What is the deal with car rentals?

0:01NPR.

0:11This is The Indicator from Planet Money. I'm Waylon Wong. I'm producer Julia Ritchie. We love having you on the side of the mic, Julia. It's always good to switch it up every now and again, keep it fresh. So we got this email the other day from a listener about a perennial nuisance we've encountered before at the Indicator, rental cars. Dun, dun, dun. Our listener Garrett placed a reservation for a car through Expedia for his trip to England this summer. When he shows up to the rental counter, they do not have a car for him. So after some back and forth with the rental car place and Expedia, he tries another rental company.

0:46We have to go across London where we find a car. And then we get there and they're like, oh, we don't have that car. But they're with a few other rental agencies in the same parking garage. And one of them has a car for like, you know, triple the price, basically. And so that's what we do because we need a car. You know, a lot of us have been there. Even if the rental car you booked is there, the cost of renting it, like a lot of other parts of our economy, is a lot higher right now. It's not at its pandemic-era peaks. Still, as of last month, it's outpacing other types of travel expenses like airfare and hotels.

1:28So today on the show, we explore the great reset happening in the U.S. rental car industry that's kept prices elevated, left fleets leaner, and some customers frustrated. That's coming up after the break. This message comes from LinkedIn ads. One of the hardest parts about B2B marketing is reaching the right audience. That's why you need LinkedIn ads. You can target your buyers by job title, company, role, seniority, and skills. All the professionals you need to reach in one place. Get a$250 credit on your next campaign so you can try it yourself. Just go to linkedin.com slash nprpod. That's linkedin.com slash nprpod.

2:10Terms and conditions apply only on LinkedIn ads. This message comes from Apple Card. Apple Card members can earn unlimited daily cash back on everyday purchases wherever they shop. This means you could be earning daily cash on just about anything, like a slice of pizza or a latte from the corner coffee shop. Apply for Apple Card in the wallet app to see your credit limit offer in minutes. Subject to credit approval, Apple Card issued by Goldman Sachs Bank USA, Salt Lake City branch. Terms and more at applecard.com. This message comes from NPR sponsor Veeam. AI promised intelligence, but it also exposed everything people couldn't see, like scattered data and hidden risks.

2:51Now there's a new way forward where protection, governance, and AI trust move together. With Veeam plus Security AI, You can see your entire data estate in real time. Because when resilience, security, governance, and AI trust come together, innovation moves safely and faster. Learn more about accelerating safe AI at scale at veem.com. One of our guides to the rental car industry is a man named Sharky Laguana. That is my name. People always say that can't be your name. It is my name. Sharky is the founder and CEO of a company called Bandigo. He used to be a professional musician until the vehicle he was traveling in broke down and he got stuck in remote Elko, Nevada for 10 days.

3:37It gave him the idea to start his own company, renting vans to touring musicians and other groups. He's also the president of the American Car Rental Association, which counts Enterprise, Avis, Hertz and Sixth among its members. Our members operate roughly 98 percent of all cars that are rented in America. and collectively we own over 2 million vehicles. Being the face of the industry means being familiar with all the pet peeves people write about online, from hidden fees to the reservation system that does not always guarantee you a car. We're all familiar, of course, with the Seinfeld joke. Unfortunately, we ran out of cars.

4:18But the reservation keeps the car here. That's why you have the reservations. I know why we have reservations. I don't think you do. So I don't have a car reservation. It's like you know how to take the reservation. You don't know how to hold the reservation. Right, right, right, right. I think we're all super sympathetic to that, right? You can't magically produce a car out of thin air. You know, you can't just say, oh, we don't have enough cars. I'll just go pick some up from the dealer. That's not how this works. So we're in an era now where we're encountering some of the realities of the business model and some of the limitations of the business model.

