Journey’s end? Car rental companies fight for survival

As more companies bought their own cars, the risks grew

Every May, as the mercury rises and thousands of tourists descend on Barcelona, car-sharing app SocialCar is typically bombarded with a flood of requests.

The start-up, which allows drivers to hire out their own vehicles as rental cars across Spain, would normally expect 2,500 transactions during the month, the traditional start of the crucial peak season.

This month, they will be happy to clear 300.

“We have seen no demand, zero,” said founder and chief executive Mar Alarcón, who has been confined to her Barcelona apartment for the past two months.


Being a start-up, the business has limited overheads, with its cars owned by motorists.

For the industry’s largest rental groups, the outlook is even worse.

Despite riding high in the opening weeks of the year, coronavirus, which has prompted lockdowns in multiple countries and ground international travel to a halt, has ignited a global, existential crisis among the world’s largest car hire companies.

In the US, the Carl Icahn-backed Hertz group this month narrowly swerved bankruptcy, delaying payments to lenders due in April until May 22nd.

Its main listed rival, Avis, posted a $158 million (€146 million) loss in the first quarter, warning of an 80 per cent fall in sales in April and an $800 million cash burn between April and June.


Germany's Sixt secured a €1.6 billion loan partly financed by state development bank, KfW, while Paris-based Europcar tapped its banks for a €220m loan that is 90 per cent guaranteed by the French state.

“There was a fast decline in every region we operate in,” Europcar chief executive Caroline Parot said.

“Usually we make the bulk of our profit and the bulk of our cash between April and October. With Easter being killed, it was essential we get more liquidity to cover the crisis.”

Businesses across the sector have furloughed or permanently reduced staff, dumped cars to reduce costs and cut all non-essential spending.

Privately held US group Enterprise, the industry's biggest player, said it faced "significant and unprecedented challenges" during the crisis.

One rental group described the short-term hit as “bigger than September 11th, and the 2008 recession, combined”.

While the whole sector is under enormous strain, the pandemic has exposed a sharp divide between the two models of fleet ownership that underpin the industry.


The “buyback” approach, favoured by Europcar, involves a rental group taking vehicles with an agreement the carmaker will buy them back at a fixed time and price. This shelters the hire group from any unexpected changes in used car prices.

The second approach, pursued by Hertz, is where hire groups buy the cars outright, saddling them with the job of selling the vehicles at a later date – a set-up portentously known as the “at-risk” model.

This strategy is reliant on the steady rise of used car residual values - a situation with striking parallels to the US housing bubble that depended on ever-climbing prices before the crash during the financial crisis.

For years, cautious listed hire groups favoured the certainty of the “buyback” approach.

But Enterprise preferred the “at-risk” model, using its scale and reach to sell its cars afterwards.

Its success prompted industry executives to joke that Enterprise was really a used-car dealer with a rental arm, rather than the other way round.


Still, other rental groups copied Enterprise and began buying up cars themselves, spurred on by the apparent ease of flogging nearly-new vehicles, as they sought freedom from manufacturer obligations even though it left them without the safety net of a fixed resale value.

The percentage of rental cars in the US owned outright by the hire groups rose from 58 per cent in 2015 to 79 per cent in 2019, according to Jefferies data.

“If you look across the rest of the sector, they moved towards more ‘at-risk’ cars and the assumption was you wouldn’t see used car pricing fall off a cliff,” said analyst Hamzah Mazari at Jefferies.

Then, coronavirus hit.

This exposed the weakness of the “at-risk” model, where groups typically hold vehicles in an asset-backed security, or ABS. They pay off the depreciation at a fixed rate and any interest, and at the end of the period, sell the cars, winding up the ABS.

When used car prices fall faster than expected, as they did in April when they dropped 12 per cent compared with March, the rental groups are forced to stump up cash as additional collateral.

While the valuations happen monthly, the collateral is posted at the end of each quarter, meaning companies with high exposure have until June to find the required reserves.

Avis is expected to face a $700 million bill, sapping almost half of its $1.6bn liquidity, according to calculations from Jefferies.

Hertz, which holds 90 per cent of its cars “at risk” in the US, faces a potential payment of $800 million, accounting for almost all of its $1bn liquidity, they added.

Avis this month insisted its model, where it depreciates cars at 20 per cent a year – faster than the expected average decline – gives it a buffer within its ABS to withstand sudden, marked price falls.

The business takes “a conservative approach to asset-backed securities financings”, chief financial officer John North told investors on a call.

Hertz, in its filing delaying payments to lenders, said the company was working to “develop a financing strategy and structure that better reflects the economic impact of the Covid-19 global pandemic and Hertz’s ongoing operating and financing requirements”.


Another big potential downside for groups using the “at-risk” model is having to sell their own cars, a near-impossible task when auction houses and dealerships are shut.

In contrast, those reliant on the “buyback” model, such as Europcar, will be able to hand vehicles back once their contracts are over.

“Today, thanks to the ‘buyback’ model we were able to de-fleet heavily,” Europcar chief Ms Parot said.

By June, the company will have reduced its fleet by a third, while slamming the brakes on orders for new vehicles.

While it would typically buy 150,000 cars between March and May, its peak buying months ahead of the summer surge, the company will buy none.

“We are at the beginning of the purchase period. We have been able to delay or cancel those purchases,” she said. The group is likely to halt all new purchases until at least July, depending on the recovery of its markets.

While some pick-up is expected in the summer, the leisure market that drives half the sector is not expected to return “until next Easter at the earliest”, Ms Parot said.

Nevertheless, demand is rising in some surprising quarters.

“In markets where shelter-in-place restrictions are being lifted, we’re seeing early indications of improving demand, leaving us hopeful for recovery beginning in the third quarter,” Avis chief Joseph Ferraro said during an earnings call.


Lingering concerns about public transport, along with the increasing need to travel for groceries or work, are likely to lead to a rise in demand for private vehicles in one form or another.

Zipcar, the car-sharing group owned by Avis, has experienced growth after launching Dedicated Zipcar, which gives customers access to a single vehicle for a period of time, alleviating health concerns.

“Over the past few weeks, we have seen growth in new use cases,” Zipcar president Tracey Zhen said.

These rare, upbeat developments provide hope the industry can evolve and get through the crisis. But for those groups that survive, debate over outright ownership of fleets or the use of “buyback” arrangements will probably return, reshaping the sector.

For Ms Parot at Europcar, the crisis has shown “buyback’s” advantages, a model she said also avoided distracting hire groups from their core business of providing cheap easy-access transport. “We are not car sellers. That is not our job.”

- Copyright The Financial Times Limited 2020