With Limited Supply and High Demand, Rental Car Rates Increase | June 2021
During the COVID-19 pandemic, cars went unused in rental lots. To compensate for the low demand, many businesses sold these cars. Now the industry is grappling with rising demand as travel bans lift.
As vaccination rates increased into the summer months, travel rebounded due to pent-up demand. Rental cars, however, were in short supply. As a result of limited supply and high demand, rental car rates increased. In the United States, car rental rates in May 2021 were up 30 percent compared to May 2019, with some areas experiencing increases of more than 50 percent. Rental car prices for Memorial Day weekend were nearly double.
Rental Car Demand Crashes During the Pandemic
During the COVID-19 pandemic, rental cars sat unused. Travel restrictions, including testing requirements, stay-at-home orders, and quarantine requirements, ground travel to a halt. Additionally, many companies implemented work-from-home policies and temporarily halted work-related travel. This was incredibly detrimental to rental car companies that rely heavily on business travelers.
For more than a year, normal life was put on hold as people waited for a vaccine. Some car rental companies went under or filed for bankruptcy. For example, Hertz was faced with not only decreased demand for rentals but also decreased demand for its fleet of used cars. The company regularly sells its rental vehicles to pay back its creditors. Navigating the slump was too much for Hertz which filed for Chapter 11 bankruptcy in May 2020. Chapter 11 allows businesses to reorganize and create a payment plan with creditors. Hertz announced plans to emerge from bankruptcy a year later backed by new investment firms.
Rental Cars in Short Supply
Like Hertz, many rental car companies in need of cash tried to sell off their vehicles. They sold hundreds of thousands of cars, anticipating a slow recovery. At the time, with little-to-no demand for rentals, prices sank. During the pandemic, rental car rates in Hawaii, for example, were as low as $5 per day. Now, with vaccines widely available and nearly half of Americans fully vaccinated, consumers are hungry for travel, but there aren’t enough cars to meet the demand. As a result, rates in Hawaii are averaging $900 per week.
Looking at the Road Ahead
Demand is only extraordinarily high in vacation destinations such as the beach and mountain resort areas, meaning some car rental outlets have more than enough cars. But rental car companies are not able to efficiently transport cars from one location to another. Carriers that transport vehicles can be slow and expensive.
Complexities in the supply chain have made the matter even more challenging to resolve. A global shortage of semiconductor chips, which are used in a vehicle’s electronic systems, has caused auto manufacturers to pump the breaks. This left car rental companies who purged their fleets empty-handed.
Some industry experts believe the rental car shortage could continue to be a problem into 2022.
In the Classroom
This article gives students a timely real-world example of supply and demand, covered in Chapter 1: The Dynamics of Business and Economics. Additionally, the content, which discusses supply chains and bankruptcy, could be used to complement Chapter 8: Managing Operations and Supply Chains and Bonus Chapter A: The Legal and Regulatory Environment.
Discussion Questions
- What caused the shortage in rental cars?
- What is pent-up demand? Do you think this high demand for travel will continue?
- If rental prices are too high, do you think consumers will resort to other methods of transportation? If so, what other methods of transportation do you think people will rely on?
This article was developed with the support of Kelsey Reddick for and under the direction of O.C. Ferrell and Linda Ferrell.
Sources:
Ann Schmidt, "Memorial Day: Rental Car Shortage Is Hurdle for Travelers," Fox Business, May 26, 2021, https://www.foxbusiness.com/lifestyle/memorial-day-rental-car-shortage-2021
Megan Cerullo, "Rental Car Rates Soar With Vehicles in Short Supply as Travel Rebounds," CBS News, May 10, 2021, https://www.cbsnews.com/news/rental-car-rates-soar-with-vehicles-in-short-supply-as-travel-rebounds/
Michael Wayland, "Hertz Shares Surge by More Than 50% After Selecting $6 Billion Turnaround Bid," CNBC, May 12, 2021, https://www.cnbc.com/2021/05/12/hertz-shares-surge-by-more-than-50percent-after-selecting-6-billion-turnaround-bid-.html
O.C. Ferrell is the James T. Pursell Sr. Eminent Scholar in Ethics and Director of the Center for Ethical Organizational Cultures in the Raymond J. Harbert College of Business, Auburn University. He was formerly Distinguished Professor of Leadership and Business Ethics at Belmont University and University Distinguished Professor at the University of New Mexico. He has also been on the faculties of the University of Wyoming, Colorado State University, University of Memphis, Texas A&M University, Illinois State University, and Southern Illinois University. He received his Ph.D. in marketing from Louisiana State University.
