Regulations

Credit Crunch and Low Hourly Rates Plague Industry

Posted on November 1, 1991 by Scott Fletcher, LCT Editor/Publisher

I have never heard more livery operators and coachbuilders comment on the difficulty of locating financing for the lease or purchase of a new limousine. One coachbuilder told me this week that his average financing approval rate is about one prospective customer out of every five. “It’s not that these people don’t have good credit,” he said, “but they usually can’t afford to pay all of their taxes and other fees up front.”

He then pointed out a second major problem for prospective buyers. “In many cases, people still owe too much on their ’86 or ’87 limousine to be able to trade-in for a new one.” In fact, it is not uncommon for the owner of a two or three-year-old limousine to owe more than the vehicle’s market value.

This phenomenon is a widespread problem in the livery industry. The scenario often involves a longterm lease or loan in which the buyer has made a minimal down payment. As limousine owners walk away from situations in which they find themselves owing more than a vehicle is worth, banks and leasing companies unwillingly become used limousine brokers. Because this is unprofitable, these institutions tighten limousine credit so that even successful and stable livery companies find it difficult to expand and update their fleets.

For those who haven’t, sold a stretch limousine for awhile, it might be worth checking the Used Limousine Trading Post in the back of this issue for the approximate value of any vehicles to be replaced in the near future. If the amount still owed on a vehicle is more than it’s worth, the deficit might be corrected by sending a little extra toward the principal each month between now and trade-in time.

On the positive side, the current credit crunch should mean that fewer potentially troublesome loans are being approved. This should mean fewer repossessions and better credit conditions down the road. Although the livery industry is currently struggling to make capital improvements, this is probably a healthier era than when anyone with a pulse can buy a limousine.

Livery Rates Stable While Revenue Falls

According to our sister publication Auto Rental News, the rental car that cost $69 per week ten years ago is available for $59 today. With inflation running approximately five percent a year, one might have expected today’s rental car rate to be more than $100 per week. Instead, rental car revenue today is really about half of what it was ten years ago.

By comparison, the livery industry has at least maintained its $45 per hour rate for stretch limousines over the past ten years. At the same time, allowing for inflation, the rate should be more than $70 per hour just to remain even with 1981 in real revenue. When limousine rates remain stable, revenue effectively declines five percent a year.

Today’s airlines face a similar situation. Robert Crandall, chairman of American Airlines, claims that the airline industry has not yet recovered from the Gulf War which sidelined much of the traveling public. Actually, industry analysts say that airlines are not having trouble filling planes, but sharply reduced airfares make it nearly impossible for airlines to make money. The problem isn’t really the Gulf War, or the economy, or fuel prices... it’s an overcrowded marketplace that makes air travel an undervalued and unprofitable commodity.

Livery companies face the same problem. Limousines operated profitably at $45 per hour in. 1981. But, according to our estimates, every vehicle in the fleet must bill over 100 hours a month at $45 per hour just to break even today. I hope the livery industry does not have an average hourly rate of $45 or $50 through the end of the ’Nineties. The past ten years was long enough.

 

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