Auto Rental News May/June 2005
How much time do you and your staff spend truly managing your rental fleet? Try taking this simple test. If you can accurately answer all of the following questions, you don’t need to read this article any further.
– What percentage of your company’s gross revenue is spent on car costs?
– How many cars did your company sell last month?
– What was the actual monthly holding cost in dollars on those cars you sold?
– What was the actual monthly depreciation as a percentage of capitalized cost?
– How many cars will you sell next month?
– How many cars will you sell the month after next?
Again, if you can answer these questions off the top of your head, turn to the next article. But some of you probably won’t be able to readily answer all these questions. That’s because most independent and franchise rental operations don’t have a designated fleet person. As a result, the business owner assumes the role of de-facto fleet manager.
By the time you take off your HR, marketing, sales, motivator, and crisis-of-the-day problem solver hats, you may find some time at the end of the day for fleet. The problem with this approach is that you end up spending about 5% of your time on the part of your business that consumes up to 50% of your total revenue.
Does this sound familiar? When I talk to most operators, they use phrases like “my hunch is” and “my gut tells me” to describe fleet costs,their short- and long-term plans, and their growth or contraction strategies.
It’s time to get serious about fleet.
Most independent car rental companies have a fleet expense of about 40% to 45% of their gross revenue. The well-run companies are at 34% to 39%, and the poorly run ones used to be at 55%+. I say “used to be” because most of those “high percentage” folks are now doing other things outside the rental car business.
Fleet cost is defined as the actual monthly cost expressed in dollars or as a percentage of the capitalized cost. Don’t confuse value depreciation with either “curtailment” (the amount of money you’re paying your lender back) or tax depreciation. I’m talking about how the car is actually losing value in the market. Although very important, interest, insurance and maintenance should not be factored in. They are in themselves critically important, and I’ll address them in later articles.
Where Does Your Company Fit In?
If your fleet expense is in the 34% to 39% range, then you deserve to be congratulated. The fact that you even know this percentage is encouraging. And this brings up an interesting point: How do you measure your fleet’s financial performance? Some operators simply judge their success by how much, or in most cases how little cash, is left over at the end of the month or year. Like most areas of your business, managing your fleet requires careful planning and execution to make improvements.
It all starts with measurements. How can you know where to go if you don’t know where you’ve been?
Think of something within your business that you measure well. It could be counter sales. Many operators dedicate an inordinate amount of time training employees on how to sell ancillary products like CDW and SLI, and then measuring employee penetration levels for these sales. These products generally account for 10% to 15% of revenues. How much time did you spend last month training, measuring and executing your fleet plan, which accounts for 34% to 55% of your costs?
There are many different ways to slice and dice fleet numbers. The largest rental companies are fanatics about fleet planning and remarketing because of their enormous impact on profit. As an experienced fleet planner, I can tell you that fleet planning and the execution of that plan happens every hour of every day. The big companies have contingency plans in place for every imaginable market shift and opportunity that may arise. Market information is shared nationally within these companies, and results are published daily.
A really well-run company, with good measurement tools, can even measure to the penny how much cheaper the red cars will run versus the white ones. But we’ll keep it nice and simple.
First: Revenues vs. Fleet Costs
This is the simplest and best place to start. It’s a macro number that speaks to the very core of your business and can be the difference between a week’s vacation in Rio or an afternoon of explaining to your banker. Have your accountant, or an employee who’s good with numbers, calculate revenue versus fleet costs for the past six months. (I don’t want to scare you with math problems.) This will give you your first measurement and generally indicate how much urgency you should give to fleet management. Remember to leave insurance, maintenance and interest out of the equation.
What should the number be? The number should be one that enables you to stay in business and make money. But as a general rule, the number should be below 40%.
What could cause a high expense ratio? Many factors drive poor ratios. Some of the most common causes are:
– Low utilization
– Poor or slow remarketing processes
– Improper accounting, such as booking fleet incentives dollars to operating revenue
– The wrong fleet mix
– Poor new car buy
– Poor check-out and check-in processes that allow your cars to get beat up.
In most cases, poor ratios are a combination of two or more of these factors. Correcting the problems requires that you do something different. That may be, at first, uncomfortable to you and your employees. An example might be pushing utilization averages from the low 70s to a higher number. You have a disproportionate expense ratio but a high comfort level from branch managers that vehicles will always be available for your renters with minimal stress to the staff. Taking that utilization to 80% will require your employees to manage reservations tighter and improve how they share vehicles between locations. At first, employees will most likely resist. But as profits rise, the smart ones will conform.
Calculating Actual Monthly Holding Costs
Earlier, I mentioned some potential causes for disproportionate fleet costs. You now need to drill down a little further. The next step is calculating your actual costs by fleet category or model. This will identify winners and losers in your fleet, which will in turn provide additional data for remarketing plans and future new car buys. This information will also help you evaluate rate structures throughout your fleet.
Many operators will look at a cheap capitalized cost and relate that to a “cheap car to operate.” That is not always the case. Here is a simple formula you can use to calculate your actual per-unit monthly holding cost in dollars:
– Take the price you paid for the car
– Subtract the price you sold it for
– Divide by the number of months it was in service.
You are now one step further in making an informed decision and verifying or dispelling your hunches. This monthly dollar measurement is important, but it needs to be supported by the actual monthly amount the vehicle is depreciating. This should be expressed as a percentage of the capitalized costs. Both numbers need to be evaluated in conjunction with one another to give the complete cost picture.
If you establish simple measurements that you review regularly, this will help you make practical decisions about your fleet. Of course, many different factors come into play as you drive your fleet costs down. But certainly, you’ll never know what they are until you start identifying and measuring them. You can’t manage what you don’t measure. Believe me, your competition is measuring and managing this crucial piece.
When you get some of these basics down, you are then prepared to do a “deep dive” by model, time of the year, and cycling patterns.
My next article will focus on the importance of a solid remarketing plan and will help answer some of the other questions posed to you at the beginning of this article.