COVID-19 Market Insights

Here is a quick recap of industry related headlines over the last week: 

• Wholesale prices continued to lose steam last week. Overall, price changes were stable, but some segments began to reflect larger declines that started the week prior. 
• Wholesale prices of 2-6-year-old vehicles increased by 2.7% for the month of August. Last year, prices were flat during the same period. 
• Black Book’s Retention Index increased by 2.3% in August. At the end of the month the market was 10.6% above the August 2019 level. This is the highest value the Index has achieved since its launch in 2005. 
• Overall wholesale sold volume was below 2019 levels, but the performance of different channels varies with some overperforming the previous year. 
• Retail listing prices continued to increase last week. 
• Used retail listing volume has started to increase from the August lows, but still remains at  levels significantly lower than last year due to two main drivers: overall used inventory is lower, while many units in good condition are continuing to be presold before they are listed online. 
• The August unemployment rate unexpectedly dropped to 8.4% according to the US Bureau of Labor Statistics.  
• Weekly initial unemployment claims dropped to under one million in last week’s DOL report but remain above levels during previous recessions. 
• New light vehicle sales for August were about 19% below August 2019 volumes – 1.3 million units were sold. 
• Black Book’s 2020 projected annual light vehicle sale number was updated up to 13.2 mm units, a 500,000 increase from our previous projection in April. At these levels, this would reflect a 22% year-over-year decrease in total sales volume. 

Last Week’s Highlights from the Wholesale Market 

Volume-weighted, overall Car and Truck segments both showed signs of slowing down after 15 consecutive weeks of increases, with the overall market increasing by only 0.03% this past week (compared to 0.27% the prior week). As for specifics, the overall Car segments decreased by -0.22% (compared to 0.04% the prior week), and the overall Truck and SUV segments increased again this past week at 0.18% (compared to 0.41% the prior week).  

The graph below shows week-over-week depreciation rates for the entire market, including Cars and Trucks/SUVs/Vans for the last several months. We experienced 15 consecutive weeks of consistent week-over-week increases, but two weeks ago we saw the first signs of a few segments slowing down and last week the trend continued with even more segments reversing direction.  We also show an average weekly change from several previous years (grey line). 

News from the Retail World (Used and New) 

• This year has been far from typical, but over the last week we saw the first signs of typical, seasonal behavior, and that is the softening of values that traditionally occurs as we move into fall. The sentiment from dealers is that they are holding off on purchasing large amounts of used inventory, until after they observe how their lots performed over the Labor Day weekend.  
• Some new vehicles continue to be in short supply, such as SUVs and Full-Size Trucks, but the overall supply of new vehicles available on dealer lots has improved. Supply chain disruptions continue to cause slowdowns in production, particularly in parts coming from Mexico. Absenteeism at manufacturing plants in the states is also continuing to impact output. GM and Honda have both been in the news recently as they struggle to keep their plants staffed and have both resorted to temporarily transitioning white collar office workers to fill in for absent production staff.   
• Big news on the future product front this week is the reveal of the much-anticipated Jeep Grand Wagoneer and sibling Wagoneer that are expected to hit dealerships next summer. The Grand Wagoneer concept vehicle that debuted featured a plug-in hybrid powertrain, loads of technology, and a price tag that will exceed $100,000.  

What Comes Next? 

We expect a large, incremental influx of used inventory to hit the marketplace starting in September and last into the beginning of 2021, coming from prolonged lease return delays and downsizing of rental fleets. In addition, lenders expect a significant increase in delinquencies and repossessions over the upcoming months as the economy continues to feel the effects of high unemployment. With much weaker retail demand, and a projected oversupply of used inventory, we forecast a significant drop in wholesale prices this fall, relative to the heights seen in recent months. 

Longer Term View 

Although the economic effects of the pandemic will continue to be felt as far out as three years from now (e.g. according to the recent CBO’s economic outlook report, the unemployment rate will not return to pre-COVID levels for at least a decade), we still project that wholesale vehicle values will return to the pre-COVID-19 baseline by 2023. Used vehicle supply will decline significantly due to cuts in lease and fleet (both rental and commercial) sales throughout 2020 and into 2021. 

Economic Conditions 

Job Market 

• The graph above compares weekly initial unemployment claims from the current recession against the Great Recession of 2007 – 2009. The severity and speed of job losses is unprecedented. The horizontal (x) axis is an offset (in months) from the beginning of the recession, with week 0 being the week of March 21st. 
• Last week, the Labor Department reported that the US added 881,000 new jobless claims.  
• Since March, we have seen 24 consecutive weeks of record layoffs and furloughs.  

