Subscribe or upgrade your account to read:

Car rental: bumps, blind corners and hairpin turns

Automobiles

Car rental: bumps, blind corners and hairpin turns

Reduced supply of vehicles and pent-up demand have turbocharged the sector’s profitability

The hedge funds that took control of Europcar more than doubled their investment after Volkswagen agreed to buy it for $3.4bn © REUTERS

When the pandemic hit, car rental companies cut their fleets by up to a half. That did more than stop their businesses from veering off the road. This reduced supply of vehicles, combined with pent-up demand, has since turbocharged the sector’s profitability.

In August, US-based Avis Budget Group hailed a “$1bn turnround”. It reported the best quarterly revenue, adjusted ebitda and margin in its 75-year history, a year after its largest-ever ebitda loss. As a result, there have been big rewards for investors who backed the sector when it was in a tight spot.

Avis’s share price has leapt by more than eight times since last year’s trough. Operating profits at Germany’s Sixt next year should hit a record high on current estimates. The hedge funds that took control of Europcar Mobility Group more than doubled their investment after Volkswagen AG agreed to buy it for $3.4bn in late July.

Finally, Hertz recently emerged from bankruptcy after inspiring a bidding war from rival buyers. Its Chapter 11 plan eliminated 79 per cent of its corporate debt.

To be sure, the pandemic still casts a long shadow. The spread of the Delta coronavirus variant slows the recovery of business travel. In August, Sixt said the fourth quarter remained “fraught with uncertainty” even as it announced quarterly pre-tax profits ahead of the same period for 2019 and an expanded market share. US rental car pricing may be up more than half year on year in August, but the surge has moderated from 76 per cent earlier this summer, notes Barclays.

Another problem is the chip shortage in the auto industry. Rental companies cannot source enough vehicles until the shortage ends, probably next year.

As demonstrated by VW’s swoop on Europcar, rental companies are expected to have a big role in the much-vaunted shift to car sharing and other mobility services. But if users cannot hire cars when they want them, they will not relinquish car ownership easily. Exiting the trouble spot will be the real test of a rental company’s skill.

Our popular newsletter for premium subscribers is published twice weekly. On Wednesday we analyse a hot topic from a world financial centre. On Friday we dissect the week’s big themes. Please sign up here.

Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.

Content not loading? Subscribers can also read Car rental: bumps, blind corners and hairpin turns on ft.com