Why leasing and rental will converge

We asked two industry giants: Michel Taride, former Group President at Hertz International and elected into the Fleet Europe Hall of Fame 2019; and Pascal Serres, former Deputy CEO at ALD and 2013 inductee into the Fleet Europe Hall of Fame.

Mr Taride has 38 years’ experience in the car rental industry, Mr Serres more than 25 years in leasing and fleet management. He is currently also the Chairman of the Fleet LatAm Advisory Board. That’s a pretty big amount of pooled wisdom and experience. So, what’s the lowdown?

Gentlemen, will long-term leasing and short-term car rental converge?

Pascal Serres: "I believe that the evolving requirements of consumers, especially in new mobility, mean that the long- and short-term businesses will indeed converge."

Michel Taride: "I agree that they will converge and complement each other. However, at some point, they will also compete with one another. And that’s fine. Their relationship today is one of supply. I believe leasing companies will increasingly operate private leasing and become suppliers of consumers who are also looking for short-term rental and mobility solutions. On the other hand, short-term rental companies are growing the multi-month rentalsegment and are already operating car sharing, hence the overlap."

Pascal Serres: "Both will indeed be complementary. Short-term rental companies provide replacement and pre-delivery cars to leasing companies, who could offer in return re-marketing and refinancing solutions. This is a business of competitors who are also partners. I believe the major limitation of long-term leasing is its lack of flexibility. Supplying a car for three years and 90,000 km: that’s the core business. But customers today are looking to switch cars and to have shorter contracts. So, flexibility will drive the future of long-term leasing. However, the existing business model of long-term leasing is very profitable when most Rentacar business are in financial stress, excepting Sixt SE, Localiza in Brazil and a few others. And that’s strange, because the pricing structure of the short-term business is more sophisticated."

Michel Taride: "I see short-term rental as fast-moving, complex and very competitive. It depends on many external factors and multiple variables which are not easy to predict. A typical month starts with no more than around 20% of the bookings already in. And there is a tiny margin for error in planning, in order not to miss revenues and operating costs. And retail pricing changes millions of times a day… Plus, unlike with leasing, the Residual Value (RV) at the end of the car’s life is not known beforehand, nor is the level of usage. Compare that with the leasing business model: if everything is managed correctly, it is almost impossible for a leasing company to make a loss. I think things will change – the lack of flexibility for the corporate segment means leasing companies will have to move into "multi-months", and that "multi month" product has never been properly serviced by either part of the industry. The six-to-eighteen-month market is there for the taking."

Why are some rental companies profitable, and others not?

Michel Taride: "For a number of reasons, starting with leadership and strategy in its broad sense: are you a premium or low-cost brand? do you want to be a leading global operator (meaning you need to be the best to everyone, everywhere), or more specifically target airports, the leisure segment, etcetera. This comes with a lot of risks, thefts, damage, accidents, bad debts, which all can be very costly. Good companies with highly experienced leadership, entrepreneurial culture, disciplined execution and good tools know how to manage these risks, they don’t go after everything but choose their battles wisely, and as a result operate profitable businesses."

Pascal Serres: "When you look at short-term rental, you see two groups. First, those ones with a market which accounts for, say, 80% of their revenue: for Sixt it’s Germany, for Localiza it’s Brazil, for Enterprise it’s the US. Sixt and Localiza are already mixing short- and long-term, even if the short-term segment still represents around 80% of their revenue. They have a different business model and their shareholders are families. This facilitates a longer-term view of the company. The second group is Avis, Hertz and Europcar which have been facing lower profitability in the recent past."

Just to get to the bottom of this profitability question: Why is short-term rental per se not as profitable as leasing? Because say what you will, you get to rent out one asset many, many times…

Michel Taride: : "That’s because there is a very wide spread in profitability levels between rentals, branches, channels, countries,... whereas a leased car generates revenue at a fixed rate. Rental vehicles are generally kept for five to 18 months and may be used 75% to 80% of the time. For the rest of the time, they’re costing you money. So you have to measure profitability per transaction, per location, by customer, and it’s very hard to be granular when there are thousands of transactions a day in thousands of locations worldwide, and a pretty volatile used car market. On this point, some of the rental companies havturned remarketing into a core competence, almost as much as renting out cars itself."

Pascal Serres: "One other factor pushing both models into competition or merger with each other is the explosion of private lease. This business is creating a need for used cars, and lease companies are beginning to respond to this. This is something new, because leasing a used car is extremely complicated. It means completely rethinking servicing, maintenance, etcetera. Over the next two to three years, all long-term leasing companies with large turnovers of cars will have their cars sometimes used several times. They will therefore have to review their pricing model."

Michel Taride: "Both sides have worked together in the past – including our own former employers, Hertz and ALD. Now there is a rationale for this to evolve further. Whether with or without equity, that’s to be discussed…"

So new mobility business models will trigger convergence?

Pascal Serres: "Yes – after all, a car is a means of mobility. And just look at Uber – they’re trying to get into every mobility domain. So, a company like Uber may become an aggregator, because all forms of mobility under a single brand looks promising: one single app on the smartphone. With Amazon selling ALD contracts in Spain, we are seeing a move towards cars as a commodity, and subscriptions. Usage, not ownership."

Michel Taride: "I refer to this as ‘Smart Integrated Mobility’:people don’t want 10 different mobility apps on their phone…they want to use various transport solutions at the touch of one app, from booking to payment"

Who’s better placed to respond to the new mobility challenge? Lease or rental companies?

Michel Taride: "Smart Mobility – which for me is really pertinent in large urban environment - requires many types of players. And MaaS is the way forward in the more and more "Smart Cities". This requires end-to-end Fleet Management, Customer Relationship Management and Logistics capabilities with all that it entails. There are very few industries which currently have all these skills. But car rental companies have most of them. As new types of cooperation take hold, a central question will be: Who owns the customer and the customer data?"

Pascal Serres: "I agree: the rental business is closer to current market needs. Car-sharing systems can also be used by rental companies – in effect, rental is a form of car-sharing. But profitability is the limitation. So any integration will require fine-tuning the business model. Long-term leasers are beginning to diversify their offering, though, with car-switching and so on, and are getting closer to new needs."

Michel Taride: "Leasing companies are masters at B2B, and with corporates changing their needs, they are well placed to do fleet management. So they can take care of shared mobility within a client company."

Would existing players be vulnerable to a new, more customer-oriented type of company?

Pascal Serres: "The existing lease companies are too strong, at least in the short term. So, no immediate danger. Three to five years down the line? Maybe."

Michel Taride: "The industry is acutely aware of the threats posed by high tech, customer-oriented operators, with new brands." Consequently, the so-called legacy operators are implementing transformational strategies as we speak. Pascal Serres: "Yes, and this is another good point: lease companies don’t have great brand recognition with the public. But rental companies do."

Michel Taride: "These differences are what make rental and lease companies complementary."

Do both industries have a bright future? And what about OEMs?

Michel Taride: "For short-term rental, yes – if they transform themselves and become relevant to Millennials, not just the older generation. But they have a tradition of transformation and survival, so there’s no reason to doubt they’ll manage this latest disruption, in fact a revolution. OEMS will find it more difficult to transform. As a factory-based operation, they lack flexibility. With their size and structure, they lack the required speed to change direction."

Pascal Serres: "Leasing companies are doing well and are well placed to take advantage of the changing landscape of the future – if they adopt a long-term view. What’s important for the industry as a whole, is that the service business will likely take over from the asset business, which will affect OEMs as well".