The economic realities of the car rental industry give companies, including multinational car rental group Avis Budget Group and Enterprise Holdings, the world's largest car rental operator, multiple reasons to slow down the adoption of electric vehicles. Think about it, every time a renter forgets to fill up the car when they return the car, they will lose a lot of money.
But on Monday, local time in the U.S., car rental companies received the strongest reason to date, asking them to transition to electric vehicles faster and make it an important part of their fleets. Hertz, a global chain car rental brand, ordered Tesla for 100,000 electric vehicles sends a signal to car rental companies that they need to develop an eviction strategy as soon as possible, perhaps sooner than they originally planned.
For John Healy, an auto industry analyst at North Coast Research, it's no surprise that Hertz is the first of a handful of large rental car companies to make a big bet on electric cars.
After an era of industry consolidation, three companies have seized 95 percent of the airport terminal's car rental business: Enterprise, which owns Alamo and National, Hertz, which owns Dollar and Tree, and Avis, which merges with Budget. But so far, only Hertz has valued the EV bet the most, with a focus limited to the niche market for luxury car renters using high-end services such as Ultimate Choice. Healy said: "The electric vehicle industry has not improved much. ”
The Ultimate Choice service offers consumers high-end electric vehicles from brands such as Porsche and Tesla, but the number of high-end electric vehicles in hertz's fleet is only "a few hundred" compared to the 100,000 cars ordered from Tesla. Speaking of the main competitors, Healy said: "They're trying to make money by renting a car, not satisfying this niche. Hertz argues that wealthy renters, combined with the "conspiracy" factor of electric vehicles, are sufficient reasons for these companies to experiment with fringe businesses, "but that's about it."
Energy Transition with Tesla Leasing
An Enterprise Holdings spokesperson said: "Our focus is not simply to add numbers, but to work thoughtfully with industry partners and stakeholders to drive the long-term survival and growth of electric vehicles, including ensuring that the grid and charging infrastructure are ready." ”
The spokesperson also added that the company began working with a top European consultancy this year to better understand how to transform its business model, operations and infrastructure to participate in operations with more electric vehicles. In the U.S., the company has launched thousands of electric vehicles, delivered them to employees, and put them into a rental fleet in specific markets to test electric vehicles. In the coming years, the company's fleet will begin a massive transformation.
If demand isn't enough to justify investing heavily in electric fleets, the Hertz deal could be a sign that the time has come. But the huge economic hurdles that the rental car industry needs to overcome have to do with the attitude of people who have so far been hesitant about electric vehicles.
As Hertz prepares to re-conduct its IPO after a restructuring of private equity investors, and with former Ford Motor Corp. CEO Mark Fields as interim CEO, news of a deal with Tesla gives it another way to stand out in the integrated car rental space. But at the end of the day, electric vehicle fleets are a problem that all major rental car companies need to address as part of a commitment to sustainability and new economic thinking.
Car hire was once considered a "bargain"
Dan Ives, an analyst at Wadebush Securities who studies Tesla, said the rental car fleet has always been seen as a "bargain" because of the sheer size of their bulk purchases. "Hertz is spending more than $4 billion on orders for electric cars, which have never been considered before with Tesla," he said. This is not only a turning point in the market's interest in electric vehicles, but also a turning point in raising awareness of Tesla's production capacity. The company's factories are expanding around the world, as well as in Austin in the United States. ”
The rental car industry buys between 1.5 million and 2 million cars a year, accounting for a large portion of new car sales. Ives said: "For Tesla, this is 2 million cars that have never appeared on radar. After the deal was announced, Tesla's market capitalization soared to $1 trillion. Jonathan Smoke, chief economist at Cox Automotive, said: "It's also a clear signal from Tesla that they can deliver a lot of new cars. ”
The model Hertz ordered from Tesla was the Model 3 sedan, but outside of the luxury car market, the size of the electric cars available for rent was always an issue because the sedans were too small to meet the preferences of many tenants. But that is changing as more crossover electric vehicles and other hybrids are produced. In the second quarter of this year, crossover utility vehicles accounted for 50% of electric vehicle sales.
Carbon emissions and car rental industry
North Shore Research analyst Healy said that while the car rental industry's carbon footprint is not a major concern for the U.S. government, future pressures are expected to increase, and people who follow the industry are always talking about it, and President Biden wants rental car companies to commit to using electric vehicles. "The government's push is uncertain, but it is likely not to disappear," he said. ”
Car rental agencies have sustainable business models, such as Enterprise Holdings' carbon offset program and its long-standing research collaborations in the field of biofuels. The company has been reporting carbon emissions levels for Scope 1 and Scope 2 for years, but Scope 3 emissions occur in the exhaust pipes of its fleet. Avis-Barge Group also offers carbon offsetting and carbon footprint estimation to corporate customers and has made the acquisition of car-sharing company Zipcar part of its sustainability plan. The company reported that it has more than 21,000 hybrids in its global fleet.
In recent years, shareholder advocates focused on ESG (environmental, social and corporate governance) have been pressuring car rental companies to increase their purchases of electric vehicles. A 2020 climate resolution by Hertz shareholders included electric vehicles as part of the broader discussion on climate change. Hertz's standard car rental business currently has only three hybrid cars to choose from in specific locations rented by consumers, with no pure electric vehicles. While Hertz has taken steps to improve the energy efficiency of its operating facilities, the impact of the company's fleet has not been adequately addressed.
Driss Lembachar, transport and infrastructure manager for Morningstar's sustainability ESG risk assessment business at morningstar, said that from a regulatory perspective, the ultimate responsibility for emissions and compliance with fuel economy standards lies primarily with automakers, who are exposed to less exposure to vehicle emissions risks than automakers. But the fuel efficiency and longevity of the car rental company's fleet and renewal are crucial for investors, as these aspects affect the attractiveness and customer satisfaction of the company.
