In the current climate of low oil prices, few companies have responded to questions about their expectations for 2016 with strong optimism, but the rental sector appears to be one market segment where positivity continues to be the rule. Though superficially counter-intuitive, budgetary constraints and a cautious atmosphere are strong drivers the rental sector — particularly because rental is more cost-effective than purchase.
In fact, the rental sector is currently benefitting from several trends in its favour. The oil price is one, but the region is also experiencing a more generalised growth in the preference for rental arrangements. A decade ago, contractors and fleet operators owned everything — today everybody rents something. As the region’s equipment owners have shifted towards a total cost of ownership perspective, it logically follows that you only retain the fleet you can definitely generate value on.
The most euphoric voice comes from aerial work platform provider Rapid Access, whose sales and marketing director Alexis Potter enthuses: “We experienced tremendous growth in 2015 in every machine segment of our business and across the region and we expect further growth in the coming years. During 2015 we invested around $28.5m into our Middle East fleet, growing it by 750 units.
Offering additional explanation for the strength of Rapid’s segment, Potter notes: “We are the region’s largest provider of powered access and benefitted last year from growth driven by two main factors. The first is our own expansion — both increasing our market share and opening new depots in Muscat and Riyadh. Secondly, the effect of an increasing recognition across the Middle East that powered access systems represent the safest way to carry out work at height.”
Pat Fallon, COO of veteran genset supplier Byrne Rental, backs up the sentiment of growth within rental, noting: “We have seen sustained growth in recent years in the GCC rental industry driven by buoyancy in the markets where we operate.”
Though as a caveat, he adds: “Quantifying that growth is difficult as it has been more pronounced in oil and gas and infrastructure development and this is further divided by the product concentration. For example, large-scale international power project rentals have seen a slowdown — meaning that many local players in that area have retrenched to their bases and added to the Gulf’s competitive landscape in doing so.”
Strike three comes from Julian Ford, CCO of Altaaqa Global Caterpillar Rental Power, who says: “In the Middle East, the buoyancy of the rental power market is spurred by several factors, including the availability of diesel, utility shortages, intensified construction activities, sustained oil and gas production, the repair and maintenance of refineries and unreliable electricity supply in many areas.”
He points out, however, that the rental power industry “goes in cycles” in every region, and remains dependent on the prevailing market and economic situation. As an example he cites the adverse impact of the El Nino weather phenomenon on hydropower dependent countries in Africa is driving the growth of the temporary power market there.
Even in the heavily stressed market of Iraq, Subhi Khudairi, president of the Iraqi Khudairi Group, paints a picture that is, while nuanced, by no means negative.
He notes: “This year has been a tough year for all markets in Iraq, and the rental market is no different — but while projects have been affected by the fall of oil and the deteriorating security situation, we continue to grow our fleet and expand into market segments we have not serviced in the past. This is allowing us to prepare for the market upswing by providing a broader range of services and improve customer satisfaction.”
He continues: “Cranes have long been the strongest segment of our business, thanks to the oil and gas sector, but recently, as we pursue other market segments outside oil and gas, we have seen that the opportunities for medium to light equipment, such as forklifts and aerial lifts, are growing quickly.
“There remains a depressed market in Iraq, but there are pockets of opportunity that continue to require high-quality machinery compliant with international safety standards.”
Dealer competition
One regional trend is that of distributors and dealers in the region establishing or considering the possibility of establishing their own rental arms to supplement their sales income and work hand-in-hand with their existing aftersales functions.
Abdul Latif Jameel Heavy Equipment is keenly eyeing the possibility of establishing a rental division in Saudi Arabia, for example.
“The drive by more dealers and distributors to develop their own rental services has increased the number of players in the marketplace, particularly in the depot sphere — offering smaller generators and a range of services beyond power rental,” suggests Ford.
