<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>quacked</author><text>I can&amp;#x27;t help but notice how weakened this entire process is as a result of revolving around money. In terms of manpower and expertise, none of these changes really need to happen, but since everyone is chasing a buck as a matter of survival, a bunch of stupid stuff occurs.&lt;p&gt;I don&amp;#x27;t have any brilliant solutions to bring about the Roddenbury-style economy, but it is infuriating to look at a scale problem you describe and trace the major causes back to the money. Are the cars going to vanish if the debts aren&amp;#x27;t paid for a year? Are the physical Hertz buildings going to crumble if the banks aren&amp;#x27;t satisfied? No, currency changing hands has nothing do with reality passively changing shape! And here we are, watching people sell off rental car fleets because assets will be seized unless the money changes hands in the right way.</text></item><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>b9a2cab5</author><text>&amp;gt; are the cars going to vanish if the debts aren&amp;#x27;t paid for a year?&lt;p&gt;No, but the retirees who depend on the income from bonds packaged from those debts will be screwed. Also, cars might not vanish but they do depreciate regardless of whether money exists. That&amp;#x27;s still a cost incurred by the rental company even though &lt;i&gt;no money changes hands&lt;/i&gt; when it happens.&lt;p&gt;Ultimately the car companies were overleveraged and were forced to exit before their &amp;quot;positions&amp;quot; in cars became profitable. There&amp;#x27;s nothing short of the state propping you up that can solve that.&lt;p&gt;Even the Soviet Union had money and had to deal with economical realities. One of the reasons they collapsed was because of increasing grain production deficits causing an imbalance of trade. You can&amp;#x27;t legislate your way out of the market because the market&amp;#x27;s invisible hand will always show eventually, even if you can stave it off via state control of everything.</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>quacked</author><text>I can&amp;#x27;t help but notice how weakened this entire process is as a result of revolving around money. In terms of manpower and expertise, none of these changes really need to happen, but since everyone is chasing a buck as a matter of survival, a bunch of stupid stuff occurs.&lt;p&gt;I don&amp;#x27;t have any brilliant solutions to bring about the Roddenbury-style economy, but it is infuriating to look at a scale problem you describe and trace the major causes back to the money. Are the cars going to vanish if the debts aren&amp;#x27;t paid for a year? Are the physical Hertz buildings going to crumble if the banks aren&amp;#x27;t satisfied? No, currency changing hands has nothing do with reality passively changing shape! And here we are, watching people sell off rental car fleets because assets will be seized unless the money changes hands in the right way.</text></item><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>mschuster91</author><text>&amp;gt; I can&amp;#x27;t help but notice how weakened this entire process is as a result of revolving around money. In terms of manpower and expertise, none of these changes really need to happen, but since everyone is chasing a buck as a matter of survival, a bunch of stupid stuff occurs.&lt;p&gt;Resiliency against interruptions costs &lt;i&gt;a lot&lt;/i&gt; of money: warehouses to store parts, logistics to rotate these parts, paying suppliers for these parts earlier than the parts are needed, waiting until you have enough cash to buy stuff outright...&lt;p&gt;The core point is: governments, businesses and individuals have historically always had these costs - but at least the Western world has been enjoying a couple decades without major interruptions like war on the home territory, oil crises or the looming threat of the Cold War getting hot (and causing interruptions as a result), which means everyone got &lt;i&gt;incredibly&lt;/i&gt; complacent. After all, when there are no interruptions to expect in the near term, why spend cash in the near term to guard against them?&lt;p&gt;And so, when Corona hit, &lt;i&gt;everyone&lt;/i&gt; got hit.&lt;p&gt;&amp;gt; Are the physical Hertz buildings going to crumble if the banks aren&amp;#x27;t satisfied? No, currency changing hands has nothing do with reality passively changing shape!&lt;p&gt;The &lt;i&gt;existing&lt;/i&gt; buildings may not go crumbling, but &lt;i&gt;planned&amp;#x2F;under-construction&lt;/i&gt; buildings are getting put on hold when the banks&amp;#x27; income stream vanishes and as a result of that, in turn, the workers can&amp;#x27;t work, ... &amp;lt;insert recursive ripple effects here&amp;gt;.</text></comment>