As the semiconductor shortage slashes vehicle production, rental car companies are taking extreme measures to bolster their fleets. The businesses are buying used vehicles at auction. - IMAGE: Flickr.com

As the semiconductor shortage slashes vehicle production, rental car companies are taking extreme measures to bolster their fleets. The businesses are buying used vehicles at auction.

IMAGE: Flickr.com

Top auto manufacturers warn that without needed chips, a potential 1.3-million shortfall in U.S. car and light-duty truck production will result; a major concern for ravaged rental car fleets that sold off some of their inventories during the pandemic. 

The global semiconductor shortage is causing uncertainty in fleet supply and resulting in tighter fleets throughout the industry.

As the semiconductor shortage slashes vehicle production, rental car companies are taking extreme measures to bolster their fleets; they are buying used vehicles at auction.

The move represents unchartered waters for companies like Hertz Global Holdings Inc. and Enterprise Holdings Inc., which typically buy new vehicles in bulk, rent them out for a year, then sell them at auction. Occasionally, companies purchase a few used cars to handle short-term demand surges, but they the purchases were never routine. 

Heightened demand has used-car costs soaring. According to the Manheim Index, used car prices are 52% higher than a year ago and experts predict they’ll stay that way well through June. 

“We expect to see records in the Manheim Index through June before demand softens enough to align with supply trends,” said Jonathan Smoke, chief economist of Cox Automotive, which owns Manheim, the nation’s largest used-car auction. “We expect retail prices to continue to rise into the summer, as retail trends tend to follow wholesale trends with a six-week lag.”

A spokesperson for Hertz told Bloomberg that the company is stocking its fleet with as many used cars as it can to prepare for a post-pandemic travel boom.

“The global microchip shortage has impacted the entire car-rental industry’s ability to receive new vehicle orders as quickly as we would like,” the spokesperson said. “Hertz is supplementing our fleet by purchasing low-mileage, pre-owned vehicles from a variety of channels including auctions, online auctions, dealerships and cars coming off lease programs.”

Rental companies are also holding onto cars longer. According to Manheim’s midmonth report in April, rental cars coming to auction now have an average of 79,000 miles on them, up 54% over a year ago and 18% higher month over month. Typically, rental car companies sell vehicles before they hit 40,000 miles. 

Rental car companies will outlay gobs of cash to build bigger fleets. But in the end, they will increase rental rates to compensate for the added expense. 

Consumers will pay the price for the rental car shortage. They can expect to pay top dollar for their rentals—if they can find them. Rates in Florida reportedly are averaging $100 a day, while Hawaii rates have hit $200 a day, and Puerto Rico rates have risen to $600 a day.

As the change hits consumer pocketbooks, rental car companies take their profits straight to the bank.

Avis Budget Group Inc. posted record margins in the Americas during the first quarter and grew revenue per day by 12% to almost $60. The company lost $170 million on a net basis but made $47 million in adjusted earnings before interest and taxes, marking its best Q1 performance since 2015. 

Still, Avis declined to provide full-year guidance, citing limited vehicle supply and other issues as the reasons.

“The global semiconductor shortage is causing uncertainty in fleet supply and resulting in tighter fleets throughout the industry,” Avis Budget said in a statement. “We have historically navigated through significant vehicle recalls, and believe we have the logistics in place to manage our fleet during this disruption in supply.”

 

Originally posted on Auto Dealer Today

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