• In the early stages of the crisis, the US unemployment rate in April skyrocketed to 14.7%, the highest monthly rate since the Great Depression.  
• The May unemployment level decreased to 13.3% due to the success of the Federal Paycheck Protection Program (PPP) and other stimulus measures enacted in part by the Federal Reserve and Government.  
• As the country and the economy continued to reopen during the early part of June, the monthly unemployment numbers eased further to 11.1% and dropped to 10.2% in July.  
• In August, we have seen a further improvement in the labor market as the unemployment rate fell to 8.4%. 
• The Labor Bureau also noted in its reports that there was a classification error in its surveys, and the real unemployment numbers were actually higher for each month since March, as illustrated above. 
• There is a concern that without further federal stimulus, these gains will be temporary and employment numbers may deteriorate. According to a recently released CBO report, “the unemployment rate is projected to peak at over 14 percent in the third quarter of this year” before declining in the fourth quarter. 

This recession is very different and unprecedented in the labor market – reflecting an almost instantaneous jump in unemployment with projected fast growth within a year. The graph above compares unemployment rates for the last several major recessions. The horizontal (x) axis is an offset (in months) from the beginning of the recession. 

Although we have seen a reduction in unemployment claims, the initial economic shock and job losses have created a deep hole for us to dig ourselves out of. Between February and the end of August, the nation lost close to 11.6 million jobs. 

Consumer Confidence 

Not surprisingly, consumer confidence has been on a rollercoaster over the last six months. 

• At the beginning of the year, sentiment was strong – the University of Michigan’s Monthly Consumer Sentiment Index in February was at 101 points.  
• As the COVID-19 pandemic spread across the US, the Index dropped to 71.8 points in April and increased slightly to 72.3 points in May.  
• During recent testimony by Federal Reserve Chair Jerome Powell, he noted that during the months of April and May, “stimulus checks and unemployment benefits are supporting household incomes and spending.”  
• With these one-time stimulus payments and extended unemployment benefits helping the economy, the Index for June increased further to 78.1. The gains, however, were not uniform across the country. With a significant reduction in the number of COVID-19 cases, the Northeast region led the way with a record 19.1 point month-over-month jump, while the Southern region rose just 0.5 points due to the dangerous increase in numbers of new infections and fear of further shutdowns.  
• With a weakening of the economy and the increase in new COVID-19 cases across the South, consumer confidence retracted to the lows of April in July. The University of Michigan’s Monthly Consumer Sentiment Index for July decreased to 72.5 points and increases slightly in August to 74.1.  
• The latest report also predicts a further weakening in consumer confidence without substantial fiscal stimulus: “Although strong gains in consumer spending from the 2nd quarter lows can be anticipated, those gains will significantly slow by year-end without some additional fiscal spending programs to diminish the hardships faced by unemployed workers, small businesses, as well as support for state and local governments.”  

Gross Domestic Product (GDP) 

• The Bureau of Economic Analysis published an advanced estimate on GDP in the second quarter – real GDP decreased at an annual rate of 32.9%. This was the highest drop in GDP ever recorded.  
• Consensus states that the economy will start to grow in the third quarter as compared to the previous one. The current “nowcast” from the GDP Now model [from the Federal Reserve] estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2020 was 29.6% on September 3rd.  

Delinquencies In Automotive Lending 

The number of accounts in ‘hardship’ jumped substantially in April and kept increasing through June across all risk groups, according to the Monthly Industry Snapshot by TransUnion. The numbers stabilized in July and currently, about 6.3% of all accounts are in hardship – this is almost a 1,400% increase over last year. The increases are across all risk tiers. As deferrals expire in the upcoming month, coupled with a high unemployment rate, lenders expect a large portion of these ‘hardships’ to become delinquencies.  

According to the “Senior Loan Officer Opinion Survey on Bank Lending Practices” from the Federal Reserve, lenders started to tighten standards on auto loans in the first half of 2020. Recently released results from the second quarter showed a substantial increase in the number of banks that tightened their standards.  

Gas Prices 

Gasoline prices reversed the May trend and then started to increase. Since their lowest point at the end of April, prices are up $0.41, to $2.22 per gallon last week and holding steady for the last several weeks, according to the U.S. Energy Information Administration.  

