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Supply and Demand-How it Relates to the Auto Industry

I.         SUMMARY:

Customers had begun to find different ways to solve their transportation problems. The luxury of renting a vehicle was outweighed by the opportunity to save money. This trend continues today. According to this article on the Auto Rental News website, the fact that revenue numbers for the third quarter of 2002 indicate that the auto rental industry is continuing to slide and has posted reduced revenue in excess of five percent when compared to 2001. Attempts to increase demand were made in all areas of operation. Focusing on modifying marketing strategies, reducing prices, and collaborating with airlines to offer travel packages were just a few. Most importantly, auto rental companies have placed a greater emphasis on customer service. Customers can go to any rental agency for an inexpensive vehicle. However, a smiling, courteous rental agent could make the difference and bring the customer back again. Today’s lower demand has forced the auto rental industry to rethink its previous life of luxury; customers have become prized possessions. As the demand curve has shifted drastically for the auto rental industry, we have been scrambling to find equilibrium.

Tomorrow may bring remarkable changes for the auto rental industry. It is doubtful that any changes will be seen in the short term. However, a new thinking within the industry, coupled with a fresh approach to handling the customer could be part of the solution. Currently, the supply of available rental vehicles far exceeds the public’s demand and the curve has shifted dangerously away from the equilibrium that is required to keep our industry strong. A dramatic change within the market place is necessary before auto rental companies can begin to rebuild. This change is likely to take years to commence. Eventually, rental companies will be forced to liquidate the remaining aged vehicles within their fleets and the used vehicle market will take another beating due to an increase in supply. The solution for the auto rental industry is far away and is not definite. Until then, consumers will be able to enjoy a great selection of inexpensive rental vehicles provided to them by very courteous rental agents.

II.         EVALUATION OR RESPONSE:

Today’s questionable economy, in conjunction with fewer travelers and a greatly reduced demand, has created the first economic hiccup in the auto rental industry in the last twenty years. Previously, the auto rental industry enjoyed an almost guaranteed six to eight percent revenue gains every year. This trend came to a shattering end. Auto Rental News reported in their article that in 2001 rental companies experienced a four percent reduction in revenue when compared to 2000.

In the past years, the auto rental industry has seen many changes. Fewer customers, increased insurance costs, an overabundance of available rental vehicles and a drastic reduction in vehicle value are just a few. Auto rental companies have tried to modify the way they do business in response to these changes. Nationally, rental companies have reduced rates, fleet sizes, and number of employees in an attempt to find equilibrium within the market place. While this article was written before the terrible events of September 11, 2001, it does make an excellent case of what is happening now, even if, in reverse.

Supply and demand, as it relates to the rental car market, is a constantly changing entity. The demand for rental vehicles will vary depending on many factors: holidays, local events, season, and others. Likewise, the supply of vehicles is affected by many factors: manufacturer pricing, company size, season, and most importantly, demand. These two factors, and the relationship between them, have combined to create a volatile market within today’s auto rental industry.

Currently, supplying rental vehicles is not a difficult task. Acquiring rental vehicles from manufacturers supply lines is an equally effortless task. Rental companies are experiencing a glut of vehicles parked on their lots. This surplus of vehicles is only partially due to a reduced demand upon the rental companies from their customers. The events on September 11th created a massive market shift within the auto rental community, thereby forcing the auto rental industry to deal with this incredible surplus of vehicles.

Auto rental companies hoping to scale back the size of their fleets to match reduced demand have been forced to retain their vehicles due to situations related to the new car market. Auto manufacturers are lowering prices across the board on new vehicles in an attempt to clear showroom floors. These radical price reductions to rental companies and consumers alike have effectively lowered the resale value of every vehicle in the nation. In conjunction with reductions in price, manufacturers are offering low or no finance rates on new vehicle purchases. These special finance offers are effectively ruining the used vehicle market throughout the United States.

With used vehicles bringing less money, auto rental companies are hesitant to sell off last year’s models. As a last resort, rental companies are offering ridiculously low rates to the consumer. While these rates have served to lower the average daily rental rate across the country, they have done little to increase the countries reduced demand for rental vehicles.

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