Why the Tesla-Hearts deal is a turning point in the car rental business

The economics of the car rental industry is Avis Budget Group Enterprise Holdings has multiple reasons for delaying the adoption of electric vehicles. Think about how much money they make each time a borrower forgets to return a car in a full petrol tank. But on Monday, car rental companies received the biggest reason to move quickly to EVs as part of their fleet. transaction With hertz Tesla The 100,000 vehicles need an EV strategy and will signal major car rental companies, perhaps sooner than planned.

For North Coast Research’s automotive industry analyst John Healy, it wasn’t surprising that Hertz was the first small group of major car rental companies to make a big bet on EVs. After an era of industry integration, the three companies account for 95% of airport terminal car rental companies. Enterprise owns Alamo and National. Hearts owns Dollar and Thrifty. Avis and budget combination. However, Hertz has been the only company to offer EVs in a significant way so far, and its focus has been limited to the niche market of luxury lessors using premium services such as Ultimate Choice.

“Electricity isn’t very advanced,” Healy said.

Its “ultimate” vehicle category provided consumers with access to luxury electric vehicles such as Porsche and Tesla, but the number was at the “hundreds” level of the fleet for 100,000 Tesla in Hearts trading. was. “They were trying to make money by renting a car instead of meeting this niche,” Healy said of a major competitor. Hearts thought the combination of wealthy renters and EV “conspiracy” factors was a good reason to experiment with business margins, but “no more,” Healy said. rice field.

Enterprise and Avis Budget did not immediately respond to requests for comment.

If there is still no demand to justify the large spending on EV fleets, Hertz’s deal may be a signal that the time has come. However, there are major economic hurdles that the car rental industry must overcome in connection with its traditional hesitation in EVs.

When Hertz is preparing for a re-IPO with former Ford CEO Mark Fields as interim CEO after restructuring under a private equity investor, Tesla’s headline is another way to differentiate with an integrated rental space. To provide. But in the end, EV fleets are an issue that major car rental companies need to address as part of their sustainability efforts and new economic thinking.

Dan Ives, an analyst at Tesla’s Wedbush Securities, said car rental fleets were always considered “out of control” due to the size of bulk purchases. “The fact that Hearts jumped into the deepest part of the pool and spent more than $ 4 billion was never on the radar for something like Tesla,” he said. But now it represents not only EV interest from the market, but also a turning point in the supply that Tesla can produce by expanding its factories around the world and in Austin in the United States.

The car rental industry accounts for 1.5 to 2 million cars annually and is an important part of new sales.

“For two million Tesla who haven’t been on radar before,” Ives said.

Tesla arrives Market capitalization of $ 1 trillionn Monday after the transaction was announced.

“This announcement is a clear signal that Tesla can deliver a large number of vehicles,” said Jonathan Smoke, Chief Economist at Cox Automotive, in an email statement to CNBC.

The size of EVs for rental has been a problem beyond the luxury market, where sedans are too small for most rental companies’ tastes, but they are changing as the production of crossover EVs and other hybrid vehicles increases. The crossover utility segment accounted for 50% of EV sales in the second quarter.

The carbon footprint of the car rental industry was not the main focus of the U.S. government, but pressure was expected to increase in the future and there was discussion among those following the industry, Healy said by President Biden. The car company that said it wants to rent a car commits to a fleet of electric cars.

“The government’s impetus hasn’t been decided yet, but it probably won’t go away,” Healy said.

Car rental companies have sustainability in the following business models: Corporate carbon offset program A long-standing research alliance in the field of biofuels. Enterprise has been reporting on Scope 1 and Scope 2 carbon emissions for years, but not on Scope 3 emissions from fleet car tailpipes.Avis Budget also offers carbon offsets, carbon footprint quotes for corporate clients, and Quoted acquisition of car-sharing company Zipcar As part of its sustainability initiative. Avis Budget reports that it owns more than 21,000 hybrid vehicles worldwide.

ESG-focused shareholder advocacy groups have recently pushed this issue to car rental companies and urged large companies to buy more EVs. NS Climate resolution of Hertz shareholders in 2020 We have included EVs as part of a broader discussion of climate change. “Hertz’s standard car rental business currently has only three hybrid electric vehicle options in selected locations for consumer rentals, not all electric vehicles. Hertz has taken steps to improve the energy efficiency of its operating facilities. We have taken steps, but the impact of the company’s vehicle remains. It has not been adequately addressed. “

Driss Lembachar, Manager of Transportation and Infrastructure for Morningstar’s Sustainalytics ESG Risk Assessment Business, is primarily an automaker that meets fuel economic standards in terms of ultimate responsibility and regulation of emissions. However, the fuel efficiency and age of the car rental company’s fleet, and its renewal (or lack thereof), are important to investors as these areas affect their attractiveness and customer satisfaction / retention levels.

