Rental Market: Riding The Economic Waves

Traditionally, the rental industry has been a primary purchaser of basic underground construction equipment such as loader backhoes, excavators, trenchers and multipurpose skid steer loaders with various attachments.

However, it was clear to exhibitors at the 2009 Rental Show sponsored by the American Rental Association (ARA) that the worldwide recession hasn’t excluded the rental market.

“It was the slowest rental show I’ve seen in more than 30 years,” said a sales executive of one longtime equipment company exhibitor. “Attendance was substantially down. The ARA show traditionally is a ‘selling’ show, but not this year; rental centers aren’t buying and neither are the big chains.”

Indeed, many rental companies have publicly expressed their intention to reduce fleets and limit spending. United Rentals, the world’s largest renter of equipment, is responding to the recession with a 360 degree fleet management strategy, said Paul McDonnell, United Rentals senior vice president, Trench Safety, Pump & Power.

“Since December 2008,” McDonnell said, “we’ve seen a slowdown in nonresidential construction that appears to be nearly universal, affecting all geographic regions. This appears to be largely due to a lack of credit. From what we can see, the credit markets are still frozen in mid-2009, despite some optimistic press reports.”

Commenting specifically on underground utility construction markets, McDonnell said budgetary constraints and tight credit markets have made it harder for many states and municipalities to fund projects, and the slowdown in homebuilding has had a negative impact on rental equipment demand for some time.

Big fleet, big picture

Managing a rental fleet the size of United Rentals’ in any economic environment is a complex process, said McDonnell.

“It involves managing capital investment in equipment, utilization, rates, fleet mix and age, and physical location of the assets,” he explained. “You also have to manage your markets to the best of your ability, understanding that some external factors are beyond your control. For example, our trench safety business has been able to offset some of the decline by pursuing infrastructure construction and the industrial sector. Right now we have equipment on rent on power plant construction, wind farms and LNG (liquefied natural gas) terminal projects. The energy sector has proven to be more economically resilient than commercial construction.”

McDonnell said that in April, United Rentals CEO Michael Kneeland commented that the company expects net rental capex for the year to be near zero, or even at a net positive inflow.

“In other words,” said McDonnell, “the inflow of money from used equipment sales and the outflow of money spent on purchasing fleet will be at very similar levels. In the first quarter of 2009, our company exceeded its target for used equipment sales. As a result, proceeds from used equipment were $15 million greater than rental capex spent in the quarter. This strategy also reduced the size of our rental fleet, according to plan: our fleet size was at $4 billion of original equipment cost at the end of March, compared with $4.1 billion at the start of the year.”

McDonnell said de fleeting is a process that definitely needs constant analysis.

“The ideal,” he said, “is to carry enough fleet to address customer demand now and in the near term in any given category, but not carry dead weight over an extended period of time. United Rentals has very robust technology tools in place to analyze equipment utilization by category and class of equipment.”

United Rentals does not disclose specific fleet positions on a category level, McDonnell said, but as an indicator in the underground construction market, the company’s aggregate fleet level of backhoes, trenchers, excavators, mini excavators and skid steers was lower on a year over year basis in early June, while the trench safety fleet was basically status quo (information is calculated on original equipment cost).

Rays of light

Indeed, trench safety equipment is one bright spot in the rental picture.

“Our current plan is not to de fleet trench safety equipment,” McDonnell said. “We are optimistic that the business will improve with the application of stimulus funds and will strengthen over the next five years. In fact, United Rentals is continuing to invest in bringing new products to market, and we also continue to standardize our trench safety fleet across all regions.

“Standardization increases our ability to redeploy underutilized assets to stronger markets where demand is greater. So far this year, trench safety rental rates have been relatively stable on a year over year basis, which has not necessarily been the experience of general construction rental businesses. We are dealing with rate pressure in some markets on a localized basis, but our trench safety footprint overall has not seen a significant decline in rental rates versus 2008.”

Another positive in the economic picture is the presence of several large projects that are still going strong, particularly in the energy sector.

“Going into the spring,” said McDonnell, “our branch operations – general rentals, aerial, trench safety, pump and power – began to see a seasonal uptick, although at a lower level than last year.”

Fleet management in any environment is a delicate balance between managing rates and utilization, McDonnell observes.

“This becomes even more difficult in a downturn when there is added pressure on rates,” he said. “United Rentals is doing everything possible to arm our branch teams with tools that facilitate fleet management through daily decision making. For example, our company expects to have price optimization software in place in all branches later this year.

“The rate environment for construction rentals is challenging, including most underground construction equipment. Rates are clearly very important, but we are equally focused on increasing penetration by making the best possible equipment solutions readily available to our markets. Given the challenging operating environment, our customers are looking for competitive pricing, but they are also seeking more productivity. Productivity is a huge deal for contractors not just to earn incentives, but to position ahead of the pack for the next bid.”

McDonnell believes United Rentals’ size and scope of operations is helping the company weather the current recession and will be an advantage when the economy improves.

“One of the advantages of having a footprint our size is that we can move equipment from weaker markets to markets where demand may be stronger,” he explained. “Our company has been very aggressive about transferring equipment among branches to tap into pockets of demand; transfers are another way to manage rates and elevate revenues. In the first quarter, we transferred $1.3 billion of equipment among our branches, based on original equipment cost. Size is definitely an advantage, now and in a recovery.”

Concludes McDonnell: “Every fleet management move we make is done with one eye on the current economic environment and one eye on the recovery. We have a very experienced management team at the helm that has seen cycles before. The key is agility – constantly adjusting fleet to respond to customer needs, while positioning for long term growth. We view fleet management as a fluid process. Our approach, together with cost control, is the difference between riding out the cycle, and managing through it.”


United Rentals, (203) 622-3131,

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