Current Wholesale Market Overview 

Auction Insights 

• Auctioneers continued to struggle this past week to get the bids up, as buyers have backed off in their bidding leading up to the holiday weekend. We continued to see deals being missed over a few hundred dollars.  
• “No-sales” and “ifs” increased in frequency this past week as sellers held firm to floors, and buyers found themselves not needing as much inventory due to new vehicle deliveries increasing in frequency and in volume.  
• With complaints around condition reporting accuracy continuing to be a commonality, a seller’s reputation is more important than ever. Sellers with a solid reputation for offering quality used units have an advantage, as buyers are now willing to step up in price on units from a trusted seller. This is becoming even more important in recent weeks, as we’ve seen the overall condition of units being offered for sale has deteriorated. This is due to a couple of reasons: 
  • Remarketers are using this strong market to clean out their unwanted inventory and 
  • The highest quality units are being scooped up by buyers upstream. 

Auction Volume 

In the last several weeks, we have seen the wholesale sales volume decrease significantly as dealers started to pull back on purchasing. The drops were not uniform across all auctions and platforms. The graph below illustrates the estimated year-over-year change in the monthly sold volume in the wholesale market. The summary includes all major wholesale channels such as open auctions (digital and physical), dealer-to dealer platforms, direct to dealer sales, etc. 

Sales Rate 

• At the onset of the pandemic, as shelter-in-place orders went into effect, sales rates quickly tumbled into the teens. 
• Subsequently rates began climbing each week before finally stabilizing.  
• After weeks of consistently strong sales, much of seller’s best inventory has been sold. As a result, sales rates have started to marginally decline as the condition of units being offered for sale has deteriorated. New inventory deliveries have begun to increase in frequency which is leading buyers to be more selective in their used purchasing. Black Book’s estimate of the overall Weekly Average Sales rate is presented below.  

Current Wholesale Price Trends 

Current Market Level View 

• Volume-weighted, overall car segment values decreased -0.22% over the last  week. This is the first overall Car segment decrease in 15 weeks.  
• Sporty Cars took the hardest hit with a decline in values of -0.72.  
• Compact Cars also took a substantial adjustment at -0.54%. 
• The only Car segments showing any strength this past week were the Premium Sporty Car with an increase of 0.38% and Near Luxury Car with an increase of 0.27%. 

• When volume-weighting is applied, the overall Truck segment (including pickups, SUVs, and vans) values increased by 0.18% last week. 
• A majority of the segments had changes that register as “stability” with the exception of Full-Size Trucks and Compact Vans that had large increases, 0.84% and 0.82%, respectively.  
• Full-Size Trucks have been on exceptionally strong recently and continued their ascent for the fourteenth week in a row. New truck deliveries have increased in frequency and volume, but consumer demand remains high. 
• Compact Vans is a very small segment, with a relatively low price point, so even small dollar changes in the market register as a large percentage change.  

Black Book’s Seasonally Adjusted Retention Index 

The graph above compares Black Book’s Seasonally Adjusted Retention Index for the 2019 and 2020 calendar years. The Black Book Used Vehicle Retention Index is calculated using Black Book’s published Wholesale Average value on two- to six-year-old used vehicles, as a percent of original typically-equipped MSRP. It is weighted based on registration volume and adjusted for seasonality, vehicle age, mileage, and condition. The Index offers an accurate, representative, and unbiased view of the strength of used vehicle market values. It measures an ‘apples-to-apples’ year-over-year retention comparison. 

• 2020 started slightly below 2019 levels, but the market showed early strength in February and March.  
• As the US economy shut down due to the COVID-19 pandemic, we measured the highest single month drop in April of 6.9 points since launching the Index.  
• As we entered July, wholesale prices continued the rebound that began during the second half of May and continued through the month of June, with June’s Retention Index climbing back to pre-COVID-19 levels with a record jump of 9.1 points.  
• Black Book July’s Index value jumped above 2019 to 126.0 points as wholesale prices continue their climb.  
• Our recently released August Retention Index jumped further to 129 points – the highest retention level ever recorded since the inception of the Index in 2005. 
• Our current “nowcast” for September stands at 123.8, a decline from August as wholesale prices start to fall. 

During the last recession (2007-2009), the Index declined by about 15 points in a span of 12 months before recovery started. We project that the Index will decline over the next five months after the summer’s strength. The graph below shows the historical trends in Black Book Retention Index that covers the last 15 years including the Great Recession. 

