U.S. rental car companies this week unanimously reported year-over-year profit growth for the third quarter, thanks largely to growing volume. Though executives agreed corporate demand continues to march upward, pricing remains flat or down compared with last year. Still, they see a fomenting recovery in the rental car business that could present an opportunity for commercial rate increases in the coming year.
"We're in the early stages of a multi-year upswing in the business, particularly since travel demand is still well below 2007 levels," Avis Budget Group chairman and CEO Ron Nelson said during the company's earnings call on Thursday.
Though its pricing remains below last year's levels, Avis Budget's domestic volume grew more than 4 percent for the three months ending Sept. 30, picking up as the quarter wore on and continuing through October. "The acceleration was most pronounced in our commercial business," Nelson said, noting that commercial volumes were up 2 percent in the quarter overall and 6 percent in September.
Avis Budget, however, reported U.S. car rental pricing declined during the quarter by nearly 4 percent, noting a difficult comparison to 2009's third quarter "when our pricing was up over 9 percent" year over year, Nelson said. Compared with third-quarter 2008, pricing was up 5 percent.
Following two years of declines and softness, Hertz chairman and CEO Mark Frissora sees new opportunities for corporate rate increases, as supply is "adequate" and demand is projected to continue growing, though he noted that "pricing power is less than it was a year ago." Hertz's rental rate revenue per transaction day for the commercial segment was up a modest 0.5 percent for the quarter, at $44.84.
Said Frissora: "As volume improves, you would think the pricing in commercial would begin to improve with that, so hopefully we would expect sometime next year we would get some positive price growth on the commercial business."
Travel management company forecasts are mixed on rental car rates for 2011, with Carlson Wagonlit Travel projecting a decrease from 2010 levels of up to 2 percent on the low end, and Advito suggesting rates could increase by up to 4 percent on the high end.
Frissora noted varying degrees of supplier pricing power, commensurate with the size of the customer. "What we're finding is that in the very competitive top 50 accounts, pricing pressure continues to be high," he said. For midrange and small-range accounts, Frissora said, "There are more opportunities for pricing growth."
Avis Budget's Nelson agreed, revealing a focus on new account wins in the small-business segment, "which tends to have a higher average pricing than other commercial segments."
When it comes to large accounts, however, rental executives said it's all about maintaining market share, which leaves fewer opportunities for substantial price increases. Nelson said Avis Budget has maintained account retention "well over 99 percent." Noting Hertz's goal to maintain its 99.3 percent corporate client retention rate, Frissora said, "I think the competitors have all settled on market share numbers that they're at right now. I don't think anybody in the industry is looking to cut price."
Profits Surpass 2009 Third Quarter
Hertz reported third-quarter net income of $156.6 million, compared with $64.5 million a year earlier, while Avis Budget reported a $90 million net income for the quarter, up from the $57 million net income posted for the same period in 2009.
Less of a player in the corporate market, Dollar Thrifty Automotive Group reported $49.2 million in net income for the three months ending Sept. 30, up from $30.1 million in the third quarter of 2009.
Dollar Thrifty rental revenue grew 1.6 percent year over year, thanks primarily to a 1.4 percent increase in average transaction days, president and CEO Scott Thompson said, adding that the company is "pleased with our forward bookings" and expects rental revenue to grow in the fourth quarter by between 2 percent and 4 percent year over year.
M&A Still In Play
While Dollar Thrifty shareholders on Sept. 30 rejected Hertz's acquisition offer, Avis Budget Group execs on Thursday said they are awaiting antitrust clearance from the Federal Trade Commission before proceeding with plans to pursue a deal with Dollar Thrifty.
"Dollar Thrifty represents a substantial growth opportunity for our company, and our offer represents a premium valuation to the Dollar Thrifty shareholders," Avis Budget's Nelson said, adding that the FTC "has not provided us with a view as to whether, when or under what conditions they will approve our proposed transaction."
Though DTAG said its record net income was negatively impacted by $11.9 million in expenses related to the rejected deal with Hertz, executives shied away from addressing merger and acquisition activity during its earnings call on Tuesday. Thompson addressed a shareholder question on the topic thusly: "We've been a stand-alone company for 60 years," he said. "We were a stand-alone company this time last year when we received an unsolicited offer. So, that unsolicited offer failed, and during that period we stayed focused on operating the business, I think, as evidenced by the numbers we produced. What I would tell you is we never got unfocused on being a stand-alone company. That's always been the strategy, but, at the same time, we certainly have equity interest and we certainly understand our fiduciary duty to our shareholders to maximize shareholder value. And if we see a strategic alternative that we think is in the best interest of the shareholders, we certainly will entertain it and work on it diligently."