Do you want to know how profitable a car rental business is? If YES, here is a detailed analysis of the profit margin for a car rental business.
Car rental is the hiring of a motor vehicle from one party to another party. Rentals are generally made on a daily, weekly or monthly basis depending on the needs of the renter. The car rental business is also associated with a car that is hired for a period of 12 months or less. Rental of cars for a longer period is commonly referred to as leasing.
The car rental industry is comprised of two principal markets: general use (including airport and local market facilities) and insurance replacement. General use companies typically serve airport and local markets, and they account for approximately 73% of rental revenue in the United States, while the insurance replacement segment account for approximately 27% of rental revenue.
The car rental industry is dominated by a few major global players. Among them are Avis, Hertz, Budget, National Alamo, etc. There are also large regional players, but car rental companies typically prefer to trade under the brand of a global player in order to capture a proportionate share of incoming leisure travel.
The total number of rental vehicles in service in the U.S. was estimated at 1.7 million in 2001, but has doubled ever since. The industry was estimated to have earned $31.87 billion in total revenues for the 2019 calendar year — a new record, according to data collected annually by Auto Rental News. The total surpasses the previous record of $30.27 billion, set last year, 2018.
For entrepreneurs wishing to enter the popular car rental market, one of the concerns is if the business is profitable and what profit margins they are looking to expect while running the business. While the figures may not be constant, but here is a rough estimate.
What is the Profit Margin for a Car Rental Business?
As of today, there are a lot of speculations that the car rental market is no longer a cherry tree. With the constant economic nosedives affecting travel and tourism and the depreciation rate, the car rental industry may be in for some stormy periods.
But of course that does not mean that the car rental service business is finished. Far from it, a lot of car rental businesses are seeing good profit margins from the business. Coming down to the basics, it has been discovered after decades of performance observation, that car rental companies generally produce net income margins of 5 to 10 percent.
This is to say that a car rental company does not make much money because a car costs tens of thousands of dollars to acquire but it rents out for tens of dollars per day, and depending on your location, you may not be assured of daily bookings. With this statistics on hand and considering other variables and expenses, it may take a car rental business quite a long time to break even talk more of making profits.
How Profitable is the Car Rental Business?
Although precise figures for the industry’s profitability are elusive, it isn’t difficult to get a rough idea. According to the annual reports of Hertz, Avis, and Dollar Thrifty, rental car companies typically hold their vehicles for anywhere between 4 and 22 months, with an average holding period of 13 months.
To put it another way, each year, they turn over roughly 92% of their respective vehicle inventories. Typically, a car rental business is profitable when a car from a fleet is booked for 72% of the total time. To be able to attain such figures, you should endeavor to spare no expense and effort on marketing.
A successful business needs to generate enough money to cover all expenses and still be left with appealing gains, and you will soon discover that car hire companies usually meet this goal quickly after entering the market. Even with vehicle maintenance costs, inspections, insurance policies, employment pay and all other financial demands of the company, you’ll still manage to access profit.
In order to accurately assess the profitability of a car, and invariably your car rental business, you will need to assign a usable life to the asset. If you typically run a fleet of new cars, you can comfortably set your mileage life to 60,000 miles. 60,000 miles is what most new car manufacturers’ powertrain warranty ends.
If your area has good competition, a 2018 Accord will only bring in around $45 per day, considering all variables. Although the average daily rate maybe lower, but the utilization rate is relatively high coming in at 80%. To make it more broad spectrum, you may have to account for multiple scenarios and find out cash flow for multiple utilization levels.
With a 45$ per day rate and an 80% utilization, your vehicle will generate $1,012.50 per annum. If you offer extras (car seats, one-way trips, prepaid fuel, post-trip cleaning) you will on average make 10% more per month. If you offer delivery to your guests this number will also increase accordingly.
Your expenses should also be taken into consideration. These should include insurance, maintenance costs, among others. You can round off your expenses on the car to $150 extra per month. Accounting for expenses leads you to a net income of $408.50 before accounting for unrealized equity.
Once that is factored in, you net in $628.50 each month on your 2018 Accord Sport. Having considered all else, you can go ahead to make your deductions so you can get your gross profit. You will find your profit hovering 5 to 10 percent, which is still a good margin. But you should remember that the profitability of your business still lies on the amount of publicity it receives.
A car rental business can start off as something small and quickly reach expansion if things go as planned. What started with just a few vehicles available for hire, can lead to the opening of multiple rental locations around the city or even around the country, which means a developed company with advantageous, steady profits.
From available statistics, the demands for car hires is not decreasing anytime soon, but on the contrary, more people are choosing this option in various scenarios, and the odds of your business growing and doubling its profit even during a single year of activity are high ones. If you do things right, you may also turn your rental startup into an actual franchise, and thus become a nationwide known brand.