Insatiable Ride-Hailing Companies Bite into Rental Car Demand

cars Yury Gubin/Adobe Stock

Spend Matters welcomes this guest post from Kayla Bruun, senior economist at IHS Markit.

Despite the seemingly favorable demand-driving conditions of a robust job market, low fuel prices and an upward trend in domestic travel spending, rates for U.S. passenger rental cars as measured by the producer price index have declined 31% since the third quarter of 2014. The price decreases occurred among cars rented for business and leisure travel, as insurance replacement vehicle rates have held steady.

Concurrently, rising fleet costs attributable to a supply glut in the used car market are overwhelming rental car firms' cost savings from automation initiatives and low gas prices. This suggests that rental car prices are falling due to a mismatch between supply and market demand, not as a result of lower input costs flowing through.

The ascendency of ride-hailing technologies is a potential explanation for the recent divergence between rental car producer prices and their historical demand drivers. This unprecedented source of lower-priced competition has grown exponentially even as rental car prices have drifted down. Consumer expenditure patterns support the possibility that companies such as Uber are garnering an ever-larger share of demand and pushing rental car prices lower.

Divergence from Historical Demand Drivers

The passenger rental car industry derives about half of total sales from customers traveling through airports on business or vacation. Hertz and Avis/Budget — two of the three largest companies serving the U.S. market — locate about 70% of sales outlets near airports.

As such, demand for rental cars has been driven historically by factors that tend to rise and fall with travel spending. While indicators such as airline traffic and hotel occupancy have recovered since the recession, rental car rates have recently moved in the opposite direction. The trend cannot be explained by lower input costs passing through to consumers; any savings gains from lower fuel prices and automation are being negated by rising fleet retirement costs due to the sluggish used car market. Hence, the reason for falling rental car prices likely exists on the demand side.

New Competitive Threats

If an increasing portion of travel-related ground transportation demand is being redirected to ride-hailing companies, then that would help explain the recent softness in car rental prices. While the arrival of ride-hailing technologies such as Uber have been most widely scrutinized for their disruption of the taxicab industry, the ubiquity and on-demand nature of these solutions renders them a viable substitute for rental cars, as well.

Consumer expenditure on the category including ride-hailing technologies increased by 44% between 2014 and 2015 (the most recent period with available data), coinciding with a steady rise in the Bureau of Economic Analysis' measure of real tourism output. Over this same period, there was widespread reporting about U.S. taxi companies suffering double-digit declines in revenue, and rental car prices began their persistent downward slide.

The timing and magnitude of the consumer spending increase suggests that demand for ride-hailing is being drawn from sources beyond just traditional taxis. Growth in consumer expenditures for out-of-town auto and truck rentals have been trending lower, as well, further supporting the theory that ride-hailing companies are siphoning off demand from rental cars.

Conclusion

The candle has been burning at both ends for passenger rental car companies, as dynamics in the used auto market push fleet costs up and new competition from ride-hailing technologies suppresses prices. As the weakness in used car values eventually spreads to new vehicles, firms may recognize some relief on the cost side as fleet acquisition costs subside. Fuel prices are expected to remain low through 2018, offering further potential cost-savings. With respect to demand, the traditional contributors to travel-related car rentals are expected to maintain positive momentum. However, the extent to which ride-hailing will continue to take demand from rental cars remains unclear.

Bottom line: The rapid expansion of ride-hailing technologies may be hampering price growth for the passenger rental car industry.

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