5:01But here's the thing. The car rental business model may not be what you imagine. The rental car business, Sharkey says, is more like three types of businesses in one. So there's the renting out of the cars for one, but then there's the more critical part, fleet management. In other words, rental car companies borrow money to buy large fleets of cars, rent them for a while, and then figure out a good time to sell them on the used car market. Car rental companies live and die by depreciation. Chris Brown is an associate publisher of Auto Rental News, an industry trade publication. Car rental companies were, you know, making more money in their ability to buy cars cheaply and to sell cars for a pretty good price.

5:48And then the rental income was incremental to their profits. So before the pandemic, overfleeting was more common for rental companies, buying lots of cars so they could eventually make lots of money on the used car market. And there's our vocab term for this episode, overfleeting. That's having more cars than you actually need to rent out to customers. Yes. in the not-so-distant past, Whelan, having all those cars meant that if you showed up to the car rental counter and they didn't have your car, they'd be more likely to have another one. Yeah, and maybe you would get some other perks learned in there, too.

6:23Yeah, like a Yankee Candle car freshener or a cleaner. Really? No, I don't know. So they might still try to upsell you on insurance and fuel, but those are, like, less critical to the bottom line. But then the pandemic happens, of course. Fewer people are traveling, and the rental car companies are stuck with like all these cars in their lots. And what happened next? Labor costs rose. Supply chain disruptions meant automakers could not get the semiconductor chips they needed to fulfill orders, including orders for large rental car fleets. Chris says the supply chain issues in the car rental industry were about as severe as any out there.

7:01Rental car companies couldn't get cars. And because they couldn't get cars, the cars that they had, they charged a lot of money for it. So rental rates were through the roof and customer service kind of took a hit there. Chris says the supply chain issues have mostly resolved for retail inventory. But companies are still dealing with high interest rates. Large fleets and cheaper car rentals were just another byproduct of the zero interest rate policy era when the Federal Reserve lowered rates to stimulate economic activity and dig us out of a recession. Another thing that's added to today's higher costs is that the fleet makeup has changed.

7:43Chris says automakers once saw rental companies as like a dumping ground for entry-level cars. Now they're pushing higher-end models and SUVs. He says that's what consumers want. These bigger vehicles are expensive for the customer to rent, but they have better resale value when a rental operator decides to put them on the used car market. Chris thinks these smaller, higher-end fleets are here to stay as rental car companies recalibrate the way they operate in this new era of higher interest rates. Now, I think that the car rental companies have more discipline in the way that they buy cars, and they really understand that over-fleeting is not a recipe for higher profits.

8:32Some competitors are taking advantage of these industry shifts, especially in bigger markets. Churro, for one, is a car-sharing app that lets people rent their cars out like Airbnb. It doesn't have the fixed cost of renting space at an airport or managing a fleet of depreciating vehicles. Churro has grown its fleet to over 365 ,000 active vehicles worldwide. Sharkey says these peer-to-peer companies, as they're called, are still a fairly small portion of the overall market. Avis, for example, has more than 467 ,000 vehicles in the Americas alone. They're in our industry, and we do have some peer-to-peer operators among our membership.

9:10I'm not aware of anybody in our industry that's lying awake at night worried about them. We're worried about our customers. Sharky knows people get frustrated with travel inconveniences, like the one our listener wrote to us about. I think consumers got accustomed to very low rates because the industry, for a long time, was in a place of high stability and high competition. There is some relief. According to Travel App Hopper, the average price to rent a car this summer was$44 a day. So it's down about like 2 % from last year, and rental car prices overall were down about 6 % from 2023. Still, experts say these more nimble fleets and elevated prices are here to stay, at least for now.

9:52You know, this actually reminds me of another Seinfeldism. What is it? Pirate shirt? Spongeworthy? No, that's a shame. Did I do that right? That's a shame. That's a shame. That's a shame. This episode was produced by Corey Bridges with engineering by Kweisi Lee. It was fact-checked by Sierra Juarez. Kicking Cannon edits the show and The Indicator is a production of NPR.

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