He points out that the inherent flexibility of such a setup makes depot businesses an attractive venture for new players in the market. However, he contrasts this with Altaaqa’s power projects business, which is more specialised and involves a high degree of engineering expertise and technical skill — limiting the rate of new entries into the sector.
Fallon notes that while, on the face of it, the concept of distributor/dealers adding rental arms can be perceived as additional competition, this has been the case for years in mature equipment markets.
From his experience at Byrne Rental, he notes: “Professional dealerships will integrate a rental model that does not pose a threat to their rental company customers and in fact, can become a source of cross- or re-hire to support the rental company.
“There are of course odd exceptions who, on forming their rental business, took the decision to cease supplying rental companies and instead went head to head with them – only to find that the end result was a loss of revenues as they failed to take the share of the rental market they had banked on securing and meanwhile allowed non-competing suppliers of plant and equipment to enter and indeed grow their business with their former customers!”
In Iraq, it would appear that the rental market is still at an earlier stage of development, which might explain why quite so many companies are eagerly eyeing its market potential.
Khudairi notes that most “dealerships” in Iraq are in reality just traders focused on selling machines. In contrast, there are few official channels with aftersales service and customer support, and any services beyond sales, including equipment rentals, are rare.
He says: “While we own and operate successful dealerships in Iraq, we have chosen to separate our rental and dealership businesses into separate companies with designated staff.
“Having designated staff for each division allows sales and rentals to have a more defined focus, learn more about the specific business they work under, and most importantly better assist the customer.”
Strong incentives
The primary benefits of rental arrangements for end users are, of course, the avoidance of purchase costs and the significant advantages of being serviced by a specialised third-party service network.
Speaking for Byrne, Fallon notes that customers with “exhausted owned assets”, who cannot justify the purchase of dedicated equipment, remain the primary driver.
He explains: “There is growing recognition that rental is preferable to the use of valuable capital expenditure to procure equipment that is not relevant to their core business, by providing an ‘off balance sheet’ solution and passing the costly repair and maintenance expense to the renting entity.”
In the case of powered access equipment, the temporary nature of the application is a significant deterrent to purchase. “As working-at-height activities vary a great deal in scale and environment it is only through rental that clients are able to use the right machine for every application,” notes Potter.
“Clients are able to keep the machine for only as long as they need in order to safely complete the task at hand — ensuring that clients can focus their financial capital within their core business.”
In terms of temporary power, the very name of the market segment emphasises the time-specific nature of the customer’s requirements.
However, by way of further incentive, Ford adds: “Temporary power plants are readily available and are immediately deployed to virtually anywhere in the world where electricity is urgently needed.
“Renting power also offers the customers the possibility of paying for the electricity produced by the hired power plants from their operating revenues. Additionally, renting electricity negates the need to spend scarce capital expenditure that is usually required to build permanent power stations.”
In the Iraqi market, the plummeting oil prices and budget issues have meant that many companies simply do not have the capital to purchase their own equipment.
Khudairi comments: “The cost of managing and maintaining your own fleet is not only high in Iraq, but the availability of genuine parts and certified service providers in Iraq is limited. Therefore, the effort involved maintaining assets is very burdensome on customers that are not local to the market. Many of our customers also prefer renting equipment in order to minimise lead times.”
Staying flexible
In line with what one might expect in a cash-strapped business climate, many rental operators are finding favour with rental agreements that provide the greatest flexibility.
For Rapid, which rents machines for daily, weekly or monthly durations, Potter notes: “We are seeing growth in shorter-period rentals which points to the maturity of powered access systems in the market, and their increased use by a wider range of end users.
“Many of these clients are not working on major construction contracts — a key sector for us — and only require machines to carry out short-term working at height in industries such as facilities management.”
As most of Byrne’s customers know the periods for which they require to rent, the company maintains a ‘standard flexible-period rental pricing model’. Fallon adds: “This changes a little in certain very specific industrial applications like logistics and some industrial applications where the longer-term lease of equipment is more prominent.”