Sale of zero-emission vehicles in the United States Continue to riseMore than 168,000 zero-emission vehicles (batteries, plug-in hybrids, fuel cell electric vehicles) were sold in the second quarter of 2021, up 33% from the same period in 2020, up 122,000, according to industry groups. bottom. Alliance for automotive innovation. In the second quarter of 2021, sales accounted for 3.8% of the automobile market, the highest rate ever. The automotive industry has invested $ 330 billion in electrification by 2025 and predicts that more than 130 zero-emission vehicles and 30 hybrid electric models will be available over the next five years.

The initial cost of a car rental company due to the adoption of EV is the main reason for slow movement not only in the purchase price of the car but also in the construction of the necessary charging station infrastructure, and the current economy of car rental The car business is , Makes your stay in a petrol car attractive. The rental company makes money every time a car is returned without a full tank of gas, and that’s only about 5% of total income, but according to Healy, it’s a high-margin income. It seems possible to develop a business model that charges EV “replenishment”, but today there is no established practice for that.

This is one of the unknowns that car rental companies experience with the steep learning curve of fleet management using EVs. The timing of EV charging should be considered when moving the car in and out of the agency compartment. I have a basic question that I can’t answer yet. The number of charging stations required and the number of charging stations required. Quick charge. It takes less than two minutes to fill a car with petrol, but it can take hours to charge a car, and that time lag can be important in meeting customer demand.

Analysis of old EVs in recent years Tesla’s customer service has been scrutinized They have shown that they can present their own maintenance and service profile. Hans-Werner Kaas, senior partner at McKinsey and Company, told CNBC in 2019 that EV repairs are generally less frequent, but more expensive, and equipment such as ride controls and tires weigh curbs. He said it may require more frequent service or replacement due to its size. And acceleration of electric vehicles.

There are potential economic benefits that EVs may offer to car rental companies. They can potentially save money on maintenance and the residual value of the car will last better. However, all unknowns associated with the EV unit economy are prioritized over potential economic benefits.

“Their view was that they didn’t have enough infrastructure and no attractive habits that needed it. So why change something?” Healy said. “There was an opinion. We wait, but it’s not the time.”

For Hearts, the timing of major announcements related to positioning against competitors is good in the process of returning to the open market at the IPO.

Major car rental companies, whether marketing approaches or billing customers for various services, tend to follow each other in recent history, among the three major players. When the space is integrated in, it puts pressure on the Avis budget and the enterprise Holdings that starts moving in EV space. Like Tesla, Hearts and major automakers such as GM and Ford are planning to produce a large number of EVs in the coming years. Car rental companies have historically focused their fleet purchases on US automakers before adding units from abroad.

“I think Avis and Enterprise need to do something about it,” Healy said. “This has been a copycat business for the last 50 years and it will not change.”

Ives quoted the automotive industry as saying that there is more than one for bulk orders. “I would be shocked if other Hertz competitors didn’t call Tesla,” Ives said.

As consumer conditions change and interest in EVs grows, car rental companies run the risk of losing their business if they move too slowly. Healy predicts that in the future, more consumers will be willing to pay extra to try EVs. “You can rent a Tesla at Hertz for an additional $ 40 a day, and if Avis doesn’t have one, you might try … there’s a corresponding customer and Hertz in the margin. It ’s a better place. ”

For Tesla, this deal is a good way to introduce the technology to consumers who have never driven an electric vehicle before. In particular, the selling price of EVs compared to conventional automobiles has dropped to a level where there is room for mass adoption.

“Every consumer who rents a car has the potential to turn into a buyer … it’s an extended test drive,” Ives said.

The car rental industry is hesitant not because companies are running out of money on EVs. “The industry is more profitable than ever,” Healy said. According to Healy, fleet sizes have increased by just 15% against demand amid a chip shortage that limits car production, and are now back at pre-pandemic levels of 80-85%. The value of cars on the balance sheet is also rising, in contrast to the typical depreciation expected of used cars.

Future quarterly results should show record profitability, and in today’s market of high demand and limited car supply, car rental companies can charge twice as much as past regular prices. .. “If you need a minivan in Florida, you’re paying $ 100 a day instead of $ 75,” Healy said.

And despite strong balance sheets and less likely integration in an industry dominated by three major players, there’s not much else available for these companies.

Healy said more changes are taking place throughout the automotive industry, starting to focus on the businesses that accompany automakers. He covered the auction space and the largest auction house, Manheim, recently performed in an investor presentation to remodel 53 auction sites with 127 EV stations for charging and properly assess their value. He said he would do the battery condition diagnostic work that needs to be done. “Some changes are beginning to be seen among neighboring companies in the industry,” said Healy, an auctioned EV.

Why the Tesla-Hearts deal is a turning point in the car rental business

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