CARY, N.C. -

The volume of off-rental vehicles making its way into the wholesale market in 2020 is expected to be 250,000 higher than forecasted pre-pandemic, according to Black Book, which said in last week’s COVID-19 Market Updates report that rental companies are likely to shed units from their fleets in the back half of the year to align with softer consumer-facing demand.

In a domino-like fashion, spurring this was the pandemic-driven downturn in the business and leisure travel sectors, both of which are likely to see major declines the rest of the year and not bounce back to normal for some time, Black Book said

“According to IATA (The International Air Transport Association), air travel will not return to pre-COVID-19 levels until after 2023,” Black Book said in the report.

“This puts tremendous financial pressure on rental companies, that rely on air travel, to reduce both their current fleet and future acquisitions,” the company added, pointing to Hertz’s bankruptcy filing late last month. “In addition to Hertz, we expect other rental companies to reduce their fleet during the summer and fall months to match lower demand for rentals.”

The aforementioned additional quarter-million rental vehicles reaching the wholesale market in coming months is the “base case scenario in which rental companies (excluding Hertz) can gradually reduce their fleet instead of a rapid-fire sale,” Black Book said. 

Conversations with remarketing leaders at two of those rental companies reveals methodical, measured approaches to such volumes, as to preserve vehicles and avoid flooding the market.

Through a spokesperson, Hertz declined an interview request for this rental remarketing story.

Strategies in rental remarketing

For Avis Budget Group, the adjustments started early, as it ramped up de-fleeting in the first week of March, says Gregg Nierenberg, the company’s senior vice president of fleet services.

Avis Budget moved about 35,000 cars out of its fleet during March, he said.

“So, when you factor that in with the success we had, like much of our industry and my peer group, working with our OEM partners, we were able to cancel also a large proportion of remaining 2020 model-year new vehicles coming in,” Nierenberg said in a phone interview earlier this month. “In fact, we were able to cancel approximately 80% of our incoming rental orders.

“Because of some of those swift actions that we took, not only in canceling orders, turning back repurchased vehicles, and then the aggressive de-fleeting in March, it alleviated a fair amount of pressure that we had in terms of rightsizing our fleet (to meet) rental demand,” he said.

April was a major challenge across the board in the wholesale industry. And with steep declines in vehicle values, Avis Budget “really minimized” its wholesale participation, focusing instead on direct-to-consumer channels to remarket vehicles, Nierenberg said.

Things started to turn in May, as the company “saw really strong demand heat up throughout all of the sales channels,” he said.

“From our perspective, it really led with strong retail demand compounded by really limited supply of desirable used vehicles in the marketplace,” Nierenberg said.

“Each week that goes by, we have a really disciplined process within Avis Budget Group to review our fleet levels at the geographic area down at the make/model level, vehicle-class levels to make sure that we continue to have alignment of our rental demand,” he said. “And then we’re also continually looking at the used-car values to see what makes sense to de-fleet.”

Similarly, the remarketing team at Enterprise Holdings has taken a “very thoughtful approach” to how it handles its fleet, says Nate Lattimer, the company’s vice president of remarketing sales and operations.

In general, Enterprise’s primary remarketing avenue has been direct sales, Lattimer said.

“Through this pandemic, that has not changed,” he said. “The way we’ve interacted and transacted with our dealership partners has, however.”

Lattimer estimates that “low-touch, no-touch” sales have represented 95% of Enterprises’ remarketing sales.

“To coincide with that from an online perspective, we developed a strategy with our partners over at SmartAuction to provide another great channel for us to sell inventory,” Lattimer said. “We dipped into it about six months prior to the pandemic. We were focusing on a more digital selling strategy, and the current situation has pushed us more aggressively into this channel.

“And to be frank with you, the results have been fantastic,” he said. “It's definitely been a great compliment to our direct sales team and we believe that this will continue to be a significant component of our overall future strategy as well.”

Lattimer acknowledges the potential impact of too many rental vehicles hitting the market at once, a risk that would even exist in a traditional climate.

“Overall, car rental’s a significant link in the automotive value chain,” he said. “And there is a responsibility that we have in the day-to-day execution that we take very seriously, for sure. Protecting residual values is a significant piece of that responsibility.”

