Avis Budget Group Inc. plans to reduce its exposure to falling used-vehicle prices by shifting more of the financial responsibility for remarketing its retired vehicles onto automakers.
Program vehicles, for which manufacturers take financial responsibility for remarketing, will make up about half of Avis Budget's fleet in North America in 2015, up from about 36 percent this year, its executives said.
That shift will help the company offset rising fleet costs, the executives said during a conference call after the rental car concern reported that third-quarter net income had surged 63 percent to $192 million as revenues rose 6 percent to $2.54 billion.
The company's fleet costs rose 7 percent to $326 per unit per month in the third quarter.
The rental car company forecasts its North American per-unit fleet cost for all of 2014 at $312 to $315 per month, up 4 to 5 percent from 2013. Costs are predicted to increase another 3 to 4 percent in 2015.
Automakers sell program vehicles to rental car companies with the agreement that the automaker will take responsibility for remarketing those vehicles when they are retired from fleet use, meaning the automaker will book any profits or losses from the vehicles' sale.
Vehicles for which rental car companies take financial responsibility for remarketing are known as risk vehicles.
In recent years, rental car companies favored risk vehicles because an industrywide tight supply of used vehicles sent prices skyrocketing. That allowed rental companies to pocket more profit from their sale of vehicles that were retired from the rental fleet.
But times are changing. Now program vehicles are a "better value," said Avis Budget CFO David Wyshner.
CEO Ron Nelson said numerous vehicle recalls, a growing supply of off-lease vehicles and strong new-car sales have pushed used-vehicle prices lower and fleet costs higher this year.
"Fleet cost pressures are an industrywide problem," Nelson said during the conference call. "We have far fewer risk cars than any of our competitors."
Wyshner said the company also plans to mitigate the impact of rising fleet costs by increasing its use of alternative remarketing channels to dispose of vehicles once they are retired from use.
Those channels include online auctions, direct-to-dealer sales and sales to consumers through a partnership with AutoNation Inc., the nation's largest dealership group. Those channels bring $250 or more per vehicle above prices for vehicles sold in auction lanes, he said.
"So far this year, a quarter of our risk dispositions have been through these channels, an increase of approximately 50 percent compared to 2013, with close to 30 percent of our cars sold through these channels in the third quarter alone," Wyshner said.
"We expect alternative channels to represent a still higher percentage of our risk car sales in 2015."
Wyshner said another cost-efficient move is the company's ability to stock its Payless rental car fleet with vehicles from its Avis and Budget locations and with low-mileage used vehicles its buys at auctions.