a car fleet maintenance company can buy the car for the same price I can buy it (maybe even cheaper by paying up front) and knows enough about maintenance not to get scammed by the mechanics while keeping it running for as long as possible. So if there is big difference in cost between me owning a car and me paying a company to use their car, where exactly do these huge overheads come from? Do they spend too much on bureaucracy, offices and corporate taxes? Or does the “moral hazard” problem translate into a small minority of customers heavily damaging the cars by driving them poorly? Or is there big principal-agent problem of the company being scammed by their own mechanics? Or what is the problem with the economics of this?
Conversely, how could a car rental company be structured to avoid whatever cost pitfalls? For instance, if the company is a small outfit majority-owned by a car mechanic who pays himself a salary mostly for the work on repairing cars (which he also owns, hence eliminating the principal-agent problem) and the customers are selected from groups not likely to damage other people’s property, would the costs come down to the private ownership levels or below? Or would there still be some major overheads not accounted for in my analysis so far?
Well, obviously, the rental company would have to take in enough money, over and above the cost of the cars themselves, to pay for standard overhead costs like rent and utilities for their building, salaries for their employees, and enough profit to make the whole business worth their while.
The maintenance costs for new cars are trivial. Rental companies typically sell a car after a year.
The cost difference between you owning a car and you renting a car is the same as the cost difference for you owning a house and renting a hotel room. You’re paying a premium for short-term use at a designated location.
The overhead costs for both hotels and rental cars are primarily that you tie up capital buying lots of cars (or building a hotel), and that you have to account for less than 100% occupancy.
Exactly. Compare the total cost of buying a new car and selling it after 1 year with the cost of leasing a new car on a 1-year lease. Compare that with renting a new car for a fixed 3-month term times 4 terms.
You’ll find the differences aren’t that large.
Now compare that with renting from Avis by the half-day from an airport with all fees & optional coverages added and multiply that by 365 days by 2 rentals per day. Now you’ll find a huge difference.
ok, so this explanation makes sense in the “things cost like that because that’s how things are done” kind of way. If we sell the car after one year of renting it and if we live in this weird American market where a used car after one year drops massively (seemingly more than the real value delta) in price, then this seems like a reasonable way to set prices.
So if we want to run a lower price rental company, why don’t we do it differently? Why not refuse to sell cars after one year and instead milk them for all they are worth, taking advantage of the competence of staff (or owner) mechanics to keep them in good repair? Why not also, perhaps, take advantage of the above-mentioned price drop of used cars and buy the used cars to begin with ourselves?
I understand that the resulting “brand” and market niche under such a scheme would be somewhat different from the existing competition. The cars wouldn’t be quite as shiny, but then prices wouldn’t be quite as big also.
Has the industry “been there, done that, didn’t work”? Does such a scheme violate some fundamental principles of car rental economics and so is not viable to begin with? Or is the industry just wedded to some market niches to the exclusion of the others for no good reason?
Would you want to rent a 1997 Ford Escort at the airport with 138,000 miles on it if the guy promised you that the mechanic just checked it out? In a strange city? At night?
I would want to get explanations not based on mocking and scare tactics. If the company has a good record of having cars runs normally and if they will show up with a new car in the highly unlikely case of breakdown (unlikely because they are better than me in estimating the likelihood of any given car breaking down out of the blue) then sure, why not.
Also, if this hypothetical model works and provides for low rent costs, it could then be used not just for brief rentals in the airport but also for long term use rentals (similar to leases), where getting the cost of use to be close to or lower than the cost of ownership is particularly significant. At which point it could even be marketed with scare tactics of its own - “rent from us and you are guaranteed a working car for $x per month, without worry about how much the mechanic will scam you tomorrow and with the ability to easily surrender the car if you find a better deal”.
But in any event, scare tactics and customer psychology is not the underlying economic and technological reality. My goal in this thread is primarily to understand the economics of such business models, not the marketing angle.
Looking at reviews for one of their franchises http://www.yelp.com/biz/rent-a-wreck-seattle it seems that that particular franchise suffers from lack of economy of scale (resulting in not enough cars available) and also charged at least one customer $23 per day. Which is a lot less than normal in the business but admittedly still seems to be much more than car ownership cost. But then maybe if this model were implemented on a larger scale, the prices could come down?
I guess ultimately this question goes back to what I asked in the OP. Is the current level of prices an artefact of an environment with too many all-expenses-paid people whose accountants don’t give a damn, or are there actually some fundamental factors making long term car rental even in the best circumstances inherently much more expensive than car ownership.
Hard to say. Rent-a-Wreck has been around for a long time, and has never expanded beyond being a niche player. The fact that they operate as individual franchises, rather than company-owned facilities likely means that each location is a fundamentally independent operation, individually buying used cars to use as rentals. If you’re looking to build an economy of scale, I wonder if you’d need to do it with something other than a franchise operation.
