Like hotels and airlines, car rental firms this quarter are reporting improvements in corporate volumes. Unlike corporate hotel ratesand airfares, however, corporate car rental rates likely won't start to increase versus year-earlier levels before 2011, according to Avis Budget and Hertz executives.
Volume recovery is evident, at least among the largest rental clients. Hertz CEO Mark Frissora on Wednesday said the company's "top 25 accounts" are producing volumes that are up "20 to 25 percent" versus last year. According to company information, total on-airport commercial transaction days increased 14.3 percent during the second quarter. Frissora noted that business travel volume currently "is still about 15 to 20 percent off '07 levels. It is one of the big opportunities for us as it ramps up."
When asked if corporate volumes would continue to increase by double-digit percentages, Frissora said, "Absolutely, that will continue into the fourth quarter. Business travel sequentially every single month has strengthened, and we haven't tapped out on that yet."
At Avis Budget, "We saw positive volume growth for our largest customer group, the $1 million-plus accounts," said CEO Ron Nelson, speaking Thursday to analysts. He noted that midweek commercial business "continues to recover."
But overall, Avis Budget's total commercial volume in the second quarter retreated another 3 percent, a smaller decline than the 8 percent drop in leisure volume. When asked why commercial volumes still were falling--though slower than in previous quarters--as many other business travel suppliers reported growth, Nelson said Avis Budget includes in such measurements government business, which the company recently "moved away from ... because it just wasn't that profitable. Our government business was down 30 or 40 percent in the quarter." He also cited a "very tight fleet during the quarter, so there probably was a little bit of commercial volume that we could get; to me, that is opportunity in the back half of the year."
Prices 'Should' Increase In 2011, But 'Difficult' To Predict
Despite recovery in corporate demand, both Frissora and Nelson cited competitive pressures for the lack of pricing power.
"There are three of us [including Enterprise, which owns the National and Alamo brands] actively competing for commercial business, and procurement managers still are very focused on reducing costs," Nelson said, who added that Avis Budget's commercial pricing in the second quarter was "flat." The "large, $1 million-plus accounts just aren't getting very significant price increases, if any."
Hertz's Frissora detailed how commercial pricing in April fell 3.5 percent year over year and improved each month through July, when it was down 0.5 percent. "We have competitors that have been very aggressive in trying to get corporate business, and we have not given up any market share," Frissora explained. "Whether it be a General Electric or an IBM, big accounts that have airport market share are ripe for competitors to go after if they are trying to gain share. We have about 45 percent-plus share among the Fortune500 companies, and that is share we have had to defend. Pricing should start to improve, certainly going into next year, but that is very difficult to predict when you are negotiating 200 contracts every month."
"We'll get down to flat [versus last year], it is hopeful, some time in the fourth quarter, and start increasing prices," he continued. "But pricing becomes more important in a tough economy. Whether or not we get pricing increases next year, we will try to push it. We have competent competitors that continue to price below market to gain share. I cannot control them, so I have to respond accordingly to keep our share."
Both Avis Budget and Hertz claimed corporate account retention rates above 99 percent.
Both also highlighted growth in the small-business segment. Avis Budget's "increased focus on the attractive small-business market has been paying dividends by driving meaningful dollar gains," said Nelson. The second quarter marked "the fourth consecutive quarter we are up in this segment."
At Hertz, small-business account volumes "were flat about a quarter ago and now they are up 6 to 7 percent," Frissora said.
Pursuing Dollar Thrifty
Both Avis Budgetand Hertzreported higher second-quarter net income than a year earlier, and both continue to jockey for position in the race to acquire Dollar Thrifty Automotive Group, which posted second-quarter net income of $42.3 million, up from $12.4 million a year earlier.
Hertz appears to be in the driver seat, having executed a definitive merger agreement in April. On Monday, the company noted that its proposal "won regulatory approval from the Canadian Competition Bureau" and on Wednesday Frissora said Hertz is "pleased" with the pace of the review by the U.S. Federal Trade Commission. Hertz expects to complete the merger "in the near future."
Avis late last month outlined its bid, insisting its offer is "superior" to Hertz's.
In a letter sent Tuesday to Nelson, Dollar Thrifty CEO Scott Thompson wrote that the company agrees that Avis Budget's bid "is more favorable, from a financial point of view, to our stockholders than the Hertz merger." However, he added that "Avis Budget's unwillingness to provide a reverse termination fee, coupled with your disinclination to provide analytical data supporting your antitrust position, leaves us incapable" of assessing the timeliness or certainty of the proposal. "Higher price cannot compensate for a deficiency in deal certainty," he concluded. Nevertheless, Thompson told Nelson that Dollar Thrifty would "consider any modifications you may wish to make to your proposal."
Dollar Thrifty shareholders on Sept. 16 are scheduled to vote on the Hertz merger agreement.