Recycle the Alamo : Rental Agency to Buy Used Cars to Offset Higher Costs

From Bloomberg Business News

Alamo Rent a Car Inc., in a drive to cut costs and maintain low prices, plans to begin stocking its rental fleet with used autos.

The Fort Lauderdale, Fla.-based company, which purchased about 175,000 new cars last year, said in a filing with the Securities and Exchange Commission that this year it will buy a small number of low-mileage vehicles that are less than a year old.

No matter that the vehicles will be virtually identical to the new cars now in Alamo's fleet. The message being sent by the nation's largest independently owned rental agency is that it plans to lessen its dependence on traditional supply agreements with auto manufacturers.

The car makers have levied drastic price hikes under these arrangements, crimping profits for all major rental companies--and producing heavy losses at Alamo.

"Necessity becomes the mother of invention," said Brent Burns, Alamo's senior vice president of fleet. "What we are trying to do is have the flexibility to continue to have the lowest cost structure in the industry so we can provide the best value to our customer--profitably."

The strategy marks a risky departure from standard operating procedures in the car rental world. Although smaller rental agencies stock used vehicles, industry leaders have traditionally offered their customers only new cars.

However, Alamo is a little different in that it caters primarily to tourists rather than the business people pursued by Hertz and Avis. New tactics may enable Alamo to preserve the low prices vacationers prize.

Until now, the major car rental companies have bought their cars under so-called repurchase agreements with car makers such as Ford Motor Co., General Motors Corp. and Chrysler Corp. For instance, Alamo bought more than 97% of its cars in the United States through repurchase agreements in 1994.

Under these agreements, auto manufacturers promise to repurchase the vehicles after a certain period. The arrangements boost sales for manufacturers and provide rental companies with a guaranteed price for the used cars.

However, manufacturers have been paring sales to rental fleets ever since consumer demand spurted during the 1992 model year. GM, Alamo's primary supplier, will sell 550,000 cars under repurchase agreements during the 1996 model year, down from 775,000 in 1992, said Jon LeSage, executive editor of Auto Rental News in Redondo Beach.

What's more, manufacturers between 1992 and 1995 doubled car prices under the repurchase agreements and forced the rental companies to hold the cars longer, LeSage said. The change spelled disaster for rental agencies, where car costs represent about 60% of total overhead.

Privately held Alamo, which prides itself on low prices, was hit particularly hard. Net profit declined to $24.9 million in 1994 from $49.92 million in 1992. The company expects to post a net loss of about $30 million in 1995.

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