Car rental fleet costs not yet set off by anticipated increases in corporate car rental rates helped contribute to Cendant Corp. lowering of its first-quarter financial outlook today, even as it released 2005 fourth-quarter and annual revenue increases.
The lodging, real estate, travel distribution and car rental conglomerate said the anticipated corporate price increases for its car rental business won't take effect until later this year. Those price increases eventually will more than offset increased fleet costs, according to Cendant CEO Henry Silverman.
Earnings for Cendant's Car Rental Group, which is parent of the Avis and Budget brands, fell by 10 percent to $72 million in 2005, compared to $80 million in 2004. That drop came despite a 16 percent increase in revenue, up to about $1.31 billion in 2005 from about $1.13 billion in 2004.
Rental day volume was up 17 percent, but that was countered by higher fleet costs for newer vehicles, as the company grew its car rental fleet by 17 percent. Manufacturers raised prices by up to 20 percent for 2006 model year vehicles
(BTN, Aug. 15). Although Cendant has raised leisure rental rates three times since June, on the corporate side "price increases are going to take longer to achieve, as market conditions would suggest that most car rental companies are waiting until contracts come up for renewal before raising prices," Cendant president and CFO Ron Nelson said on Tuesday in a conference call with investors.
Neil Abrams, president of Purchase, N.Y.-based Abrams Consulting Group, last week said he was forecasting rates in the industry to increase to about 8 percent and that the corporate rates would reflect that as well. His numbers also match the level of increase Cendant indicated its corporate customers should expect when it notified them of the impending increase last August.
Cendant, which is set to break into four pieces later this year, also attributed the downgrade to a quieting residential real estate market.
Fourth-quarter revenue was $4.3 billion—a 7 percent increase from last year. Net income totaled $537 million, up from $357 million in fourth-quarter 2004. In 2005, Cendant's revenue was $18.2 billion, up from $16.7 billion last year.
Meanwhile, net income for the company dropped to $869 million in 2005 from $1.37 billion the previous year. Additionally, loss from continuing operations totaled $39 million for the New York-based company, which Cendant attributed to lower results in its travel distribution services businesses than previously forecasted, even though 2005 transaction volume in the United States rose 6 percent and traditional agency and online bookings rose 4 percent and 21 percent, respectively.
Cendant plans by fall to spin off its four primary business units into separate companies in an effort to attract investors and boost share prices, at which time the company will drop the Cendant name and create standalone, "pure-play" companies in the travel distribution, hospitality, vehicle rental and real estate entities
(BTNonline, Oct. 24, 2005). Galileo International, Travelport and Orbitz for Business, as well as other brands, will comprise the distribution spin-off. Avis and Budget will make up the vehicle rental business and Cendant's hospitality company will include its brands Amerihost Inn, Days Inn, Howard Johnson, Knights Inn, Ramada, Super 8, Travelodge and Wingate Inn.
"We are now in the execution phase and remain on track to complete the spin-offs of real estate services and hospitality in the second and third quarters of 2006, respectively, and the separation of travel distribution from vehicle services in October 2006," Nelson said.