Car Rentals and Electric Cars are filing for Divorce, for now...
Issue 14 (05/02/2024): Rental car companies and EVs haven't experienced the same level of success as initially thought of. It comes down to high repair costs, poor infrastructure, among other factors.
In light of Bird’s bankruptcy filing, I became invested in the world of electric transportation, from cycles, scooters, boards all the way to vehicles. In this venture, I came across a Financial Times article stating that “Electric cars are not the future” with the subtext refining the statement to “in cities at least”. Although my agreement in this notion remains minimal, It poses some fantastic arguments regarding electric car usage in the future which I recommend reading. However, it also brings up a question regarding the rental economy.
In an economy where less and less people are purchasing houses, cars, among other long term goods, the notion that perhaps rental consumption may increase naturally arises. Does this fact stay true for electric goods?
Before we dive in, I want to underscore that I consider both companies such as Hertz as well as Bird primarily rental companies - in which you pay for the usage of a transportation device by either the distance traveled, or the time kept in your possession, or a combination of both in some situations.
Why Electric Vehicles and Rentals don’t get along with each other?
Renting cars is a hassle. From underage fees to complicated insurance protocols, no company has gotten the experience of renting cars truly right. Although Uber and Lyft have begun their attempts, as well as the convenience of ZipCar along college towns, nothing beats the behemoths of Enterprise, Avis, and Hertz in terms of usage. I use the term “beats” very lightly as I’ve never had a comforting experience renting from any company - especially Hertz. “Beats” just refers to where the masses flock to get their fix of a rental car.
Over the last half a decade, these companies have onboarded large fleets of electric vehicles - mostly Teslas - that of course brought a lot of attention. Many people would use the excuse of renting cars to try out a Tesla and that brought this skewed view of the rental industry and the inflated demand for electric vehicles.
Hertz’s Brink of Bankruptcy to EV Escapades
Hertz filed for bankruptcy in 2021 and can call itself lucky to be the firm it is today. The car renter saw Knighthead Capital Management and Cartares Management buying the company out of Chapter 11 at a valuation of $7.43 billion - post restructuring in May of 2021.
It went so far as to be known as a gambler’s stock, where all bets are off when it comes to making money with the Hertz stock. Although the stock isn’t doing incredibly well as of now, it was doing worse prior to it’s Chapter 11.
Although not completely related, part of the rehabilitation plan was the aim to amass an electric vehicle fleet to encourage customers to use Hertz once again.
So Why is Hertz selling off it’s EV Fleet?
Hertz is selling off a third of its electric vehicle fleet and will buy gas cars from the proceeds after citing lower demands and “higher-than-expected” repair costs as the predominant factors. Funnily enough, they are being sold at steep discounts of up to $17,000 per unit directly on its website. Once all the tax credits are inputted into your costs, you can count yourself an owner of a Tesla for as low as $14,000!
Hertz filed a report on January 11th highlighting the following:
The Company’s decision to reduce its EV fleet will result in the recognition, during the fourth quarter of 2023, of approximately $245 million of incremental net depreciation expense related to the sale”
That’s a sizeable chunk that doesn’t reflect well for investors but the company continues by stating:
“The Company does not expect this EV fleet reduction and the corresponding addition of ICE vehicles to have a material impact on its asset-backed securitization facilities, nor does it anticipate the need to make additional cash contributions to such facilities as a result of this strategic action.”
Although an idyllic approach, it seems rather unlikely that there are minimal long term impacts for such a move.
The Issues with Rental and EVs
It’s obvious that all rental cars have two things in common: highly inflated mileage numbers given how old they are, and they are inevitably more beat up than their non-rental counterparts. So let’s track how this results in the so called friction that has been brought on between Rental companies and EVs
On Customers
At the end of the day, the KPI that all rental companies follow remains customer usage and how much they buy into a certain model or make of a car. The simplest way to explain this is, although customers say they may use a certain good, do they back that up with actually purchasing that good. By the looks of it, the EVs in Hertz’s booking site are always available, and never exceed usage by more than 30/40% of it’s fleet.
Charging Infrastructure
I went on a trip with a friend recently, where we drove a Tesla and this gave me first hand experience of understanding the charging infrastructure and the customer experience when on a trip with an EV. To find a suitable charger that was among “the fast ones”, it would lend itself to a detour of upwards of 25 minutes.
Most customers of rental vehicles want a reliable car but also are always on the clock. Spending 30 odd minutes each day to charge the car, if not more should you be travelling larger distances, isn’t exactly conducive to the road trip experience we all hope for.
Although yes, you can time your charges to do pit stops, go shopping, or just take a break off the wheel, it still adds a significant chunk of time to your trip - especially if you are renting for a road trip - which most customers do…
Like vultures trying to circle their prey, I recall driving around a car park charging station in Sacramento eagerly waiting for the next charging station to open up. Once a station opens, dozens of Tesla’s circle the block clawing and swerving to be the next one charged. That’s not how I want to spend my PTO breaks.
