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Introduction
Alternative fuel vehicles are automobiles that do not rely on petroleum-derived fuels or partly depend on them. They may include hybrid electric vehicles, battery electrics, solar powered vehicles, dimethyl ether automobiles, biofuel, nitrogen and hydrogen-powered cars. Lotus rental should only consider these products if the demand for the fleet exceeds the costs incurred to buy and run them.
Analysis
Lotus car rental is a profit-making institution, and must consider the economic feasibility of introducing this product above everything else. The common reason for buying alternative fuel vehicles is to minimize one’s environmental impact.
Lotus car rental must know whether there are enough people who value this principle. Since a market assessment of Lotus consumers has not been done, then publically available information on alternative fuel vehicles should be considered.
Priceline.com carried out an analysis of customer’s willingness to rent alternative fuel vehicles from car rentals, and they found that 48% of them were willing to pay slightly more money for an alternative fuel vehicle. 72% of the participants in the research wanted to find more environmentally friendly and economic cars (Analysts carried out the study among 764 subjects).
When pressed for more details on how far people would be willing to got to pursue their green objectives, 39% were comfortable with a three dollar extra charge. This represents slightly over 10% more than Lotus rental charges for the car. However, when firms increase price rates to $4, Priceline found that only 8% of the subjects will still pay this price for a green car.
However, if rental-car companies increase charges by $7-10, then only 1% of the consumers claimed that they will pay for it. Priceline’s survey also indicated that customers would consider more fuel efficient vehicles if gasoline prices increased to excessively high levels (Priceline, 2011).
The above results show that there is indeed a ready market for the alternative fuel vehicle fleets (Washington State Department of Transportation WSDOT, 2009). Car owners may choose such vehicles for environmental reasons, prestige, car design and other non-economic purposes.
In fact, other competing rental firms are already introducing alternative fuel vehicles and charging extra for these cars. If Lotus car rental were to consider this aspect alone, then it should charge a premium for all green automobiles.
Rental firms such as Hertz and Enterprise (some of the most well known brands in the rental car industry) are already introducing hybrids in green-conscious states. Although only selected branches have these automobiles, it is clear that rental companies are adapting to the trend.
Aside from assessing the marketability of such a vehicle, the organization must know the economic feasibility of owning an alternative fuel vehicle. A number of car owners may purchase such automobiles in order to save on money.
Gasoline prices keep fluctuating, so any other option would be welcome. Furthermore, manufacturers did not design the engines in conventional vehicles for fuel efficiency thus leading to greater costs. When making the decision to incorporate these cars into the Lotus fleet, the company must examine its break even point.
Since most alternative fuel vehicles are more expensive than traditional cars, then one must know whether the savings in fuel costs will offset the initial expense of buying the vehicle. One must also determine how long this will take. In this case, the breakeven point is that point in time when cost savings or fuel savings equal the extra amount of money paid for the vehicle initially.
Although this point may be altered by a series of factors such as the model-type, the nature of fuel used and the price of the gasoline (if the make is a hybrid), one can still perform an analysis on some of the well known brands and percentage levels of mileages that take place.
Taking the example of Toyota Corolla, which costs approximately $15,450, it is possible to compare its purchasing price with a similar hybrid version of the Corolla, that is; the Toyota Prius. Currently, the hybrid version costs $ 22, 800; Lotus will have to spend an additional $ 7,350 in order to upgrade to an alternative fuel model. Alternatively, if the company invested in the Toyota Camry, it would only part with $19,595.
However, if it invested in the hybrid version, it would have to spend an additional $4,805. One must compare the mileage for each of the vehicles after establishing the initial costs. Lotus would have to put up with 28 miles per gallon (mpg) when renting out a Toyota Camry in an average city.
The Toyota Corolla has a gas mileage of 31mpg. Some alternative fuel vehicles also get tax incentives. This calculation only analyzes hybrids; therefore, one should consider the tax credits that one would get for the Toyota Camry hybrid and the Toyota Corolla hybrid (Toyota Prius).
