The global car rental business has registered impressive growth over time, fuelled by the increase in leisure and corporate travel, and particularly the rise in corporate budgets. The Middle East markets, like Oman, too have been part of this growth story. Certain trends in the Omani market make it unique to run a car rental operation here. The market for long-term vehicle leasing has grown to bypass the spot rental business. The overall business of car rentals in Oman has been growing at five per cent year on year, slightly less healthy when compared to the ten to 15 per cent year-on-year growth that was witnessed prior to the economic recession of 2009.
Situational factors have kept the industry fairly buoyant in the region. Industry sources estimate that 50 per cent of the car rental business in Oman is driven by tourism and the rest from an increasing number of infrastructure projects. The trend of short and long-term leasing has taken root as a result of corporates ascertaining that rather than owning assets and investing in their maintenance and upkeep, including registration, accident management, service and insurance, it is less cumbersome to lease vehicles.
Today, that has become the core aspect of the business of many of the car rental operators in Oman.
However, some very serious bottlenecks remain that need to be addressed if the industry has to evolve further as the tourism sector develops and demand from corporate houses increases in the coming years.
Wafer-thin profit margins, an increase in vandalism, theft and organised car crime, high vehicle maintenance and insurance costs, not to mention perennial logistical concerns like parking and the availability of skilled manpower, are some of the major issues plaguing the business.
Shabbir S Boxwala, general manager, Budget Rent A Car, says, "Car rentals is a very complex industry. People think it's just about renting a car, but it's more than that. It is a high risk business, in that we actually give away our assets to unknown people everyday to drive and we don't monitor them. Then, there are car thefts and tyres and wheel caps being stolen by gangs that operate. We have lost 30-odd cars in the past five years. This wasn't happening before in Oman. We pay a lot more insurance, probably five times more as compared to a privately owned car. So there are a lot of risks and we try to mitigate these risks by ensuring we have the right customers."
A bumpy ride
The car rental business in Europe is far more mature than the Middle East. For starters, the car rental business there relies on sophisticated technology, a younger fleet and is organised. But perhaps, the most notable distinguishing factor of all is that the core profits come from the actual renting of vehicles, as opposed to leasing or the resale of vehicles.
The earliest beginnings of the car rental business in Oman were seen in the eighties, when the tourism industry was practically non-existent. The situation changed in 1998. The market grew and more players entered and competition increased. Today, the market in Oman has a mix of local and international operators. While the international operators increasingly rely on the bulk of their bookings from their global reservation systems, local operators with their fluent market knowledge have become competent at the business.
Naresh Kumar, manager, Avis Oman, points out that the irregularities in pricing are costing the industry in a big way. "There are no fixed rates in the market. The minute a company reduces the price, people opt for it without looking at the level of the service."
He adds, "Oman was a market where people bought cars to own them, but after the recession, companies coming into Oman are looking at leasing a car rather than buying it." Car prices have more than doubled in the last few years, apart from the rise in rentals and employee salaries. These factors have contribued to the rise in the cost of businesses and have prompted companies to revise prices from time to time. Another concern is the ease with which anyone can start a car rental company.
At present, there are over 250 car rental companies operating in Oman, including a mix of international operators and local homegrown ones. The existence of the latter hasn't excessively eaten into the business of the larger operators, but they have skewed market prices. Mehdi M Jaffer, deputy managing director, Thrifty, says, "The growth in the number of smaller operators does affect our business. Earlier, there used to be a restriction on the number of licences for car rental companies." While the international car rental companies operating in Oman like Thrifty, Budget Rent A Car and Europcar draw business from their global reservation systems, the local operators like Towell Auto Leasing and Arabia Cars tend to bank on corporates.
Manayil Cheriyapurayil Aseeb, business manager Arabia Cars ( the rental business of Travel Point), feels that there will be further growth in the car leasing business in Oman because corporates don't want to invest in commercial vehicles. But across the board, whether international or local, the profitability margins have been coming down. |
A growing concern has been that of delayed payments from corporate clients. "Every company is facing the problem of late payments, some as late as 120-150 days. This, along with the growth of dealerships is posing a challenge rather than competition from international car rental companies," says Abey Abraham Issac, business manager, Towell Auto Leasing.
Rejith Kunju, sales manager - leasing, Dollar Rent A Car, says, "Car rentals from dealers have grown and it has become a more competitive market. Most companies are now opting to lease because they don't want to invest in vehicles because the cost as well as the risks are higher, including damages and accidents. Insurance and maintenance costs are also increasing."
Then there are speeding fines and the cost of vehicles that have been stolen. Reporting of vehicle thefts is also a long and arduous task. It involves reporting to the Royal Oman Police (ROP), which conducts its own investigation and then furnishes a police report, following which the car rental operators can approach the insurance companies. The process can often take six months or in some cases, even longer. In the meanwhile, there are the monthly vehicle instalments and interest that the rental companies need to cover.
Profitability
With a growing number of challenges, it comes as no surprise that the car rental business operates on very thin margins. In fact, most car rental operators don't make any operational profits and profits come from the resale of vehicles. This is often different from markets like Dubai. Says Pratip Mukherjee, general manager, Autorent, "The Oman market is very different from Dubai where leisure and business travellers are moving in and out round the year.
Due to high margins, cars rental companies in Dubai are able to make money." This has resulted in consolidation in the market because the small players are finding it very hard to keep their business going. Oman's positioning as an expensive destination hasn't helped the car rental industry. It has resulted in a gap in the expectations and delivery of service. This has been primarily fuelled by the manpower crisis in the private sector.
Like most companies in the private sector, the car rental business too grapples with the issue of shortage of skilled manpower. Private operators point out that they would appreciate more assistance from the government and dialogue with the Ministry of Manpower and the Oman Chamber of Commerce and Industry (OCCI) would be a positive step in this direction. On their own part, operators are investing in training staff at regular intervals, to keep them abreast with the evolving needs of travellers to Oman.
But there is only so much they can do.
Jaffer says, "The problems in the car rental business are all inter-linked and many of them would be sorted out if the shortage of manpower can be controlled. The government keeps increasing the minimum wage and that doesn't help." Nitin Sapre, general manager, Europcar, has a different opinion. "I don't see the shortage of manpower as a problem. The key is to groom and motivate staff so they work better," he says.
Looking ahead
The forecast for the industry in Oman looks promising, with the government taking serious steps to promote tourism. Additionally, infrastructure projects in and around Muscat will give the business a boost. "The car rental business is hugely capital intensive and depreciation is the biggest challenge. However, if it is tightly managed, it can become a very lucrative business," says Sapre. Kunju points out that up to 2017, the industry outlook for Oman is positive, seeing the number of infrastructure projects slated to come up.
"The used car market is not that healthy because of instabilities in Syria and Iran. There is slight less demand for this sector. It's difficult to find a good buyer and demand a good price," he says.
In conclusion, it can be said that the car rental industry in Oman is going through a period of transition, as the shift of profits from spot rentals to leasing becomes more pronounced.
As the number of smaller players in the market grows, and as margins get tighter, there could be room for more consolidation. Technological advancements in the car rental business in the rest of the world have meant that developing markets will eventually be forced to meet the expectations of visitors. Further, as Oman banks on its ambitious development projects over the next few years and small and medium enterprises look at promising times, the car rental business has to wait and see if it can reap from these opportunities.
© businesstoday 2013
