Despite weakness in pricing, the four dominant U.S. rental
car companies in 2011 leveraged the strength of leisure and business demand to
grow their rental revenues. For most, that translated into 2011 profits. Buoyed
by ongoing demand strength, firm leisure pricing and a favorable used car
market, the industry is eying sustained revenue growth and a profitable 2012.
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MKM Partners analyst Chris Agnew said he expected full-year
revenues for Avis Budget and Dollar Thrifty each to grow by nearly 4 percent
this year, with Hertz expected to grow at twice that rate. Earnings before
interest, taxes, depreciation and amortization also will grow for those three
publicly traded firms, with increases ranging from 2 percent for Dollar Thrifty
to 8 percent for Hertz, according to MKM projections.
First-quarter 2012 results from rental car companies showed
that transaction volume growth propelled revenues higher, but average rates
continued to fall year over year.
Dollar Thrifty Automotive Group's demand strength was
represented by a 6.5 percent increase in first-quarter rental days. Revenue per
rental day, an indicator of pricing, decreased by 4 percent year over year.
Despite Hertz's nearly 4 percent decline in worldwide rental rate revenue per
transaction day, rental car revenues grew 10 percent year over year, thanks to
a nearly 7 percent growth in transaction days. Similarly, Avis Budget reported
that first quarter North American rental car revenues grew 4 percent year over
year.
Transaction volume strength has continued into the second
quarter, according to Avis Budget CEO Ron Nelson.
"Business travel remains a requirement for business
success," he said last month during an investor meeting. "Technology
has still not replaced the value of face-to-face meetings. So while we expect the
growth in leisure travel to continue to outpace business travel growth, both
will contribute to the overall industry growth. As the global economy continues
its slow improvement, we're very bullish on the industry's prospects and even
more so on our own."
Retail Rates Firm Up,
Corporate Rates Soften
"What governs rate in the car rental industry is supply
in vehicles versus demand," said MKM's Agnew. "The industry wants to
be fairly tightly fleeted so they can pull in price at tight demand periods.
Last year, the industry was negatively impacted because the Japanese tsunami."
Rental car executives anticipated fleet disruptions stemming
from events in Japan, but those supply disruptions never materialized and
rental firms were left with excess fleet, which thereby pressured rates.
"This year, they don't have that impact," said
Agnew. "Also, I think everybody has been a little more wary about the
economy." Based on supplier commentary, Agnew said fleets are "relatively
tight versus demand today." Even though rental car firms were over-fleeted
in 2011, the impact on earnings was minimized since "there were still nice
gains from used car sales," thanks to a robust used car market, he said.
Agnew said that while recent leisure pricing has been "positive
year over year," suggesting some firming in retail rate per day, it's been
a different story on the corporate side.
The average daily cost to rent a car in the United States
during the first quarter of 2012 decreased nearly 5 percent year over year to
$40.92, according to Travel GPA data based on nearly 1 million transactions
booked primarily by U.S.-based travel management companies.
Avis Budget reported first-quarter commercial volumes grew 3
percent year over year, but pricing declined by 2 percent. Hertz, meanwhile,
disclosed that U.S. on-airport corporate pricing during the first quarter fell
3.6 percent year over year.
Avis Budget's Nelson said the three primary competitors for
U.S. corporate business—Avis, Hertz and National, which is owned by Enterprise—have
been "competing very fervently for corporate accounts, and everyone
continues to be very aggressive about pricing." He expected full-year 2012
corporate rates to decline year over year by 2 percent, similar to last year.
Nelson added that the increasing role of procurement in
negotiating corporate car rental contracts also "tends to put downward
bias on rates."
While Dollar Thrifty did not share corporate-specific
pricing and demand metrics, the company indicated that overall first-quarter
pricing decreased by 4 percent year over year, though rental days grew by 6.5
percent. Privately held Enterprise, meanwhile, for its fiscal year ending July
2011 reported "more than $2 billion in corporate travel revenues,"
but did not indicate a growth rate from the prior year.
M&A Still In Play
Combined, the four largest U.S. rental car companies account
for nearly 97 percent of the market at the top 50 U.S. airports, according to
Abrams Consulting Group data. If Hertz can deliver on its long-standing
intention to acquire Dollar Thrifty, the industry would orbit around three
major companies.
Getting to that point has been a saga of competing bids,
denied offers and a long review by the Federal Trade Commission that at press
time still was ongoing.
Hertz CEO Mark Frissora in May said the company had "made
substantial progress towards our goal to obtaining antitrust clearance" to
pursue an acquisition of Dollar Thrifty, including a planned divestiture of
Hertz's Advantage Rent-a-Car subsidiary.
Though Hertz in October had withdrawn a bid to acquire
Dollar Thrifty, the company has continued to seek FTC clearance to initiate a
buy.
"We are optimistic this [Advantage Rent-a-Car]
divestiture will satisfy the FTC staff," Frissora added. Hertz now is working
"on the next steps toward obtaining a final consent order from the FTC."
Even after divesting Advantage, Hertz would rocket to a
higher level of on-airport market share than its chief domestic competitors
should it cement a deal for Dollar Thrifty.
Also once in pursuit of Dollar Thrifty, Avis Budget has
abandoned those efforts. Instead, last year it sealed its acquisition of Avis
Europe, expanding its reach outside of the United States.
This report
originally appeared in the June 4, 2012, edition of Business Travel News.