Medium term renting will close the gap between leasing and rent a car business

Traditional usage-based offers

If you need a car for the weekend or for a month-long holiday, good solutions are currently available with rent a car companies such as Hertz, Europcar, Avis, Entreprise, Sixt, among others.

If you need a company car for 3 or 4 years, options are available with existing lessors including Arval, ALD, LeasePlan, Alphabet, Athlon and most OEM captives such as RCI Bank and Services, Volkswagen Financial Services , PSA Finance, etc.

However, if you need a car for 3 months to a year (for whatever reason and there may be plenty of good ones), offers will be difficult to find and most likely expensive.

Lessors and rent a car operators have different business models that were not originally built for medium term renting.

Business model differences

To simplify, it is important to understand the main risks and key indicators for both businesses:

Short term renting businesses need to control usage rates and avoid maintenance costs. They need to reduce holding costs as much as possible by negotiating the smaller difference between acquisition prices and buy-backs. Costs are largely driven by the logistics of frequent rotation of car drivers. As a consequence, daily rates are a basis for pricing and common offers are limited to 30 days due to technical constraints.

Full service leasing businesses need to forecast maintenance costs and residual valuesto ensure an adequate margin over fixed rental costs. Profit grows while services are bundled or when contracts are extended. Outsourced services (maintenance, replacement cars, insurance, etc.) and interest rates drive costs and rates are competitive over 2 years in order to take advantage of the depreciation curve.

In both cases economies of scale matter.

Medium term renting opportunities

Medium term renting will be a combination of both, for better or for worse.

The ‘better’ lies in the sales price difference between daily rates for short-term rent and long term leasing, which provides a huge margin to accommodate a competitive offer. However, it implies both keeping cars for a longer period in order to benefit from the depreciation curve and introducing certain constraints on customers by offering only available cars.

The ‘worse’ comes from the combination of risks associated with both businesses: managing a fleet with different drivers (usage risk), taking risk on maintenance and residual values (risk on remarketing).

Evolving market trends

Short term operators have started to increase the share of cars they buy without a buy-back to reduce their holding costs and have some flexibility to buy the cars they need most. As a consequence, they have had to hold cars for longer, and also develop remarketing and residual values expertise.

Full service leasing companies have also started to manage their own fleets in order to offer pre-delivery cars and gain some flexibility in managing their relationship with OEMs.

Both businesses have started to move towards a new model, which is slightly more complicated, as it will involve managing additional risk, whilst providing additional opportunities. In the near future, it will certainly be possible to find a car for any desired period of time at the right price as both businesses start to converge towards a middle point. Another topic to be considered in this transition is how to manage physical sites.