August 2003

Alarm bells are sounding in the car rental industry following the results of independent research released in July. Customers across-the-board are being warned of a dramatic hike in rates.

Using information provided by members of the Southern African Vehicle Rental & Leasing Association (SAVRALA), car manufacturers, banks and Stats SA, research has revealed that since 2000, overall costs in the rental sector have, on average, increased by more than 50% while revenues have increased by less than 20%.

Chairman of the rental section of the Southern African Vehicle Rental & Leasing Association (SAVRALA), Paul Pauwen explained that the objective of the research was to track the major cost driver trends affecting rental association members who comprised about 90% of the industry in terms of vehicle fleets.

He said that the price war in the car rental sector over the past few years “had taken its toll and that without their trade in used cars, car rental companies would not have been able to sustain it.”

A “pull no punches” graph has revealed that rental revenue trends last exceeded cost trends way back in October 2000. While costs continued to climb, rental revenues continued to decline reaching their lowest level between January and April 2001. From January 2002 costs had spiralled with revenues showing only slight improvement and by July this year, the gap between cost and revenue trends had snowballed to 30%.

“To understand why car rental companies are now moving to increase prices, one has to study the economic situation in South Africa over the past 20 years,” said Pauwen.

“Adapting to a high rate of inflation rate over so many years, most rental companies derived more profit from the residual values of their vehicles than from their rental. The resultant escalation in the price of new car prices meant they could sell off their used cars at a profit which enabled them to anchor their rental prices.”

When inflation stood at 15% he said that car rental companies had known that they would be paying 15% more for a new car in a year’s time and could probably sell their used car for the same or more than they’d paid 12 months previously. With the strengthening of the Rand and the decrease in inflation, car prices have stabilised and residual values have declined in relation to static new car prices,” continued Pauwen.

While car manufacturers could have reduced new car prices in the current environment, they had not. “Instead they have opted to give buyers more options, attractive maintenance plans for example, so now the consumer is buying new cars rather than used vehicles with no maintenance plans,” he said. “The result is that car rental companies and the car trade in general have had to drop their used car prices to make them more attractive to buyers. This has impacted on car rental companies forcing them to increase car rental rates which traditionally have been relatively low given the cost of cars in South Africa compared to say Europe or the USA.”

He said that the research had looked at the change over a four-year cycle and showed that over 85% of car rental sector cost drivers comprised new and used car prices, repairs to damaged vehicles, airport rentals and human resources. The most shocking finding had been the cost of vehicle repairs which had doubled over the last three years and now accounted for over 20% of overall costs.

“The price war for market share has been suicidal and I believe that in order for this industry to achieve sustainability, car rental rates must rise by at least 30%.”