Subs exclusive: Why the car rental business is struggling

In a dramatic change of fortunes, vehicle rental companies, once the darlings of a motor industry desperate to shift metal and boost registrations, are now being shunned by car makers grappling with production shortages and focused on more profitable business. Until the Covid pandemic struck in 2019, car manufacturers and rental firms had been locked in a self-serving embrace – the former supplying thousands of vehicles to the latter at huge discounts, only for the rental firms to dispose of the cars at auction, often for a profit, just six months later, and in the process distorting the used car market and weakening residual values. How things have changed. Now rental firms, anxious to replace the cars they sold off during Covid when there was no consumer demand, are at the back of the queue for vehicles as car makers adapt their businesses to deal with material shortages by favouring the more profitable private market over all others, including the rental sector. According to the BVRLA, the trade body representing rental companies, the UK rental sector had 90% fewer cars in the first five months of 2022 compared with the same period in 2019. Taking the past three years as a whole, rental firms have taken delivery of 400,000 fewer cars. The figures expose the scale of the business once enjoyed by car makers and their rental customers – a business that had potentially far-reaching consequences. "Historically, rental companies could drop product into the market and change it overnight," says Philip Nothard, insight and strategy director at Cox Automotive. "We'd regularly be having conversations with them about their plans because 50,000 Vauxhall Corsas, for example, being defleeted over a short period of time could seriously upset supply and demand and balancing those two things is critical for the maintenance of residual values." But Toby Poston, director of corporate affairs at the BVRLA, says rental firms performed a valuable function. "Supplying to the rental sector was one of the most effective ways car makers could dispose of surplus stock." They must be wishing car makers still needed them. According to Poston, not only have rental companies been put to the back of the queue for new cars, but when they do finally get them, they're also having to pay 'top prices', which, he estimates, have risen recently by up to 15%. Mark Kendall of Kendall Cars, a medium-size rental company based in Surrey that buys 250 cars per year, says the situation is critical. "Rental firms are short of around 100,000 vehicles in total. I'm still waiting for cars I ordered months ago. Some have been cancelled by the manufacturers and new terms put in place that will mean they're much more expensive. In fact, some car makers have told me I must pay retail – this when the prices of some cars have risen by up to £10,000. To be sure I get what I need next year, I will have to place my orders in August, whereas in previous years, I could have waited until January." Kendall says that among the hardest new cars to source are automatics but small cars, including the Toyota Aygo X and Peugeot 208, are also difficult to obtain. "I suspect that manufacturers prefer to save what few microchips they have for bigger and more profitable models." Another consequence of the shortage of new cars is that where, previously, rental firms sold their unwanted vehicles on the used market, now they're having to buy them from it in a bid to plug gaps in their rental fleets. "Rental firms have become heavy buyers of used vehicles," says Nothard. "The bad news for dealers is that because they think in terms of what they can earn renting out a car rather than, like a dealer, what it's worth trade as well as retail, they're becoming very aggressive competitors. Some rental firms are now among the top 10% of used car buyers." In addition to filling gaps in their fleets, he says, rental firms are also rushing to replace cars that they've had to keep for longer and that are now running up maintenance and repair bills. "The pressure's on for them to dispose of older cars before they become uneconomic to operate." At Kendall Cars, Mark Kendall has his fingers crossed he can fulfil customer bookings. "As this year's summer season approached, we began to run out of cars. People couldn't understand they must now book at least two months ahead to be guaranteed a car. I know of operators who overbook but we'd never do that. A rental car can mean the difference between making a business meeting, going on holiday, enjoying a family day out or not." That being so, consumers will be hoping Kendall Cars and the other rental companies move up the new car queue, sooner rather than later. The rising costs of rental For consumers, the most obvious consequence of the shortage of rental cars is higher rental prices. For example, in 2019 the typical weekly rental was £339 but today that figure is £675. However, if the prices of cars have risen 15%, how do rental firms justify a rise in rates of 100%? "Like everyone else, rental firms are facing increases in business costs, including the cost of decarbonisation," says Toby Poston, director of corporate affairs at the BVRLA. "Increasingly, customers are asking to rent electric cars. "This means the rental company has to invest in the infrastructure to recharge a car within an hour of its return from the previous renter. Typically, that investment is a six-figure sum." Mark Kendall of rental firm Kendall Cars expects rental rates to rise higher still next year. "I suspect that some rental firms whose rates have risen fourfold are taking advantage of customers but, without a doubt, rates are going to be higher in 2023 thanks to inflation and other pressures, including used car prices, which could start rising again."