Risky Business

Auto Rental News December 2006

Three years ago, we asked the question: As part of the balance a well-run rental company should have, you should be prepared to have some portion of your fleet as “risk” cars, just to offset the possibility that the manufacturers might some day do away with their buyback programs.

That was three years ago. Today, the real question is: Now that program cars are becoming scarce how are you going to deal with this?

Our company does all sorts of consulting and much of what my function is revolves around getting clients, or potential clients, to devote the appropriate time to fleet planning. This involves thinking about all the various components that go into it. From building relationships with manufacturers, developing remarketing strategies, transit and logistical issues, how to ‘thread the needle’ with credit lines, thinking through “getting paid” issues, etc. Over the last several years I have trumpeted a clear message that the “winds of change” were about to blow and that the entire juicy program deals the automakers were passing out to keep plants at capacity would soon dry up. I felt like “Chicken Little” running around yelling, “the sky is falling, the sky is falling”. Being a Detroit native, changes in the car manufacturing business make front-page news. Ford spokesman Jim Cain was quoted in the Detroit News, saying, “Building our business around rental cars is not the strategy at Ford. We’re focused entirely on the retail customer.” Being that I was born and raised in Dearborn Michigan, I have been conditioned to listen closely when the big 3 speak. Factory utilization, total incentive levels, labor relations, the health care problems that all manufacturing companies have in the US – these things all are part of the daily buzz in my home town.

But unlike the crazy chicken a lot of folks listened. Of course, I would like to take credit for being a brilliant strategist like say…Tom Webb, but the fact of the matter is I only needed to read the headlines in the Detroit News, and “connect the dots” to the bottom lines of my clients’ P&L statements to predict the obvious. What I saw in the news was the majority of manufacturers making enormous cuts in labor, plant closings, health care cuts, and figuring out a way to stem their legacy costs. At the same time, on skinny budgets, they are trying to conduct successful new model launches. About a year ago Bill Ford Jr. spoke on live TV to announce the biggest restructuring in Ford’s history, which included numerous plant closings, and layoffs and early retirement buy-outs. Not to be outdone, GM matched Ford’s exit packages one-for-one. This time there was no need to listen for hidden meaning or hints of inside corporate political maneuvers. Comments such as “we will continue to focus on the retail segments of our business” could be easily de coded as “fleet is on the back burner and the stove is off.” Many rental companies have seen their average revenue per unit stabilize but their net profit decrease…why? Because of rising car costs.

So if you’re the owner or the person in charge of fleet the question you must ask yourself is “Was I prepared for this change?” and more importantly “Am I prepared for the changes yet to come?” Here are a series of questions and challenges that you can ask yourself, ask your peers in the industry, or find some outside help, with…

1. If you were a company using only buyback programs, what steps did you take 18 months ago to change your business model from relying on the manufacturer to be your disposal channel, to doing it yourself?

2. If you are tied to one manufacturer – what steps are you taking to diversify? How many new fleet representatives did you meet and start a relationship with this year? Are you on their list of people to call when any news happens…either good or bad…that could impact your business? Do those reps even understand your business to the extent they need to?

3. Do you have a source to get viable used cars quickly if your business spikes or a new car order gets cancelled? Are you “connected” enough to the marketplace to know who is buying and selling all the time?

4. Have you continued to develop new remarketing channels this year versus years past, or are you still fully committed to selling just one way – say, to the same old single auction, or the same group of wholesalers? Have you gotten out in the market, either by phone or in person, to figure out who are likely suspects to buy your cars?

5. Are you spending the appropriate time evaluating your new car buys – and all of the components that are important, such as timing, equipment, etc.? Are you challenging yourself to think in different terms and patterns of fleet planning this year versus years in the past?

6. Do you have your ear to the ground on what may cause an unusual residual on a certain model – such as plant re-tooling, an engine shortage, etc.?

7. Are you cognizant of what the labor negotiation schedule is for the Detroit Three? There have been massive givebacks by labor unions, and this next round of contract negotiations might be difficult. If a strike or a slow down came during the height of first or second cycle production, do you have a fall back plan to keep your rental clients in cars?

8. The flip side to this is understanding what happens to used car demand and values if a strike happens – typically, as supply of new units shrinks, the value of an equivalent used unit skyrockets. How can you capitalize on this possibility?

9. Do you have any measurable fleet goals? If so are you pushing your levels of performance?

10. Are you planning on doing anything different in the next three model years than you did in the last three?

11. Technology – Have you utilized your existing technologies to improve fleet? Are you tied into the manufactures site so you can have access to the status of your orders or are you dependent upon the delivering dealer to update you? Do you sell your cars on line?

12. Are you using PC car book to evaluate option package, deletions, etc. Do you have PC Car book?

13. Do you have appropriate people in place, or have you started to train someone to handle the sale of risk cars? The person in charge of checking in and turning back your program cars might not be the right person to actually sell your fleet. Selling is a much different task than handling the logistics of moving car to and fro. Choose wisely – it could make a world of difference

14. With the potential of fewer units available, now more than ever utilization becomes a more important factor. Does your rental team understand that “we’re out of cars” could become a more common phrase, and what will you do about it in 2007?

You always had risk…you just didn’t know it, or think of it in these terms. You are at risk when a customer smashes a program car that may cause it to be a permanent reject – then you were stuck with a car that you paid $6000 too much for. You were at risk when your counter agents rented a program van to Florida and then…whoops again…you’re over mileage – then you ‘own’ a permanent reject again. So view the changes in the industry as they should be viewed – as opportunity. At minimum, this is an opportunity to engage your brain in reducing the single biggest expense your company has.

The most profitable companies, including the biggest one, all became – or stay – that way by having a true understanding of the new car business and the used car business. New cars that become used cars are not by-products of the rental business, but each one is a critical element of one long cyclical process. If you neglect, or put on “autopilot”, this important part of your business you might get a rental business that has its own “Detroit Three”- like headlines.

Dave Arney is the Vice President of VRCG Inc., a consulting firm in Southfield, Mich. His company’s motto, if it had one, would be: “Be pretty good at all parts of your business and you’ll do just fine.” Arney has agreed to be an ongoing contributor to Auto Rental News.

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