Transitioning to a Lean Paradigm: A Model for Sustainability in the Leasing and Rental Industries

Abstract

ABSTRACTConstruction, banking, and automobile manufacturing are among the most conspicuous segments of the U.S. economy that have yet to fully recover from the economic upheaval that began in 2007. Another and less obvious casualty is the car rental industry. Macro factors, such as declines in corporate and leisure spending on travel, and industry-specific issues, such as poor fleet management, depressed prices in the used car market, and restricted new car allocations from auto manufacturers, have dealt car rental companies crippling blows. However, survival depends on the fittest-or in this case, the leanest. Like a phoenix emerging from the ashes, car rental companies reported record revenues in 2011. This paper will analyze from a financial perspective the leaner business model developed by the leasing and rental industry. Financial ratios for efficiency, profitability, solvency, and growth will be compared before and after implementation of the leaner business paradigm. Inferences drawn from this analytical review of the industry will focus on cost efficiencies, optimal fleet management, sustainable construction, political costs, and measuring the costs/benefits of going green. Actual data from a small car rental company will provide insights into the specific changes necessary to transition to a leaner operating model and a long-term sustainable business plan.INTRODUCTIONThe automobile rental and leasing industry in the U.S. encompasses approximately 5,000 companies with aggregate annual revenue of $40 billion. This industry is highly concentrated with the 50 largest companies generating more than 80 percent of the total revenue. Major companies include Enterprise Holdings, Hertz Global holdings, Avis Budget Group, Ryder, and U-Haul International. Companies in this industry rent and lease passenger cars, recreational vehicles, trucks (without drivers), and trailers. Many U.S. -based car rental companies have also expanded to include international operations, primarily at international airports and usually through local franchisees. This industry's health is highly correlated to the health of the U.S. economy. Most customers are business or vacation/leisure travelers whose numbers can rapidly decline in an economic downturn.Approximately 60 percent of the industry's revenue is generated by the rental and leasing of passenger cars. The typical car rental operation has to acquire, maintain, clean, fuel, and repair its fleet cars, and dispose of older cars as well as operating and maintaining a reservation system for acquiring customers. Since the value of the rental asset is high, lean, efficient operations are essential for profitability. Acquiring fleet vehicles is the major financial cost for a rental company. Automobiles may be leased or purchased. Leasing is typically the more expensive option, but requires less capital. Depreciation expense for purchased vehicles is a significant charge on the income statement, typically averaging approximately 30 percent of revenue for large car rental chains. Vehicle purchases are typically leveraged. Highly seasonal revenue is typical in this industry, particularly for operations that cater to vacation/leisure travelers. With continuous vehicle turnover, fleet size for larger rental companies can vary significantly throughout the year. Fleet management is crucial to revenue generation and profitability.The automobile rental and leasing industry is required to comply with regulations concerning gasoline and diesel storage tanks, disposal of used motor oil, and the treatment of water from car wash facilities before its discharge into sewers. States regulate franchise operations and the selling of insurance coverage on rental cars. Some states, cities, and counties impose surcharges on each vehicle rental.This paper will explore the significant changes brought about within this industry in response to the recent economic downturn requiring companies to shrink fleet sizes and hold remaining fleet vehicles longer, to implement leaner operating models and to respond to tightening credit markets, weak re-sale prices, higher fuel costs, and weakening demand for air travel. …