How is it cheaper for a company to rent an employee a car than to pay mileage?

Factual Questions
1

I’m willing to accept the premise as true, as it was reported by a friend I’ve known for 20 years, who tends toward precision in all matters (and her job is as an auditor). So the question becomes: where is the arbitrage here?

Her company periodically sends her to their corporate HQ, about 200 miles away from her. But the only place she can rent a car is thirty miles in the opposite direction. So it’s apparently so much cheaper to pay for her car rental that they pay her mileage to drive that 60 miles round trip, which actually makes her overall round trip driving (including driving the rental car) 520 miles instead of 400.

So if the rental car company can come in with such a “low bid” and still make a profit, then someone in the system has to be consistently overpaying (and it’s apparently not the rental car customer).

Mileage reimbursement is, in theory at least, neutral: paying you the amount of money you lose (over the long run) by driving a mile: including your fuel, maintenance, and reduction in the vehicle’s value above and beyond what it loses with time; but not providing you a profit. So my “Bayesian prior” (call it a hunch if you prefer) is that the 55 cents/mile she says is set by the IRS is too generous, for a trip with mostly highway miles in particular.*

But let’s say that’s not the case, that they are reimbursing mileage accurately. The only other explanation I can think of for how rental companies can be making profits, while charging significantly less than the mileage reimbursement amount to their rental customers, is that they are getting some kind of arbitrage in the late-model used car market: buying cars for much less than they are worth, then selling them for more than their real value. It seems unlikely to me, though, that they are able to do this consistently better than big used car lots and wholesalers who focus on this market exclusively. And in fact, it would mean that they are conducting rentals as a weird and pointless loss leader: they’d be better off just buying and selling cars (maybe storing them a while if that’s part of the trick somehow) rather than wasting money on renting prime lot space at airports, not to mention the rental counter itself and all the employees who manage checking cars in and out. And then of course there’s the liability: risk of theft and damage.

My friend prefers this arrangement despite it costing her an extra 120 miles of driving, because she puts a very high premium on reducing the wear and tear on her car. But if I’m right, she should actually be eager to drive her own vehicle and get the mileage instead. (Unless, I guess, she hates the process of trading in a car and haggling over a new one so much that it is worth a lot to her to put that off as long as possible.)

*It would be more complicated, but more accurate, for mileage reimbursement to factor in how much stop-and-go driving there is, maybe by paying a lower rate per mile but also paying a “bonus” (“penalty”?) for each stop–which was not feasible for many years but would now be easy with a GPS device.

2

I think that the standard per-mile pay calculation also considers the driver’s time. If they’re paying for car rental instead of mileage, with nothing else in the deal, then they’re not paying for the driver’s time.

3

Does it really? That surprises me. But it does then mean that it’s still a bad deal for my friend to get the rental car rather than the mileage.

4

This IRS publication is not 100% clear, but it seems to consider costs of operation of a vehicle in two classes:

and

No mention of the driver’s time.

5

A question: Is it her actually renting the car and being reimbursed or is she picking up a car rented by the company? When I had to drive my own car for my companies benefit I was required to have a certain amount of insurance. If the company is doing the renting they are assured that the insurance is the requisite amount.

6

Corporate rental agreements might mean they pay 1/3 of the regular rental price. So maybe just $25 or $30 for the day. And they typically have unlimited mileage. And it would insulate the company from any liability issues if the vehicle broke down. If you’re driving your own car and get a flat or whatever, you might try to expense the repair cost since you had to get to the meeting.

7

But this still raises the question of how it can be profitable for the rental car company.

8

I’m not sure of all the structure behind the scenes, but it could be that the corporate rentals help ensure the entire fleet is rented. Normal consumers pay $90 and mileage, while Apple’s employees pay $30 and get free mileage. The rental car company probably isn’t making a whole lot off the $30, but they’re making a lot of the $90. Having the corporate customers mean the cars won’t be sitting around earning $0.

And the rental company will sell the car after a few years. It doesn’t cost them the whole purchase price of the car to get the car. The get some of the money back when they sell it later. And they do all their own maintenance, which means they aren’t paying a regular garage rates.

9

Companies don’t have to make money on every customer as long as they make money on the average customer.

The average rental car is probably driven a lot less per day than this customer is driving it, so including unlimited milage makes sense, even if they don’t make a profit on the few customers who drive hundreds of miles.

10

I may be off base but isn’t companies making STUPID money decisions kind standard?
I feel like I’m always hearing about some corporation making moves that look good short term and are about as fiscally sound as payday loans and rent to own furniture.

11

I used to work for a state agency that required me to use my own car, unless a rental was cheaper than mileage reimbursement.

The way the math worked, for a one-day out and back I had to go about 90 miles one way to get a rental car.

The kicker was, they only looked at the rental rate, not the refuel included. So by the time I refilled the car mileage reimbursement was about $20 cheaper.

12

The big car rental companies are basically just dumps for the automakers unsold cars.