Used Wholesale Price Projections 

Wholesale Price Impact Under the Most-Likely Economic Scenario 

Look back on 2020 

• The wholesale market started the year strong in January through March and prices went up in the first quarter. 
• Wholesale prices dropped significantly in April, as uncertainty over COVID-19’s impact and response dampened vehicle demand. This resulted in an overall wholesale price decline of 5.9%.  
• We saw a substantial improvement in prices during the last two weeks of May as many states re-opened their economies, and the monthly decrease was limited to only -1.5%. 
• During the summer months, demand in the automotive market was fueled by federal government stimulus and delayed tax season. Additionally, used and new inventory shortages drove wholesale prices up. 
• In June, wholesale prices continued to increase, and the overall market appreciated by 5.7%. As a comparison, last year’s prices declined by 0.9% over the same period.  
• Wholesale prices increased by a record 7.0% in July. 
• Wholesale prices continued the ascent in August and increased by 2.7%. 

Short-Term Outlook (Fall of 2020) 

The graph above shows a market level weighted average projected (dashed lines) and historical (solid line) wholesale values for all 2017 model year models. The green line represents our most-likely economic scenario, which does not include a possible second wave of COVID-19, as well as a still undefined second stimulus package. A more severe and prolonged recessionary scenario is shown in red.  

• Once the temporary strengthening during the summer months passes, we project values to stay below our pre-COVID-19 forecast over the next 12 months, with the deepest declines expected over the next five months.  
• We project a drop in wholesale prices this fall, as the US economy suffers through the effects of COVID-19. We anticipate that later this fall, wholesale prices will be approximately 5% lower than originally projected before the pandemic, due to a glut in supply and much weaker demand. Prices will start to recover in 2021 as the economy becomes stronger.  
• We also anticipate that older (>6-year-old), cheaper vehicles in average condition will not decline as much due to increased demand for these units.  
• Additionally, we project that newer (zero- to one-year old) models in good condition will retain their strength in the near future due to the continuous shortage of new inventory.  

Long-Term Projections (36-Month Residual Values, Fall of 2023) 

The effects of the pandemic will continue to be felt out to 36 months from now. We project that values will return to the pre-COVID-19 baseline as used supply will decline due to cuts in retail and fleet sales throughout the remainder of 2020 and into 2021. 

Wholesale Price Impact Under a Severe Recession Scenario  

In this scenario, we project a decrease in wholesale prices of up to 15% in early 2021, compared to a pre-COVID-19 baseline, with a slow recovery in the second half of the year. The effects of the pandemic and recession will still be impactful in 36 months, and we project a 10% market level decline of wholesale prices as compared to pre-COVID-19 projections for the second half of 2023. 

Used Retail Vertical  

Used Retail Prices 

With the proliferation of ‘no-haggle pricing’ for used-vehicle retailing, asking prices accurately measure trends in the retail space.  

• From the peak in early April until the end of June, retail listing prices decreased by about 4%.  
• Since the second week of June, we saw an increase in used retail prices fueled by higher consumer demand due to stimulus payments, the federal Paycheck Protection Program (PPP), and limited used and new inventory.  
• Since early August, used retail prices rebounded to above pre-COVID-19 levels.  
• We expect used retail prices to decline later in the fall as demand will decline in the absence of stimulus payments during a weak economy. 

Used Retail Inventory 

Many dealers continue to report a shortage of used inventory in the wholesale marketplace. As a result, from the peak in February, we have seen a decline in the number of used retail listings by between 20% and 25%. The true shortage of vehicles is probably not as severe as this decline would lead you to believe, as many dealers sell some of their best inventory in the first several days before listing them online. Nevertheless, the shortage of used inventory helps keep retail prices elevated even in the weak economic conditions.  

The graph above shows the weekly average of the number of retail listings collected by Black Book, indexed to the first week of the year. We see a continuous decline in the numbers starting at the beginning of May as the economy started to open in the states outside of the Northeast. 

The graph below shows year-over-year change in average monthly retail listings. 

• We started 2020 with active retail listings above the previous year’s levels. 
• By July, the listing volume dropped to about 7% below 2019 numbers.  
• August saw another drop in listed inventory to about 9% below 2019. 
• Currently, the number of listings is about 8% lower compared to last year.  

