The overall car rental pricing environment in North America has
firmed, according to Avis Budget Group executives, powered by strong leisure
pricing, which in the first quarter increased 8 percent year over year at the
car rental company. Commercial pricing, though, was flat, and contracted
commercial pricing showed a slight decline. After four years of lower average
corporate rates, Avis Budget CEO Ron Nelson intends to change that in 2013.
"For as long as I can remember we have been touting our 98 to
99 percent commercial renewal success, and for the last few years, that success
has come with a price—contracting for a lower rate for a multiyear period,"
Nelson said during a Thursday conference call with analysts to discuss the
company's first-quarter results. "That begs the question of whether 99
percent retention really should be the goal or whether a modestly lower
retention rate will drive higher renewal pricing and in turn lead to better
margins and profitability.
"We are looking for the right opportunities to test that
theory this year," he continued. "When commercial accounts come up
for bid, we are going to ask ourselves, 'Why we are being invited to submit a
proposal?' Clearly when the answer is an issue with a competitor's service,
that's a situation that may be a good opportunity for us. But in situations
where we feel a proposal is unlikely to yield profitable business, we'll be
taking a pass.
"For accounts where you are the incumbent and you are doing a
great job service-wise and not making money, you just have to go in, have some
spine and ask for a rate increase that delivers a profitable account,"
Nelson said. "We are going to think pretty carefully about how we
participate in RFPs. You can't be minus-2 percent compounded for four years and
look forward and think that's a great business strategy."
Avis Budget also "adjusted the incentive plans for our commercial
sales force, with profitability now playing a greater role in their bonus
calculations," Nelson explained. "Thus far, we think the change is
paying off. Of the more than 100 accounts we renewed in the month of March, 60
percent did so at the same or higher rates, a significant improvement from
prior periods."
Meanwhile, first-quarter commercial rental volume was up 3
percent, according to CFO David Wyshner.
On the leisure side—which affects small business revenue, a figure
that was up 7 percent in the quarter—Avis Budget led six rate hikes during the
quarter. Nelson said that Enterprise was "a more consistent fast follower,"
but that Hertz also matched most of the increases.
Nelson also noted that the company "continued to implement
price increases throughout April and May—for both brands—for daily, weekly and
weekend rentals. With increasing [fleet costs], everybody decided that it was
time this industry got some price. Now we have had four or five months of
consistent price increases, and hopefully that is a harbinger of good things to
come."
In terms of financial performance, Avis Budget's North America
division (including U.S. and Canadian car rental operations and Zipcar) posted
a 6 percent increase in revenue to $1.1 billion while adjusted earnings before interest,
taxes, depreciation and amortization was down slightly to $90 million.
Overall, the company's global revenue increased 4 percent
"primarily due to a 2 percent increase in rental days and a 2 percent
increase in pricing." Adjusted EBITDA declined 22 percent to $93 million. Net
income excluding special items was $9 million while the overall net result was a
$46 million loss, double the net loss from a year earlier, due to debt expenses
and other one-time costs.
The acquisition of Zipcar, which closed March 14, contributed $14
million in revenue and $1 million in adjusted EBITDA. Nelson said that "based
on inquiries we have heard from commercial customers about putting Zipcar on
their corporate campuses, we think there may be even more opportunity to extend
the brand beyond what was originally envisioned."