<story><title>Renting a car will be a pain until at least 2022</title><url>https://www.latimes.com/business/story/2021-09-13/car-rental-problems-persist-until-at-least-2022</url></story><parent_chain><item><author>ChuckMcM</author><text>As a systems guy, I find this situation quite interesting in the way in which it exposed interlocks in the car rental pipeline that were previously not visible.&lt;p&gt;What I hadn&amp;#x27;t appreciated was that Car Rental companies had constructed a model where they bought new cars, rented them for a couple of years, and then resold them. The car would depreciate of course but as a bulk car buyer they got the cars at a discount on dealer cost because, well they bought more than the average dealer did. So when they depreciated they didn&amp;#x27;t lose as much value as you and I might experience if we bought a car, held it for two years, and resold it to a dealer (worst case) or another buyer (best case).&lt;p&gt;So the rental agency simply tracked how much the car would &amp;quot;lose&amp;quot; in value over its working lifetime, plus the cost of needed maintenance (generally relatively low), and offset that with income of renting it out. So the math was something like (making up numbers here) $5,000 of depreciation loss against say 400 rental days at $50&amp;#x2F;day or $20,000 of rental income. Say $1000 for maintenance during those 2 years and you&amp;#x27;ve got $14,000 of &amp;quot;gross income&amp;quot; into the company, per car to pay employees and operating costs etc.&lt;p&gt;Now this makes sense and it is a fine business model, but an interesting quirk is that revenue is directly proportional to the number of &amp;#x27;working&amp;#x27; cars you have out there bringing in the bucks. More cars, more income. And if you buy the car on &lt;i&gt;credit&lt;/i&gt; there is an interest expense sure but you don&amp;#x27;t use up working capital to bulk up your fleet and boost your income.&lt;p&gt;As a result, car rental companies were carrying a &lt;i&gt;HUGE&lt;/i&gt; amount of debt pre-pandemic which was all in car investments.&lt;p&gt;Then BOOM, the black swan of a pandemic hit and air travel &lt;i&gt;stopped&lt;/i&gt; for all intents and purposes and now rental car companies are sitting on fleets of cars where they have to make the monthly payment on the debt but those cars aren&amp;#x27;t earning any income. This burns money in a hurry! So they did the only thing they could do, and &lt;i&gt;sold off their fleets&lt;/i&gt; for the most part so that they could retire all that debt. Some, like Hertz, were already in Chapter 11 bankruptcy when they did that. Late 2020 was an &lt;i&gt;excellent&lt;/i&gt; time to buy a car from one of the rental companies because they were really motivated to get them off their balance sheets.&lt;p&gt;And this then is the fun part. So the pandemic also put a huge blip in the supply chain. And since &lt;i&gt;every single&lt;/i&gt; car company had switched to &amp;quot;just in time&amp;quot; manufacturing where they don&amp;#x27;t stock parts to make cars, they expect a smooth flow of those parts from the supply chain to feed their assembly lines, had to stop making cars. They had no parts. What is more, the humans in the pipeline like truck drivers, container crane operators, container ship crews, freight forwarding staff, Etc. were quarantining or not working because of the pandemic risk and those are jobs you cannot do &amp;quot;remotely&amp;quot; no matter how much you might want to. So the supply of new cars dried up, and won&amp;#x27;t untwist until the entire chain is back up and running at capacity again.&lt;p&gt;So now the pandemic is &amp;quot;less scary&amp;quot; because smart people have vaccinated themselves and they start traveling again. And those people want to rent cars. Which is great for rental car companies, except &lt;i&gt;they cannot rebuild their fleets because there aren&amp;#x27;t any cars to buy.&lt;/i&gt;&lt;p&gt;And this adds the second fun twist, if you bought a car new in 2019 (as I did), and it is the kind of car rental companies might rent (which mine is), you get letters from the dealer in 2021 offering to buy it back from you for more than you paid for it!