient operations are essential for profitability. Acquiring fleet vehicles is the major financial cost for a rental company. Automobiles may be leased or purchased. Leasing is typically the more expensive option, but requires less capital. Depreciation expense for purchased vehicles is a significant charge on the income statement, typically averaging approximately 30 percent of revenue for large car rental chains. Vehicle purchases are typically leveraged. Highly seasonal revenue is typical in this industry, particularly for operations that cater to vacation/leisure travelers. With continuous vehicle turnover, fleet size for larger rental companies can vary significantly throughout the year. Fleet management is crucial to revenue generation and profitability.

The automobile rental and leasing industry is required to comply with regulations concerning gasoline and diesel storage tanks, disposal of used motor oil, and the treatment of water from car wash facilities before its discharge into sewers. States regulate franchise operations and the selling of insurance coverage on rental cars. Some states, cities, and counties impose surcharges on each vehicle rental.

This paper will explore the significant changes brought about within this industry in response to the recent economic downturn requiring companies to shrink fleet sizes and hold remaining fleet vehicles longer, to implement leaner operating models and to respond to tightening credit markets, weak re-sale prices, higher fuel costs, and weakening demand for air travel. As a case in point, the performance of a local National Car Rental franchise will be analyzed, and its metrics compared to the industry norms.

PRODUCTS AND OPERATIONS

Major services provided include the rental and leasing of passenger cars, accounting for almost 60 percent of industry revenue, and the rental and leasing of trucks and trailers, accounting for approximately 30 percent of industry revenue. Operations are similar for car, truck, and specialty vehicle rentals.

The difference between the acquisition price of fleet vehicles and their residual value when disposed of is critical to the profitability of rental companies. Prior to the current economic slowdown, large companies like Hertz and Avis purchases new cars directly from car manufacturers under repurchase or residual value programs which guaranteed a repurchase price at which cars are taken back by the manufacturer as long as mileage limits are not exceeded (typically 30,000 miles) and cars are in reasonably good condition. Such vehicles are non-risk or program cars. In the past, auto makers sold higher numbers of program cars--cars purchased by rental companies at reduced cost and returned to the manufacturer, usually after six to nine months.

Currently, with the difficulties faced in the automotive industry, lagging consumer sales, and the reorganization of GM, many auto manufacturers offer few, if any, program cars or repurchase programs. Another reason automakers have especially curbed sales of program cars is that rental cars and trucks have flooded the used-vehicle market once taken out of service...

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