New and Used Retail Insights 

• Labor Day weekend sales are going to be a big indicator for many dealers as to what they can expect from consumer demand in the weeks and months ahead. In preparation for the holiday, many dealers made the decision to slow their purchasing in case the holiday weekend didn’t turn out to be as successful as they were hoping.  
• Not only is there concern for what the consumer demand will look like, but new inventory deliveries have been increasing so dealers have been more selective in the used units they are sourcing at auction and the trade-ins they are keeping. At one point, many dealers were finding that any inventory was better than no inventory, but the narrative is now changing, and they are finding themselves only buying and keeping what fits in their traditional product offering.  
• COVID-19 related employee absenteeism at auto manufacturing plants continues to cause slowdowns in production. Supply chain delays also continue to dampen the ability for manufactures to keep plants operating at full capacity. Parts coming from Mexico and plants located in the United States are facing the worst obstacles as it relates to COVID-19. For the most part, overseas parts suppliers and production are running at normal capacity.  

Used Retail vs. Wholesale Prices Trends 

Each week, members of the Black Book automotive analyst team, data science team and executive leadership team speak with no less than 30 dealers, along with buyer and seller representatives, wholesalers and others, who represent hundreds of franchise and independent dealers nationwide. These industry experts, along with experts we speak with from leading fleet management and rental car companies, auction leadership, and other industry experts, help to clarify and connect the dots between the wholesale and retail markets, adding to the insights that our data reveals.  

Since the start of the pandemic, we have been observing different trends in both wholesale and retail prices (see graph below).  

In April and May, wholesale prices declined at a higher rate compared to retail prices. As margins grew, dealers reported healthy profits on a per vehicle basis. Retail prices displayed stickiness on the way down.  

Similarly, as wholesale prices came roaring back to pre-COVID-19 levels, retail prices are slow to recover, exhibiting the same stickiness on the way up. As wholesale to retail margins shrink, it is even more important for dealers to stay up to date on market movements. We are seeing this trend play out on dealership lots, where retail asking prices are not increasing at the same level as wholesale transaction prices. This means dealers are paying more at auctions and through wholesale channels, but those increased wholesale acquisition prices, as a percentage, are not flowing through to the retail lots and online listings, and ultimately to the consumer. The main driver of the slow increase in retail prices, based on our conversations with dealers, is simply the fear of sitting on inventory for too long, coupled with the added risk that the market makes a quick reversal, which leaves them stuck with a vehicle they paid too much for. Dealer sentiment is quite clear—if they are going to pay up for a vehicle in this environment, they are choosing to turn them quickly, even with less margin than normal, to ensure they are not caught with high priced inventory when the market does shift. There is no long game here. There is simply a need to fulfill demand in a risk filled environment. 

The graph below shows this retail / wholesale dynamic since the start of the year. Prices are indexed to the first week. The black line is Black Book’s Retention Index (not adjusted for seasonality). It is calculated using Black Book’s published Wholesale Average value on two- to six-year-old used vehicles, as a percent of original typically-equipped MSRP. It is weighted based on registration volume and adjusted for vehicle age, mileage, and condition. The blue line is a retail index – average listing price of available retail inventory adjusted for mileage. 

CPO Retail Sales 

Certified Pre-Owned has grown in popularity as it provides consumers with an affordable used purchase option with low mileage (a typical 3-year-old CPO vehicle will have around 5,000 less miles than a similar non-CPO vehicle), but with the peace of mind that comes with a new purchase with the additional warranty. Some OEMs also offer special financing rates and terms for their CPO vehicles. For dealers, the cost to certify a vehicle is typically minimal and the return on the retail is typically greater. CPO vehicles are typically viewed as nicer condition units as there are minimum criteria a vehicle must meet to be able to be certified, and these typically involve age and mileage restrictions. 

There are additional benefits to consumers that purchase through certain OEMs: 

• GM offers an exchange program on their Chevrolet and GMC CPO units. If the customer changes their mind within three days or 150 miles, the purchaser can exchange it for any Buick, Chevrolet, or GMC CPO vehicle.  
• Nissan is improving their CPO program by adding additional benefits such as $750 Captive Cash on all CPO Rogue and Rogue Sports and adding one-year complimentary pre-paid maintenance when a CPO vehicle is financed through NMAC. 

For some dealers, there is additional incentive to CPO a certain percentage of their used inventory as it bumps up their status with the manufacturer. For example,  

• BMW takes into consideration a dealer’s CPO sales volume when deciding on the dealership’s new car allocation.  

Cost of certifying a vehicle ranges by manufacturer. Typically, for mainstream OEMs, the cost to the dealer is $500 or less per vehicle, but luxury vehicles can reach into the thousands of dollars and vary by model. In most cases, the full cost to CPO a vehicle is the responsibility of the dealer, including any reconditioning that is necessary for it to receive certification. 