&lt;p&gt;What is more, when you see all those cars that are going to be &amp;#x27;totalled&amp;#x27; by the insurance company because they were under water in the southern part of the US or on the east coast, those cars used to be sold for pennies on the dollar in &amp;quot;salvage sales&amp;quot; in which salvage dealers would recover parts and&amp;#x2F;or do enough repairs to resell them with a salvage title. The bidding for those cars is &lt;i&gt;much more intense&lt;/i&gt; given the demand by rental car companies for stock, any stock, to boost their fleets.&lt;p&gt;It is a remarkable example of a system where the parts are interconnected in non-obvious ways that has a non-intuitive response to shocks to the system. As with most &amp;quot;emergent&amp;quot; systems like this one though, sending a shock through it does two things; it illuminates these previously unseen inter dependencies, and it tends to kill off weak players.</text></item></parent_chain><comment><author>joe_the_user</author><text>Wow,&lt;p&gt;&lt;i&gt;What is more, when you see all those cars that are going to be &amp;#x27;totalled&amp;#x27; by the insurance company because they were under water in the southern part of the US or on the east coast, those cars used to be sold for pennies on the dollar in &amp;quot;salvage sales&amp;quot; in which salvage dealers would recover parts and&amp;#x2F;or do enough repairs to resell them with a salvage title. The bidding for those cars is much more intense given the demand by rental car companies for stock, any stock, to boost their fleets.&lt;/i&gt;&lt;p&gt;Well, the thing about flood-cars is they can look and drive fine but really merit being called &lt;i&gt;totalled&lt;/i&gt; - having been submerged makes corrosion inevitable in a much quicker time frame. All of the electrical parts will go bad in X time frame.&lt;p&gt;Maybe these can be kept going long enough to bring value to companies but it seems like you&amp;#x27;ll have a lot more car renters on the side of the road than normal.&lt;p&gt;&amp;quot;Water can ruin electronics, lubricants, and mechanical systems. It may take months or years, but corrosion can find its way to the car&amp;#x27;s vital electronics, including airbag controllers.&amp;quot;&lt;p&gt;&lt;a href=&quot;https:&amp;#x2F;&amp;#x2F;www.consumerreports.org&amp;#x2F;buying-a-car&amp;#x2F;beware-the-flood-of-flood-cars&amp;#x2F;&quot; rel=&quot;nofollow&quot;&gt;https:&amp;#x2F;&amp;#x2F;www.consumerreports.org&amp;#x2F;buying-a-car&amp;#x2F;beware-the-floo...&lt;/a&gt;</text></comment>
<story><title>Renting a car will be a pain until at least 2022</title><url>https://www.latimes.com/business/story/2021-09-13/car-rental-problems-persist-until-at-least-2022</url></story><parent_chain><item><author>ChuckMcM</author><text>As a systems guy, I find this situation quite interesting in the way in which it exposed interlocks in the car rental pipeline that were previously not visible.&lt;p&gt;What I hadn&amp;#x27;t appreciated was that Car Rental companies had constructed a model where they bought new cars, rented them for a couple of years, and then resold them. The car would depreciate of course but as a bulk car buyer they got the cars at a discount on dealer cost because, well they bought more than the average dealer did. So when they depreciated they didn&amp;#x27;t lose as much value as you and I might experience if we bought a car, held it for two years, and resold it to a dealer (worst case) or another buyer (best case).&lt;p&gt;So the rental agency simply tracked how much the car would &amp;quot;lose&amp;quot; in value over its working lifetime, plus the cost of needed maintenance (generally relatively low), and offset that with income of renting it out. So the math was something like (making up numbers here) $5,000 of depreciation loss against say 400 rental days at $50&amp;#x2F;day or $20,000 of rental income. Say $1000 for maintenance during those 2 years and you&amp;#x27;ve got $14,000 of &amp;quot;gross income&amp;quot; into the company, per car to pay employees and operating costs etc.&lt;p&gt;Now this makes sense and it is a fine business model, but an interesting quirk is that revenue is directly proportional to the number of &amp;#x27;working&amp;#x27; cars you have out there bringing in the bucks. More cars, more income. And if you buy the car on &lt;i&gt;credit&lt;/i&gt; there is an interest expense sure but you don&amp;#x27;t use up working capital to bulk up your fleet and boost your income.