Nierenberg, the Avis Budget executive, points out that much of what rental companies would remarket are 1- and 2-year-old vehicles. Consider that with shutdowns in new-car production, delays in lease returns and the quality that these near-new vehicles bring, and the potential impact of more supply may not be so daunting.

“So, now what you're seeing is really tightness of new-car supply in the marketplace. And you compound that with a level of delay of vehicles coming back off of lease … in theory, even if there were additional rental vehicles coming into the market, we're in this sweet spot of pent-up demand from April and early May from consumers,” Nierenberg said. “And then I do believe that there is this distinct value that a 1-year-old off rental vehicle provides particularly from a quality, certification and condition level that I know we provide.

“Because unlike a 3-year-old off lease vehicle … our vehicles tend to have closest to new, (the) latest in terms of safety equipment and features from the OEMs,” Nierenberg said. “And so even though the miles might be similar to a traditional 3-year off-lease, we view, within the rental industry, that we might have a leg up on the used-car marketplace, if you will, because we do think we have a differentiated product in that it being only one model year old, and again, the way it's one-owner and the way we maintain our fleet.”

As Lattimer at Enterprise put it, “The rental car looks a lot different today than it did years ago.”

When Enterprise stocks its fleet, he said, they “really want to bring what the customers want, both on the rental side of business and on the sales side of the business.”

With that, the 1-year-old cars they’re selling are “very desirable, for sure,” Lattimer said.

Diversification of off-rental

As both Lattimer and Nierenberg point out, the channels in which rental volumes are remarketing is diverse. All the eggs are not in one basket, so to speak.

Rental remarketers use such levers as direct-to-dealer platforms as well as direct-to-consumer avenues like retail stores and the Ultimate Test Drive at Avis Car Sales. There are also the remarketing avenues of online and brick-and-mortar auctions.

And even traditionally dealer-to-dealer platform providers like ACV Auctions have started working with rental companies.

“Our model creates efficiencies for the rental car market. Our team of inspectors can work with these accounts and go to inspect the vehicles wherever they may be located and offer them for auction as soon as the inspection is complete,” ACV chief executive officer George Chamoun said in an emailed Q&A. “We work with several rental car companies and are adding more to our portfolio on a regular basis. We communicate regularly with them and help guide them on current market conditions to help ensure success on our platform.”  

Chamoun added: “ACV has been partnered with several rental car companies for years now. We have been actively growing our fleet lease consignment. One of our more recent product enhancements was seller disclosure of fleet lease consignment. This enhancement now shows our buyers who the fleet lease consignor is. This has had a great impact on our conversion rate in this space especially with our rental car accounts.”

Longer-term expectations

While 2020 is expected to have 250,000 more off-rental vehicles in the wholesale market than initially expected, that’s not the case for the next four years, according to the Black Book Report.

Next year, it is expected there will be 730,000 fewer rental returns than initially forecast. That gap increases to 980,000 for 2022, the Black Book data shows. In 2023, it narrows to 460,000. Current projections for 2024 are 80,000 units softer than pre-COVID expectations.

“In the longer term (later 2021 – 2023), the drop in rental return volume will benefit the price of newer used units, as supply will be limited,” Black Book said.

Concerns remain

To be sure, there is some trepidation about the potential impact of de-fleeting. In a note earlier this month, Fitch Ratings said the bankruptcies at Hertz and Advantage Rent A Car (which also filed in May) may “further exacerbate the downward pressure on U.S. used-vehicle prices for the remainder of the year and pressure lease residual values and recovery rates on defaulted auto loans.”

“Further vehicle sales or de-fleeting by rental car companies due to bankruptcies could increase used vehicle supply and pressure prices for used vehicles. Values were already negatively impacted by the still challenging wholesale market and auction conditions, with many auction houses conducting online sales only; these conditions have been exacerbated by significant economic uncertainty and U.S. unemployment in the mid-teens,” Fitch said.

The company added: “The effects of the pandemic have caused lenders to extend leases and auto manufacturers to increase incentives on new vehicles to stimulate sales. The rental car bankruptcy filings coincide with expected elevated used-vehicle supply due to delayed lease returns and a backlog of used vehicles. When coupled with weakened consumer confidence given the unprecedented spike in unemployment and significant economic uncertainty, these factors will exacerbate the already weak outlook for used-vehicle prices."