Interview: Avis Budget's Thomas Gartland

Avis Budget CEO Ronald Nelson on Wednesday during the company's second-quarter earnings call claimed "some early returns" from a "more aggressive stance in our contract negotiations" with corporate clients. Commercial pricing for the June quarter still was down year over, but by less than one percentage point. "Given the length of the commercial selling cycle, this initiative is going to take time, but we're not going to be satisfied until our pricing on renewal starts to rise," Nelson said.

Perhaps another indication of where rate winds are blowing, Hertz recently reported that commercial pricing for the June quarter increased nearly 2 percent from the same period last year.

Meanwhile, a softening used car market has raised the industry's cost of capital and pressured rental car firms. During an interview last month with BTN executive editor Jay Boehmer, Avis Budget Group president of North America Thomas Gartland spoke at length about the Manheim Index, a key industry measure of wholesale used vehicle values which peaked in 2012 but fell in every month of 2013 from prior-year periods. It was down 3 percent in June. Gartland discussed how that has changed the company's negotiating stance with commercial clients, why client retention still matters and the outlook for recently acquired Zipcar. An edited transcript follows.

Are you still seeing success in terms of rate increases in corporate contracts?

Here's the issue: Over the last three years—2010, 2011 and 2012—commercial clients in our industry benefitted from the residual value of fleet as we disposed of remarketed fleet back into the marketplace. What literally happened in our industry, and the Avis Budget business, is that our commercial pricing declined in 2010, 2011 and again in 2012 about 2 percent annually. So, in the course of a three-year period, 6 percent total. This is renewal pricing. Typically, our industry contracts for a two- to three-year period with a commercial client. As residual values were at an all-time industry high, and the car rental industry as a whole was significantly making more money as they remarketed used vehicles back into the market, some of that was given back in terms of commercial pricing as the industry focused on either retaining existing commercial customers or gaining new customers. Well, that has all changed. That began to change in the back half of 2012, and has significantly changed in the first half of 2013.

For the first quarter, executives said that in March six out of 10 commercial renewals were seeing rates flat or increasing. Have you built on that success?

We have historically had commercial retention in the 99-plus percent range, which I think speaks a lot for our brand. We have worked with our selling organization and explained to them the P&L ramifications of residual values and depreciating cost of fleet, and said we need to now move into getting back some of the pricing that we've given away over the last three years. The six out of 10 is either at a renewal of flat [pricing]—in which we've deemed the pricing we have with a client is OK—or at an increase. Six out of 10 is a good number, and that will move up. At the end of the day a 1 percent to 2 percent price increase on a commercial contract is pennies. When you think of the value of that employee to the client, not only the remuneration, but also their productivity—giving them counter bypass service, putting them in the right car that has navigation if they want it, has EZ-pass to allow them to be productive—it's really about how we can make the commercial client successful.

We always hear rental car companies talk about very high client retention rates on earnings calls. Will we stop hearing about the focus on that? Are there any new metrics you'll focus on to show the success of the commercial business?

Analysts and investors are interested in the retention rate because the business that's under contract with commercial clients for us is about 25 percent of the [total] business. If there's not some huge interruption in the marketplace through a huge disaster like we saw on 9/11, you know 25 percent of the volume will continue, and it's locked in for a two-to-three-year period. There's other volume that's also under contract that we really never talk about: that is our airline partners, our travel partners, association partners and other business partners, where we're under contract and through their sites they're marketing to the end-user consumers. Those partnerships are equally as important to investors, because for the same two-to-three-year period, and to the extent that there's not some interruption in travel, you know you're going to have the share of the market of that period of time. That's a metric we should probably talk about more with investors. Retention is important because it talks about the success of your selling, your service support organization and your overall service proposition. Whether it's 99.9 percent or 99.8 percent or whatever it's going to be, it speaks to the success. That's a metric we should never lose track of, irrespective of what's happening in the price of fleet.

Regarding Zipcar, how do you see car sharing—whether it's the technology or the business model—relating to the core commercial rental business?

First of all, the acquisition of Zipcar was a strategic acquisition. It allowed us to move into the global leader in car-sharing overnight. It's a tremendous acquisition for our company. Zipcar is a separate business model, and we've left it separate and will continue to run it separate. It's a different business model, with a membership model and a different service proposition. With that said, we've concentrated in the first 90 days on focusing on meeting unmet demand. Zipcar was capital-constrained, and we had the ability to increase fleet to meet the member demand for hourly or daily rental. Their utilization curve was all weekends. That is a different utilization curve than for commercial volume, which is Sunday through Thursday. The marriage of those two is very beneficial if you can solve for fleet sharing. So we have been focusing on fleet sharing between Avis Budget Group and Zipcar. Zipcar's fleet between the time of the acquisition and as we sit today is up 28 percent. Also, we're bringing Zipcar for members into more airports and expanding Zipcar into more cities in the United States.

Are there unique commercial opportunities with car sharing?

The next opportunity is to look at the business customer that wants to have a car-sharing model on their campus. Zipcar did have a Z-to-B model and really it's a technology model that allows the technology to work on any campus location. Many have expressed that interest.

What about some of the benefits available to Zipcar members? Can you extend to the Avis Budget renter things like hourly rental or the ability to pick up vehicles on the street as opposed to a specific rental location?

Those are all strategic, visionary opportunities for us. We've got a list of items, prioritized. For right now, the most important thing is to meet all the membership demand possible by sharing fleet, then the opportunity to use technology in other ways is in the future.