Rental car companies are turning to used car auctions to regrow fleets amid a massive shortage sending prices skyrocketing
- There's a rental-car shortage in the US that's causing fleets to be booked out or booked at high prices.
- Companies are scrambling to regrow fleets amid high used and new car prices caused by the chip shortage.
- For rental companies like Hertz, this means turning to avenues like car auctions.
The massive rental-car shortage is causing vehicle rental companies to turn to car auctions in order to regrow fleet sizes amid rising demands.
Travel is projected to boom this summer as the COVID-19 vaccine rollout and pent-up demand for travel continues to grow tangentially. As a result, car rental companies like Enterprise and Hertz previously told Insider that they have begun seeing strong demand for rental cars through the summertime.
However, this skyrocketing interest in rental cars - combined with decreased fleet sizes after several companies had to sell off chunks of their fleets in order to preserve money during COVID-19 - has created what some are calling a "car-rental apocalypse."
If you're planning your first vacation in over a year, you might want to look out for rental car prices. This "apocalypse" is causing popular travel destinations like Hawaii, Florida, Phoenix, Arizona, and Puerto Rico to see booked out fleets and rental-car prices up to over $700 a day. This has even pushed tourists headed to Hawaii to rent U-Hauls vans instead.
To combat this, car-rental companies have been trying to regrow fleet sizes again. However, attempts to bulk purchase new vehicles are facing headwinds related to the global computer chip shortage, which has already caused automakers like Ford, GM, and Volkswagen to cut or halt production. In total, the shortage could cause a million vehicles in production to be delayed this first quarter, Mark Fulthorpe, the executive director of global light vehicle production at IHS Markit, said in an IHS Markit analysis piece.
To make matters worse for rental-car companies, automakers like Hyundai aren't prioritizing fleet buyers: in April, Hyundai's fleet sales dropped 27% in order to put retail sales first, Jose Munoz, Hyundai's chief operating officer, told Bloomberg.
As a result, regrowing fleets with new vehicles may be more difficult to do this year than any year without a chip shortage.
In turn, Hertz is "supplementing its fleet by purchasing low-mileage, pre-owned vehicles from a variety of channels including auctions, online auctions, dealerships, and cars coming off lease programs," a Hertz spokesperson told Insider in an email statement. This includes a variety of vehicle types, such as small and midsize SUVs, which have been in high demand.
However, it's uncommon to turn to auctions to purchase "routine sedans and SUVs," Maryann Keller, a consultant who was formerly on the board of Hertz's Dollar Thrifty Automotive Group, told Bloomberg.
Hertz has previously purchased used cars through auctions to "support bursts in demand," but is now turning to this avenue more due to the chip shortage. Ironically, the car rental company previously had to sell 200,000 of its used cars in 2020 as part of its Chapter 11 bankruptcy deal.
Enterprise also previously told Insider that it had been working with manufacturing partners since summer 2020 to continue fleet growth amid rising demands. Now, it's working to purchase both "new and low-mileage used vehicles through all channels," a spokesperson told Insider in an email statement, adding that used and new car inventory has been low.
But turning to auctions may not be the foolproof cheap alternative rental-car companies might need. Wholesale used car prices have been steadily climbing, amounting to a 52.5% increase compared to the same time last year, according to data from the Manheim Index. The first roughly two weeks of April alone saw a 6.81% increase in used car prices compared to March.
This chip shortage has quickly become the "No. 1 issue" preventing these companies from rapidly expanding fleets with new or used cars, Chris Woronka, a senior hotel-and-leisure analyst at Deutsche Bank, told Insider. As a result, car rental companies may begin holding onto their existing vehicles for longer than usual, even if that means having vehicles with over 60,000 miles still in use.
"It's like everybody going to the fire exit at once in a movie theater," Woronka said. "It's an unusually broad and quick surge in demand that's being exacerbated by this shortage of new-car availability."