&lt;p&gt;As a result, car rental companies were carrying a &lt;i&gt;HUGE&lt;/i&gt; amount of debt pre-pandemic which was all in car investments.&lt;p&gt;Then BOOM, the black swan of a pandemic hit and air travel &lt;i&gt;stopped&lt;/i&gt; for all intents and purposes and now rental car companies are sitting on fleets of cars where they have to make the monthly payment on the debt but those cars aren&amp;#x27;t earning any income. This burns money in a hurry! So they did the only thing they could do, and &lt;i&gt;sold off their fleets&lt;/i&gt; for the most part so that they could retire all that debt. Some, like Hertz, were already in Chapter 11 bankruptcy when they did that. Late 2020 was an &lt;i&gt;excellent&lt;/i&gt; time to buy a car from one of the rental companies because they were really motivated to get them off their balance sheets.&lt;p&gt;And this then is the fun part. So the pandemic also put a huge blip in the supply chain. And since &lt;i&gt;every single&lt;/i&gt; car company had switched to &amp;quot;just in time&amp;quot; manufacturing where they don&amp;#x27;t stock parts to make cars, they expect a smooth flow of those parts from the supply chain to feed their assembly lines, had to stop making cars. They had no parts. What is more, the humans in the pipeline like truck drivers, container crane operators, container ship crews, freight forwarding staff, Etc. were quarantining or not working because of the pandemic risk and those are jobs you cannot do &amp;quot;remotely&amp;quot; no matter how much you might want to. So the supply of new cars dried up, and won&amp;#x27;t untwist until the entire chain is back up and running at capacity again.&lt;p&gt;So now the pandemic is &amp;quot;less scary&amp;quot; because smart people have vaccinated themselves and they start traveling again. And those people want to rent cars. Which is great for rental car companies, except &lt;i&gt;they cannot rebuild their fleets because there aren&amp;#x27;t any cars to buy.&lt;/i&gt;&lt;p&gt;And this adds the second fun twist, if you bought a car new in 2019 (as I did), and it is the kind of car rental companies might rent (which mine is), you get letters from the dealer in 2021 offering to buy it back from you for more than you paid for it!&lt;p&gt;What is more, when you see all those cars that are going to be &amp;#x27;totalled&amp;#x27; by the insurance company because they were under water in the southern part of the US or on the east coast, those cars used to be sold for pennies on the dollar in &amp;quot;salvage sales&amp;quot; in which salvage dealers would recover parts and&amp;#x2F;or do enough repairs to resell them with a salvage title. The bidding for those cars is &lt;i&gt;much more intense&lt;/i&gt; given the demand by rental car companies for stock, any stock, to boost their fleets.&lt;p&gt;It is a remarkable example of a system where the parts are interconnected in non-obvious ways that has a non-intuitive response to shocks to the system. As with most &amp;quot;emergent&amp;quot; systems like this one though, sending a shock through it does two things; it illuminates these previously unseen inter dependencies, and it tends to kill off weak players.</text></item></parent_chain><comment><author>joezydeco</author><text>&lt;i&gt;if you bought a car new in 2019 (as I did), and it is the kind of car rental companies might rent (which mine is), you get letters from the dealer in 2021 offering to buy it back from you for more than you paid for it!&lt;/i&gt;&lt;p&gt;I&amp;#x27;m in this situation and it&amp;#x27;s getting strange if your car is leased.  Carvana and the like were offering me thousands more than the buyout amount.  Like $5,000 at one point.&lt;p&gt;But now the automakers and their banks are shutting off 3rd party purchases, meaning the only parties that can buy the car off the lease are you and the dealer.  And the dealer has no car on-hand to replace the one you plan to sell back, or if they do they want thousands over MSRP because that&amp;#x27;s what the market is bearing.  So it&amp;#x27;s a wash.</text></comment>