Only the Mercury Milan and Ford Fusion can get a tax credit in the hybrid motor vehicle section, so a driver would not make any savings in this part (US Department of Energy EPA, 2012). Assuming that Lotus rents out or drives the car across 1000 miles every month, then it will consume 12000 miles annually.
It would take approximately 20 years for the fuel cost savings in the Toyota Corolla hybrid to amount to the additional purchasing costs. This would occur after taking a gas price of $4 per gallon. The figure would reduce significantly for the Camry, which would have a break even point of 7 years (Shaw, 2010).
It is highly unlikely that one would keep a hybrid vehicle for 7 years let alone 20 years. Lotus car rental must update its fleet, so if it will take this long to recover the additional purchase cost, then it would not make economic sense to buy such a commodity.
The hybrid is the most feasible model for alternative fuel purchase because of its affordability and ease of use (refilling). Other comparisons of conventional vehicles with the hybrid versions have still revealed alarmingly high break even points. The Saturn Vue Hybrid (2009) would result in a break even point of 12.8 years when compared to its conventional counterpart.
The Ford Escape Hybrid (2009) would result in a break even point of 10.2 years while the Honda Civic (2009) would take 13.9 years to breakeven. A Chrysler Hybrid would translate into a 5.5 – year waiting period. Lotus rental is unlikely to wait for such long periods of time to realize costs savings, so it would be wise to stick to conventional vehicles.
Depreciation is the biggest problem for most car rental firms such as Lotus. Every time a car is sitting in the company’s parking lot, then it is not making money for the firm. In fact, the company is losing money because the car is depreciating.
During such times, customers have greater leverage as they can negotiate on the prices. This would prevent Lotus from fixing prices if they had the green option. As such, the alternative fuel fleet would not generate tangible returns.
Aside from break-even point analysis, Lotus car rental should also think about the running costs of operating a fleet of alternative fuel vehicles. Studies illustrate that hybrid vehicles tend to wear out faster than conventional cars. The rate at which they require batteries is quite high thus making it difficult to save on those running costs.
It is not enough to focus on fuel consumption as there are other challenges that come with running an alternative fuel vehicle. The longevity of the conventional automobile cannot be compared to an AFV since the latter is still in its developmental stages.
If an AFV running on electric energy broke down, it would require the expertise of two professionals: an electrician and a mechanic.
This would not just be inconvenient but expensive for the vehicle owner. It would also be challenging to get filling stations for some AFVs such as biodiesel ad they have yet to develop a comprehensive network of filing stations (Kathryn, 2008). Most individuals need to live in rural areas in order to get enough fuel for the automobiles.
In order to decide whether this product would be the ideal move for Lotus, the company must focus on the hard facts around this automobile. It needs to realize that even though consumers claim that they would be wiling to pay additional charges for an AFV, very few of them would go beyond a certain amount.
Nevertheless, Lotus would still have set fixed charges in order to recover the costs incurred during purchase. A break even analysis has shown that fuel savings take long for hybrid automobiles. Furthermore, although the United States is one of the most robust hybrid-vehicle markets, the percentage of cars that fall in the alternative fuel category is less than 0.01%. This is indicative of a low demand for the product.
The fleet may not yield enthusiastic responses from car renters. Lotus may have to put up with too many inconveniences when running alternative fuel vehicles as their filling stations, repair and maintenance systems are not easily accessible. Given this challenges, it would be advisable to avoid this fleet until stakeholders resolve the above-mentioned problems.
References
Kathryn, Y. (2008). Biofuels help the environment but they are hard to find. The Vancouver Sun, p. 3.
Priceline (2011). New Priceline.com survey finds almost three-quarters of travelers want to see hybrid vehicles added to rental car fleets. Web.
Shaw, R. (2010). Hybrid car purchase economics and investment capital growth implications. Web.
US Department of Energy EPA (2012). Fuel Economy Guide. Web.
Washington State Department of Transportation WSDOT (2009). Alternative fuel report. Web.
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