Hertz (and Thrifty & Dollar) was owned by General Motors; National (Enterprise, Alamo) was mostly owned by Chrysler interests, and Avis/Budget was connected to Ford. You could see this reflected by the cars that predominated in the fleet of each rental company.

So the actual profitability wasn’t so important, as long as it basically at least broke even. The auto makers did OK just in selling their unsold inventory to the rental companies (and inflating their sales figures on the unpopular models).

13

Sometimes, big companies prefer to take the more expensive option that’s easy to administer rather than the cheaper option that may require lots of case-by-case details to deal with, especially if they got burned in the past. “Whatever, just farm it out to some turnkey, all included package so we don’t have to spend more time and headache on this.”

14

Good points. I guess my real underlying question is: shouldn’t my friend be pushing or at least angling to drive herself? She seems to think she’s doing better with the status quo but I find that a dubious proposition.

I thought they did have a mileage limit beyond which you get charged extra. That was certainly the case with U-Haul, and it strikes me as foolish not to do it with rental cars since people just using them around town won’t even come close to the limit.

15

My (very large) company strongly encourages airline+rental car even on relatively short trips. I have no official word on the reason, but my boss said it’s a liability issue. With thousands of employees doing large amounts of travel, they presumably deal with fewer accidents and mechanical delays this way. I have a few medical issues that make airline travel difficult, and am frequently a little crossways with travel accounting since my expenses don’t fit neatly in their forms. Their policy is to cover the cheaper of: either the vehicle mileage, or the cost of airline+rental car. Due to their significant discounts, I may end up losing a little money if I decide to drive.

Our travel department is so large Travelocity has developed a separate corporate site for us, and it seems we get pretty good discounts on airline and rental cars (I’ve tried planning the same trip outside the company, and it’s almost always more).

To the OP, I don’t know if it’s cheaper in the single case you’re talking about, but sometimes corporate rules make it cheaper in aggregate for them. Our company requires that we always purchase non-refundable tickets, which seems daft for some trips (with uncertain timelines). But over the many thousands of tickets they buy annually, it’s cheaper to occasionally eat the cost when one of us has to stay longer.

16

Actually, Ford owned Hertz outright from 1987 to 2005. Thrifty and Dollar weren’t part of Hertz during Ford’s ownership. Hertz existed long before Ford, and stands on its own now.

I don’t think (nor have I found evidence) that any auto OEM ever owned or controlled Avis-Budget or its predecessors.

17

I think your hunch is correct. I sometimes bill my company for mileage, and they pay it but I can tell they don’t like it, because $0.55/mi is awfully generous.

I did some quick back-of-the-envelope math and figured a compact car, with normal annual mileage, taxes, registration, gas, maintenance, repairs, is going to cost somewhere between 40 and 50 grand over a 15 year lifespan. Obviously the rental agency is selling them after a few years, but that lifetime cost is going to be factored into the resale, so it’s still a decent ballpark. The IRS, meanwhile, would shell out over 100 large for the same lifespan.

I don’t know if they’re factoring in the cost of the driver (if so, it works out to roughly $17/hr), but the company is already paying for their employee’s time, so that doesn’t seem right. It’s also a flat rate regardless of the kind of vehicle – a full size pickup is going to cost a lot more, obviously, and the margin on the IRS rate is probably a lot more reasonable.

18

Aside from other good reasons like cleaner accounting and easier liability issues, the main reason why corporations encourage car rentals is for top line deductions, especially for profitable corporations in high tax areas. On top of that, if the employee expenses it on their own (even if company sponsored) credit card, they get to kite the reimbursement.
ETA: (apologies if posted twice), my accountant also highly encourages car leasing, especially if one has a home office or is their own corporation, but this is not tax advice)

19

Companies that consistently make stupid money decisions won’t be companies for very long.

Obviously, people who run companies make bad decisions sometimes, and if you really want to get into it, there are principal-agent problems in large enterprises, but as a general rule companies are good with money.

To the OP’s question, the rental car company is probably price discriminating, charging less to your friend’s company than to someone who just walks in. I would guess that that is because the rental car value the steady flow of cash they get from corporate customers (as opposed to the uncertain revenue from retail customers), and that they have streamlined the overhead with corporate clients, and maybe that corporate clients are better about returning cars on time and clean.

20

The weird thing is, the rate was actually higher ten years ago, even before adjusting for inflation.

It’s funny you mention that. Hers is a pretty large company too, and we got on the topic because we were talking about airline hubs and how annoying they can be. She said her company is always asking “can’t you fly?” but it would either require driving 45 miles to a regional airport, then flying hundreds of miles in the wrong direction to a hub, before catching a flight to the HQ city, at which point she still has to get to them from the airport. Or she can drive three hours to a more major city and get a direct flight. Or she can drive four and a half hours (including the backtracking to the rental car place). If she drove her own car, it would be three and a half hours.

ETA:

I would still say though that there’s no way, if that mileage reimbursement were not profitable for the people receiving it, that a rental car company could be in the black charging less. It’s like that old joke about “making it up on volume”.

Kite the reimbursement?