Electric vehicle sales continue to rise
Sales of zero-emission vehicles (including battery-powered, plug-in hybrid and fuel cell electric vehicles) in the U.S., including battery-powered, plug-in hybrid and fuel cell electric vehicles, continued to rise, with zero-emission vehicle sales exceeding 168,000 units in the second quarter of 2021, up 33 percent from 122,000 units in the same period in 2020, according to industry trade group Alliance For Automotive Innovation. The report notes that zero-emission vehicle sales accounted for 3.8 percent of the auto market in the second quarter of 2021, the highest percentage ever recorded. The automotive industry will invest $330 billion in electrification by 2025, and more than 130 zero-emission vehicles and 30 hybrid models are expected to be available over the next five years.
One of the challenges, an Enterprise Holdings spokesperson said, is how to transition to leased electric vehicles outside of large corporate or leased fleet deals. The company's research found that range anxiety remains a top concern for consumers, as is the lack of public charging facilities. She noted that short-distance rentals account for only 20 percent of Enterprise Holdings' business.
For rental car companies, the upfront cost of adopting electric vehicles is not only the purchase price of the car, but also the construction of the required charging infrastructure, which has always been the main reason for the slow transition to electric vehicles, and the current economic conditions of the car rental business make it more attractive to continue to use fuel vehicles. According to data provided by analyst Healy, rental companies can make money even if the rental car returns the car without filling up with fuel, and although this is only about 5% of the total revenue, it is high-margin income. While business models can be developed to require tenants to "charge" electric vehicles, there is no ready-made approach.
When it comes to electric vehicle fleet management, car rental companies will experience a steep learning curve, which is a factor that is not. The charging time of electric cars must be taken into account as part of the terms of car rental, and there are other basic questions that remain unanswered: how many charging stations they need, and how many charging stations must be fast charged. It takes two minutes or less to refuel a fuel car, but it can take hours to charge an electric car, and this time difference could play an important role in meeting customer needs.
Enterprise Holdings noted that about 25 percent of vehicles are turnaround, cleaned and re-leased within 1 hour, providing unique charging needs for large fleet operators. In recent years, as Tesla customer service has been closely watched, analysis of vintage electric vehicles has shown that they can present a unique overview of maintenance and service.
Hans-Werner Kaas, a senior partner at McKinsey & Company, said in 2019 that repairs to electric vehicles in general may be less frequent, but they cost more, and that equipment, including ride control and tires, may require more frequent repairs or replacements due to the improved kering quality and acceleration of electric vehicles. This may offset the potential economic advantage that electric vehicles offer to rental car companies on traditional engine maintenance issues, but the residual value of the car may be better preserved. At least so far, all the unknowns associated with the unit economy of electric vehicles have taken precedence over potential economic benefits.
"Their point is that there's not enough infrastructure and no coveted customers want it, so why change anything," Healy said. The perception has always been 'we'll see, but now is not the time.' ’”
For Hertz, in the process of returning to the open market for an initial public offering (IPO), it is a good time to announce its better positioning relative to its competitors. In recent history, major car rental agencies have tended to emulate each other, both in terms of marketing and charging customers for various services, and as the three major companies integrate their fields, Avis Bargee Group and Enterprise Holdings will be under pressure to take action in the field of electric vehicles.
Extended test drive of Tesla cars
That may also be the case for Tesla, though they could rank behind Hertz or after major automakers including General Motors and Ford plan to produce a large number of electric vehicles in the coming years. Car rental companies have historically focused on U.S. automakers before increasing overseas car purchases. Healy said: "I think Avis Bagey Group and Enterprise Holdings need to do some response. For the past 50 years, car rental has been a copycat business, and that won't change. ”
Analyst Ives cites a common proverb in the automotive industry: There will never be only one bulk order. He said: "I would be shocked if other hertz competitors hadn't called Tesla. ”
With the changing consumer landscape and growing interest in electric vehicles, car rental companies are at risk of losing their business if they move too slowly. Healy expects more consumers to be willing to pay extra to try electric vehicles in the future. "If I could rent a Tesla at Hertz for $40 a day and the Avis Barge Group didn't, I might try," he said. Even if only one customer would respond to this, Hertz would be in a better position when it came to profit margins. ”
For Tesla, the deal is a great way to introduce the technology to consumers who have never driven an electric car, especially as the sales price of electric vehicles falls relative to conventional cars to a level where there is more room for large-scale adoption. "Every consumer who rents a car is likely to become a buyer, which is actually more like an extended test drive," Ives said. ”
If the rental car industry is still hesitant, it's not because these companies lack the money to buy electric cars. Healy said: "The industry has never been more profitable. His statistical data shows that with chip shortages limiting car production, fleet size has increased by only 15% over demand, and demand is now back to 80%-85% of previous levels. The value of the cars on their balance sheets is also always appreciating, in stark contrast to what they expect used cars to typically depreciate.
The upcoming quarterly results should show the record profitability of taxi companies, which can charge twice as much as normal pricing in the current market with high demand and limited supply of cars. "If you need this van in Florida, you're paying $100 a day instead of $75," Healy said. "These companies also don't have much else to buy, despite their strong balance sheets and the industry being controlled by the Big Three, which makes more consolidation less likely."
Healy said more is changing across the auto industry and is starting to gain attention from the automaker's affiliated business. He referred to the auction space, noting that manheim, the largest auction house, recently said in an investor presentation that it would retrofit 127 EV charging stations at 53 auction sites and would require battery condition diagnostic work to properly assess the value of the EV to be auctioned. Healy said: "We are starting to see changes between similar companies in the industry. ”
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