Range Anxiety
Electric car ranges are incredibly impressive - but the level of pressure the batteries of rental cars experience, they are bound to deplete further and reduce their battery health. I’d be curious to see how the range of a Tesla is impacted after being rented for a full year by customers at Hertz.
“Continental Package” / “Gold Class”
EV is the new Luxury. The marketability of Tesla is prestige and comfort. Although true, it’s not worth the “Continental Package” upcharge that is being levied onto customers. Customers have quickly understood the gimmick and are now considering other more financially apt options.
“Surprise EV”
At the end of a long day you fancy yourself some dinner and sadly it turns out that your favourite restaurant says they are out of your favourite dish. So what do you do? Ask them for perhaps a close alternative? Maybe even a request for “what’s still good that’s available?”. At the end of the day, you want something similar in quality and standard, but most importantly, something similar in experience.
For Rental companies, it turns out that EV cars are not seeing the demand that companies expected. Once all the ICE (Internal combustion engine) cars are booked, rental companies are springing up “free upgrades” to EV Teslas to customers who do not want EV, don’t know how to operate EV, don’t want to learn, and frankly, were never interested in the first place.
Although EV is exciting, only about 4% of Americans own electric vehicles, and only about 12% of Americans are seriously considering them as a purchase. Figure 2 below highlights the adoption of EVs and it seems worrying at best.
Imagine your first experience with an EV be at a rental car company - with no guidance, support, information, or understanding of the specifications of what the car can truly do. If you are more curious about this conundrum, there’s a fantastic article by Saahil Desai about how “Car-Rental Companies Are Ruining EVs”.
On Rental Companies
Maintenance and Repair
When else will you get a chance to drive an EV with insurance for a week? Rental cars naturally face more crashes, nicks, and scathing than cars that people have purchased themselves. To add fuel to the fire, the maintenance and repair costs for EVs are about 45% more expensive. According to Wired, “manufacturers are currently being somewhat cagey about releasing part numbers or offering replacement parts for battery systems.” With repair shops slowly learning how to repair these vehicles, as well as slowly gaining access to parts, the maintenance and repair costs are exorbitantly high and will only come down in the next couple of years.
Consumer Familiarity and Education
As aforementioned, if your first experience with an EV is through a rental agency the consumer familiarity and education remain next to none. Being a tech enthusiast myself, I didn’t particularly enjoy my first time driving the Tesla and it does take some time to get used to - especially with the self drive components and the active breaking system.
With less consumer familiarity, the chance of a crash remains higher, but also the comfort and enjoyment that customers experience is low.
Depreciation and Insurance Costs
It only takes a quick google to understand that EVs and Insurance premiums don’t get along either. In some areas EVs cost twice as much as their ICE counterparts” and that’s a heavy statement to digest for rental companies. Coupled with the high depreciation value of EVs, the compounding insurance premium seems financially challenging to sustain long term for rental companies.
It’s not the EVs, it’s Us
With the parts supply shortage, high repair costs, poor charging infrastructure, the supposed ROI on EVs seems unappealing. EVs have been marketed as a replacement of their gas powered competitors, but they have been treated like a supplement. Customers who buy EVs are purchasing them in addition to their existing ICE cars and people who rent EVs are either doing so without their choice, as a fad, or are very desperate for whatever is available.
The rental model for EVs fails because we have not built the expansive charging network it requires, built the repair and parts supply chain as robust, nor do the vast majority of consumers understand the EV car well enough to comfortably take it on a road trip. Resultingly, the rental model for electric cars isn’t working - for now.
Reference:
https://www.bloomberg.com/news/newsletters/2021-05-12/money-stuff-the-hertz-gamblers-were-right
https://www.wired.com/story/ev-repair-batteries-expensive-insurance/
https://www.wired.com/tag/electric-vehicles/
https://www.the-express.com/lifestyle/cars/124913/hertz-sells-ev-rental-tesla-crashing
https://www.theatlantic.com/technology/archive/2023/06/electric-vehicle-rental-cars-hertz-chargers/674429/
https://news.gallup.com/poll/474095/americans-not-completely-sold-electric-vehicles.aspx#:~:text=Bar%20chart%20showing%204%25%20of,41%25%20would%20not%20buy%20one.
https://www.forbes.com/sites/rrapier/2023/10/31/hertz-hurt-by-electric-vehicle-challenges/?sh=713b31414878
https://www.reuters.com/business/autos-transportation/hertz-sell-about-20000-evs-us-fleet-2024-01-11/
Image Rights: Hertz
Great analysis on the unit economics! Interestingly, we’re now seeing a lot of ripple effects across the wider EV industry as salss peak and companies like Ford cite EV development costs as drags on the bottom line. I wonder if Chinese imports will do anything to move the needle - perhaps not in the US because of the recent tariffs, but maybe with European rental companies?