As a utility-level power provider, Altaaqa operates to a different model — with a ‘capacity charge’ for having a temporary power plant available, and an ‘energy charge’ to cover the variable maintenance costs of operating a plant. The supply of fuel is a further consideration.
Ford details: “We are observing that customers of power project businesses are increasingly asking for guaranteed levels of fuel consumption, and even for fuel supply arrangements to be made as part of the service. While fuel consumption can be guaranteed within certain operating parameters, the funding of fuel is usually subject to a separate financing arrangement. “
With regards to Altaaqa’s depot business, where transactions are more frequent and lower in value, it is usual to have a daily, weekly or monthly charge for the use of equipment.
In Iraq also, Khudairi notes: “Many of our customers are beginning to rely more heavily on master agreements in which we agree on a set price for either daily, weekly or monthly durations for the entirety of the contract. This allows larger customers to more accurately forecast and control project costs based on their pre-determined project mobilisation schedule. While master agreements are more common for the international clients, the local contractors still rely on simple on-call rates as their projects tend to be of smaller scale and require less budgetary forecasting.”
Adapt to survive
Alongside its continuous investment in new fleet, Rapid Access is also making significant non-fleet investments to adapt and develop its “most important asset”, its people.
Potter explains: “Our people deal with our clients on a daily basis and we believe serve as our main point of differentiation across the markets in which we operate. To cater to our client base, we have increased head count and invested in the training and development of existing team members.”
As part of the Lavendon Group, Rapid Access also benefits from the expertise of the group’s Blue Sky Systems research and development engineers — which tailors the group’s services to the needs of its customers in the Middle East.
The group’s support also ensures the delivery of the latest health and safety innovations, like secondary guarding devices and attachment, to help operatives better handle materials from the safety of the basket of machines.
At Byrne, the emphasis similarly lies on listening to its customers, adding new lines of product and exploring how it can provide viable alternative rental solutions for businesses.
Fallon adds: “We are at an advanced stage of plans to launch a hybrid generator concept for the rental market and we are already delivering biofuel solutions. In the very short term we will also enter the low- to medium-range generator market with gas-powered generators, which are already well established in the international power project space but not in the lower capacities in GCC.”
For Altaaqa, while pledging to continue its offering of the most fuel efficient, reliable and technologically advanced generators and power systems to its clients, the business also plans to build upon its technical support and expert advice on equipment selection.
Ford comments: “As we have stated above, the diesel generator market will continue to grow in the next several years, so we will continue to have diesel generators readily available in our fleet.
In one parallel with Byrne, though likely in a different application, he adds: “As natural gas becomes increasingly available, and gas power generation technologies progressively find application in bigger and longer-duration projects, we will ensure to offer natural gas generators where it is appropriate.”
In Iraq, the future holds some predictable obstacles, and Khudairi notes: “The security situation and budgetary issues are making it more difficult to get new machines within Iraq, and we forecast that this will lead to an increase in market demand for all types of equipment.
“While we have primarily focussed on renting large equipment in the past we are now focussing on diversifying our fleet and providing light- to medium-size rentals in order to cover the entire rental market. In order to solidify this move we have signed an agreement with Hertz Equipment Rental Corporation (HERC) to become its official franchisee for Iraq.”
Words of Wisdom
The plant and equipment rental industry in the GCC has made major strides in recent years, according to Byrne COO Pat Fallon, and can today can be described as well developed.
He notes: “While the historical trend towards ownership of plant and equipment is still evident in some sectors, like construction — that in itself represents an opportunity for the rental industry to come up with viable rental models that allow the users of equipment see real savings to renting rather than owning.”
He concludes: “As we enter another period of uncertainty given current oil prices and the resultant ‘nervous’ trading atmosphere, good rental companies providing quality products and high levels of service can step up and become a viable choice for end users seeking to contain costs in the foreseeable future.”