Don’t bite the hand that feeds you

Car rental firms are known to have a very high car turnover compared to other fleets like those of governments or big corporations. As such, cars can be bought in one year by the rental firms and by the following year, the car hire firm is looking to sell them on. There are many reasons for this, including probably the main one being the fact that older cars will cause more problems for the car hire company and the client.

This obviously would give a bad name to the car hire company and they try hard to ensure that it does not happen. Surely no one wants to hire a car only for it to break down just like that! Another reason is the fact that the car hire sector is a very competitive industry where the standards are high, and the various firms operating in the industry will want the newest, and the best, for their fleet.

This often leads to them having to sell after possessing a vehicle only for a short time in order to add newer units to its fleet. What is interesting though is the fact that a car rental firm disposing of its cars has both its advantages and its disadvantages; It’s not all milk and honey as it might appear.

When a car hire company disposes of its fleet the major winner, obviously, is the individual or organisation that is looking for a second hand car. This is because when a car rental company disposes of its vehicles, the supply in the second hand car market rises, forcing the prices to come down, with all other factors being constant.

But while it puts a smile on the face of anyone looking to buy a second hand car, it makes car manufacturers frown. This is because vehicles that are disposed of by car rental companies are sold at low prices when they still are in a good condition and have low mileage. As a result they reduce the resale value of the brands concerned. A good case in point is the Ford Motor Corporation.

It is on record that in 2006 the motor vehicle manufacturing giant publicly announced that it was moving its focus from selling motor vehicles to the rental car sector so as to ensure that the resale value of their brands was not undermined.

The car maker argued that by considerably limiting its presence in the car hire niche market, it would be, in turn, minimising the price-reducing effect that units previously owned by car hire companies would have on the volumes of new car sales (ie they cause fewer new vehicles to be bought).

Ford said: “Motor vehicles that have been disposed of by car hire firms cause more damage to the resale value than other kinds of fleet vehicles sourced from elsewhere, since in average circumstances they are put on the market for sale when they are barely a year old. They thereby draw customers away from buying new vehicles since the second hand vehicles from the rental companies only have a few miles on their clock and they are generally in good condition and therefore as good as new. In comparison, fleet motor vehicles from the government and the corporate sector are most likely to have clocked more miles, have been on the road for more years (approximately three to five years on average) and therefore have nothing to make them be favoured over new cars unlike the ones from the car hire sector. Disposing of the commercial and government fleet therefore does not affect the resale value of ours as much in any significant way.”

They continued: “Cutting down on the volume of units we supply to car hire firms is therefore our strategy for the future. We expect, and are planning to reduce the fleet volume to the car hire sector beginning this year.”

As evidence of the fact that car hire firms selling their cars affected the resale value of their brands, Ford went on to say that the Taurus, one of their brands in the US, only had a resale value of 30% of original value when it reached 3 years of age, mainly because it was popular with the car rental companies and therefore was bought in large volumes.

On the other hand other brands from Ford such as the Lincoln Zephyr, Five Hundred, Lincoln MKZ and Fusion which were not popular with the car rental companies and therefore were bought in lower volumes, had a resale value of around 45 to 50% of original selling price after reaching 3 years old.

Even though these are Ford’s own figures, they are not the only one affected negatively by the reduced resale value of cars as a result of car hire firms disposing of their vehicles. Perhaps to cushion themselves from this effect, some of the major car makers now have interests, minority or majority, in car rental firms. Europcar, for instance, was previously in the hands of the German giant automaker, Volkswagen before going into private hands.

In that regard, the relationship between car makers and car hire companies is tricky in the sense that they both need each other while the car makers would wish this was not the case. It is a well-known fact that car rental firms form a big share of the market for new cars leaving the assembly lines. For instance, Europcar has a fleet of more than 200,000 motor cars making it a very attractive client for any automaker anywhere in the world. Enterprise Rent a Car on the other hand has a fleet of over 720,000 thousand motor vehicles. But even so it is these same firms which comprise a huge client base that pose a threat to the individual buyers of new vehicles.

Another implication of a car hire company selling its cars is that the second hand car market might experience an oversupply. This would impact negatively on other car hire companies in that when the market experiences a glut, the stock of cars does not move fast and this forces the other car rental companies to perhaps reduce the price or even sell the vehicles at a loss just to get rid of them.