I wouldn’t necessarily say “accountants don’t give a damn”…in the post-Sarbanes-Oxley days, corporate expense accounts are far more tightly controlled than they were in the past. And, even so, that doesn’t include the significant number of leisure auto rentals (by people on vacation away from home).
Even so, you’re right in the fact that the “car rental” industry is nearly exclusively the province of short-term rentals (days, or weeks at the most). Longer-term “rental”, at least in the U.S., is more in the realm of auto leases – in other words, it’s much closer to renting an apartment than it is to renting a hotel room.
All of that suggests to me that there either isn’t (a) much demand for longer-term “rental”, or (b) no one’s figured out how to make the business model work. Keep in mind that there’d be a very substantial upfront cost to set up such an operation…unless you have an independently wealthy individual who’s bankrolling it, you’d need to get a lot of start-up capital, which would be challenging to raise without a compelling business case.
Is there any competitive pressure to make car rental quicker and easier at pick-up time? It would seem not, or at least not much. My experience arriving at airport car rental pick-up desks has been that even when the car is booked in advance, they already have my credit card details, etc., there is still 5 to 10 minutes of paperwork and administration to be endured before they will give me the key and let me continue my journey. Multiply that 5 to 10 minutes for each person ahead of me in line.
It would seem that if they could cut down the time to serve each customer to say, 30 seconds (customer identifies him/herself, signs something, takes key), that would be a selling point and would also save money for the rental company.
There is, at least among frequent renters / business travelers. Several of the higher-end car rental chains, such as Avis and Hertz, have programs for frequent customers which let them go directly to their car and drive off, without having to wait in that line at the desk.
To expand on this a little, most Rent-a-Wreck locations are affiliated with a car dealership. This is a great arrangement for dealerships because they can just take a few of the nicer trade-ins, slap some plates on and rent them for a couple years and recoup many times over whatever meager discount they gave to the tradee. They can also still be for sale, so all they’re really losing is the depreciation hit from however long they serve as rentals and the cost of registering them. I have no doubt they could charge a lot less than even what they do, but this model couldn’t take over the whole rental system and so there’s always going to need to be the rental companies that rent new cars.
Oddly enough, the sister operation, 'Buy-a-Wreck" didn’t play as well in the test ads. I got a Rent-A-Wreck once just because I could walk to it from where my own car broke down. The will never get sued for false advertising, I can tell you that much. The car ran semi-Ok as long as I applied strong left hand correction when driving at highway speed but they must have kicked out a couple of homeless people and 4 or 5 cats so that I could rent it. It smelled so bad that my eyes literally burned and the smell permeated my work clothes so much that I just claimed as was busy all day at work so that people didn’t try to get too close. It was pretty cheap though and I was glad they were there.
Well, that’s the thing is that the quality of the rental cars really depends on how nice the cars are on the lot and how serious the lot is about the rental end of things. If it’s a new car dealership, they get trade-ins that are practically good as new. If it’s a scummy used car lot, they might still get some nice cars in, but they might not necessarily want to use those as rentals.
I’ve rented from both ends of the R-a-W empire. Our franchise in town is associated with a used lot and the car I rented was I think a 10+ year old Pontiac minivan, which was definitely old and had some mysterious stains but was otherwise clean and drove fine. I also once rented from a closer to the airport location in a different town that was next to a Ford dealership and rented a Taurus that was indistinguishable from a normal rental car.
You can’t ignore the marketing angle when it comes to economics. Especially if the marketing angle leaves your company looking like hell. That affects the economics of the business.
The chances of a car with 5,000 miles breaking down on you are near zero. The chances of a 10 year old car breaking down on you is very realistic, no matter if you have a fleet of mechanics on staff.
This fact is the very reason people trade in their old cars instead of sending them to the mechanic for a full service restore.
If you feel that this is a hijack to your thread, then I’ll bow out, but you can’t underestimate the perception of the public when you get a brand new car at Avis and get an old and allegedly well-maintained car at Code Grey Rentals.
I am not arguing about any specific mileage that should be optimal on a rental car. My line of thinking is somewhat similar to actuarial/insurance analysis reinforced by an attempted resolution of the moral hazard problem. If our rental/insurance company can predict that a particular 10 year old car is going to run ok for another year with expected repair costs of $500, except maybe there is 8% chance of a total breakdown, then the company could evaluate the cost of taking that chance and do that if it makes sense. The company would not be scared of being ripped off by the mechanics because, well, I guess I am here trying to figure out how to counter that. E.g. I have proposed making the mechanic to be the main owner of the company and the car in the first place. Or maybe even if not an owner per se, perhaps the chief mechanics needs to get compensation structured in a way that encourages efficiency and discourages “agent looting the principal” syndrome.
I wonder if real world examples of such compensation structures for people who are “maintaining” complex systems already exist in some fields. We don’t seem to have them for car mechanics or for medical doctors, that’s for sure.
Meanwhile, the above-outlined approach would not work for an individual car owner like myself because I am not a mechanic and neither do I have money to self-insure against major problems that could happen with an old car.