The sharing economy leads to more efficient utilization of assets and capital, thereby generating superior economic and environmental returns. Airbnb allows for the same real estate to be used more effectively. Rent the Runway does this for dresses. This same principle can be applied to the massive fleets of rental car companies — there ought to be a way for the sharing economy to more efficiently utilize these cars.
The car rental industry is an old industry (Sixt, with a fleet of 3 cars, was established in 1912). The industry has millions of cars in its fleets all around the world. A significant portion of revenues is driven by business travel during the weekdays (leading to low-priced weekend specials). Revenues are also seasonal, with winter being leaner than summer. Fleet utilization in North America hovers between 60 and 80 percent (source: Avis 10-K, Hertz 10-K).
Car rental companies like [company]Avis[/company] and [company]Hertz[/company] have bulk purchase arrangements to buy vehicles, solid insurance contracts, discounts on bulk gasoline purchases and so on. They can easily use these economies of scale and leverage their fleets to launch their own versions of an Uber-style service.
One option is that Avis could launch its own app and allows drivers with their own cars or cars rented from Avis (on special terms for short periods) to provide ride-sharing services on this app’s network. Avis would keep a portion of the driver’s fare as well as increase its rental receipts.
Another option is that Avis could create special rental offerings for Uber drivers who want to drive for Uber without using their own car (drivers who are college students, drivers from families with shared cars, or drivers with old cars). In this case, Avis would make money only from the incremental rental receipts.
Here’s what the economics could look like: Let’s say there are two million cars across fleets in car rental companies in North America utilized at 70 percent at an average gross revenue of $40/day. (Benchmarks derived from SEC filings of Avis and Hertz.) This gives us about 220 million car-days [(0.30*2,000,000)*365] where these cars are not used.
Uber prices usually surge on Friday and Saturday nights or during holidays/bad weather conditions. This is complementary to the pattern of business traveler demand — consumers need Uber-style cars when Avis and Hertz usually have them sitting on their parking lots.
Let’s say that the car rental industry is able to extract profits (net of costs) of $10/day for even 20 percent of these fallow car-days. This computes to a direct profit impact of about $500 million per year in North America alone. (This $10/day is quite conservative as Uber drivers reportedly make, on average, $25–40/hour or $200–300/day, and they also use their own cars.)
Avis and Hertz could launch their own Uber competitors or launch a program where interested drivers could rent from them and drive for Uber. Either way, it would create significantly more supply in the P2P ride sharing system, which would be a huge win for consumers. (Current supply estimates on number of active Uber drivers are still in the tens of thousands.)
Further, drivers stand to gain significantly from this as they would no longer have to finance or buy new cars and could benefit from some of the scale-economies of car rental companies. The environment overall is a winner as these same cars are utilized a lot better.
This is a big business opportunity and a chance for the “old economy” to show how it can compete in new markets. Avis bought Zipcar in 2013 in what was widely seen as a forward-looking acquisition. If car rental companies launch Uber-style services, they could over time extract even more creative benefits from their fleet being “on the road” — they could lower parking lot expenses and deliver cars to prospective customers wherever they are. Imagine ordering an Avis car through an Uber-style app and having the rental being delivered to you.
Avis’s tagline used to be “We try harder.” Perhaps it is time to do just that.
Dinkar Jain is a University of Michigan–trained engineer, a Harvard MBA and a product leader based in San Francisco. Follow him on Twitter @DinkarJain.