Thinking of booking a European vacation this summer? If testing for the virus, vaccination rules, and border restrictions seem difficult, wait until you try to find a rental car.
As countries reopen after the pandemic, disrupted supply chains have created shortages of a multitude of products and services, raising fears of consumer price inflation. Rental cars are a good example. They are now so rare that if everyone opts for a beach vacation abroad this year, they’ll end up paying a big premium for a vehicle – if they can find one. The market leader on this side of the Atlantic, Europcar Mobility Group, believes that leisure pricing could be “pretty healthy” this year. Translation: Prices are going up.
If the miserable budget of vacationers is synonymous with happiness for the recuperating rental giants, this situation is almost certainly temporary. The price will return to normal at some point.
The price mechanics are quite simple. When the pandemic began, car rental companies’ incomes plummeted and they offloaded vehicles to protect their balance sheets. Europcar and Hertz Global Holdings have filed for creditor protection in order to restructure their debts. Most large operators have about a third fewer vehicles than a year ago and some international fleets have shrunk further.
These companies are used to adjusting their fleets according to demand. They usually start buying more cars around this time of year to deal with the summer push in the northern hemisphere.
However, procuring new vehicles has become much more difficult due to the semiconductor shortage affecting the automotive industry. Some automakers prioritize deliveries to retail customers over rental fleet buyers because they make more money that way. After a year of setbacks, rental companies are also worried about adding too many cars and ending up again with too much capacity.
People who book trips on short notice also make it difficult for the rental industry to strike the right balance between supply and demand. According to Europcar, customers book an average of only three days in advance, so there is little visibility into future demand. When the company places a vehicle order, it typically takes around three months for the cars to be delivered. It is this discrepancy that announces the potential misery of holidaymakers.
While there are already reports of soaring rental prices in Mallorca, where Germans have been able to travel since March, in most parts of Europe cross-border travel is only starting to pick up. To get a glimpse of what could happen, just look at the United States, where vaccinations have taken off faster and the rental car price apocalypse is already in full swing. Vacationers in Hawaii would have resorted to cheaper U-Haul truck rentals.
The industry turnaround has been so dramatic that Hertz shareholders will receive a payout when the company exits Chapter 11 – which is unusual in this type of situation. Avis Budget Group shares have increased tenfold from last year’s low, and national profitability is at an all-time high for this time of year.
Rental companies are trying to catch up by buying used vehicles or keeping their existing fleets for longer – their vehicles haven’t driven much in the past year, so that doesn’t necessarily mean a compromise on quality. Expanding the range of vehicle suppliers is another option. Last summer, Corsica took delivery of dozens of electric rental vehicles produced by the little-known Chinese manufacturer Aiways.
The question for investors is whether a recovery in earnings can be sustained. As the pandemic has forced these companies to face inflated costs and a handful of brands control the vast majority of the market, price wars are an ongoing risk once the supply of cars is no longer limited. .
The advice to customers is simple: book as early as possible (some price comparison sites offer free cancellation), check availability before purchasing flights, or consider taking a taxi. Otherwise, be prepared for a long line at the rental counter.
Chris bryant is a Bloomberg opinion columnist covering industrial companies. This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.