Retail prices of CPO vehicles are generally about 3.5% higher than a similar non-CPO vehicle (adjusted for mileage).  Similar to the cost to CPO a vehicle, the difference varies among the segments and, for example, can climb to about 7% for near luxury sedans. 

New Vehicles Sales Outlook 

We still anticipate a significant reduction in US new vehicle sales in 2020 (both retail and fleet sales) due to continued reduction in consumer demand. This is the result of several ongoing factors, including less miles driven due to remote work and shelter-in-place initiatives, high unemployment, and an overall feeling of uncertainty by consumers.  

Overall, new vehicle sales were down 21.5% during the first eight months of the year compared to last year (with a 19% YOY decline in July). The graph below shows our current projections for new vehicles sales for the remainder of 2020.  

Our New Vehicle Sales Outlook was updated this week based on stronger than expected August sales numbers. Due to continuous production disruptions and much weaker demand due to the economic slow-down, we project a 22% drop (compared to pre-COVID-19 projections) in new sales in 2020 to 13.2mm units in our base economic scenario.  

In the longer-term, we expect new sales volume to return to pre-COVID-19 levels within five years.

Used Vehicle Supply Projections 

Black Book projects a higher than expected used vehicle supply in the wholesale marketplace for the rest of 2020 due to several factors: 

• Delayed lease returns resulting from lease extensions offered by OEMs – more than 560,000 additional three-year-old units in the second half of 2020. 
• Extensive de-fleeting by rental car companies due to lack of consumer and business traveler demand and financial pressure to raise cash – at least 250,000 one- to two-year-old vehicles will be added to the market in the second part of 2020. 
• Dramatic reduction in auction activities due to COVID-19 in March, April, and May. 
• Increased repossessions due to deteriorating economic conditions in addition to delayed repossessions during spring and summer months – we expect the volume of repossessed vehicles to at least double in the next six months compared to last year. This additional volume can exceed 1.0 million additional units in the next 6 months. 

Short Term Lease Return Projections 

When we started the year, lease returns were projected to hit a record volume of above 4.1 million units. Once the pandemic was underway and most manufacturing stopped, OEMs started to encourage lease extensions in order to push returns further into 2020, when they would be able to provide replacement vehicles. As a result, we project at least 560,000 additional units in the second part of 2020 (compared to the pre-COVID-19 estimates) due to a slowdown in sales in April / May, along with expected turn-ins of the lease extensions. 

Repossessions 

About 1.9 million vehicles were repossessed by lenders and sold (mostly) through wholesale channels in 2019. During the beginning of the pandemic, most of the states put a moratorium on auto repossessions and most of the lenders had deferral programs to help owners through the first several months of the recession. According to American Financial Services Association, as of last week, only Maryland and Washington DC still have a moratorium in place. Illinois started repossessions just a few weeks ago. Most of the lenders have ended their deferral programs. Our survey of lenders and automotive recovery companies suggest that the volume of repossessed vehicles will at least double in the next six months. We expect that there will be substantial challenges at every step of the process as recovery, transportation, and disposal are not fully recovered. 

Rental Unit Returns 

Business and leisure travel collapsed at the end of March – air travel is still down by more than 70% according to the TSA. We expect a significant reduction in both categories for the remainder of 2020. In addition, there is no expectation that travel will return to pre-COVID-19 levels over the next several years. According to the IATA (International Air Transport Association), air travel will not return to pre-COVID-19 levels until after 2023. This puts tremendous financial pressure on rental companies that rely on air travel to reduce both their current fleet and scrutinize future vehicle acquisitions.  

At the end of May, Hertz filed for bankruptcy in North America as a result of the pandemic. Several weeks ago, Hertz was able to secure a deal with its lenders that allows a gradual reduction of fleet – over 182,000 units between June and December. In addition to Hertz, we expect other rental companies will continue to reduce their fleet during the fall months to match lower demand for rentals. This practice will lead to over 250,000 additional rental units hitting the wholesale market in the second half of 2020.  

In the longer term (later 2021 – 2023), the drop in rental return volume will benefit the price of newer used units, as supply will be limited. 

The graph below shows Black Book’s projections for rental returns. The purple line shows the difference between current (darker rectangles) and pre-COVID-19 projections (lighter rectangles).  

Longer Term Used Returns Projections 

With the reduction in retail and fleet sales over the next several years, we project approximately 75k used units per month less in the market in 2023, compared to previously projected returns. This lower level of used inventory will be beneficial to used car prices as supply will be limited, helping to bolster valuations. 

Originally posted on Agent Entrepreneur