Budget Files For Bankruptcy
To noone's surprise, given its years of losing money and growing debt, Budget Group filed for Chapter 11 bankruptcy protection on July 29. The filing will not affect the company's car and truck rental operations, and no closings of rental locations or reservation cancellations are anticipated, according to Budget spokesperson Kimberly Mulcahy.
With this latest development, three of the nation's seven major car rental brands now officially are ailing. The other two are National Car Rental and Alamo-Rent-A-Car, whose parent company, ANC Rental Corp., filed for Chapter 11 last November. The albatross around Budget's neck is $750 million worth of public debt. Mulcahy said the sale of the company, which analysts agree is the only way out for the firm, is contingent on "working with lenders and bond holders to address capitalization" of that debt.
In its SEC filing, Budget listed assets of $4.05 billion and debts of $4.33 billion. The company has been able to secure a commitment for $750 million of vehicle financing, enabling it to maintain the existing fleet and purchase new cars, as well as $100 million of debtor-in-possession financing, which provides additional credit for both fleet financing and working capital needed to maintain its daily operations.
Budget's fiscal difficulties stem mainly from overextending itself in costly acquisitions, a strategy pursued after its purchase by Sandy Miller, formerly a Budget franchisee, in the late 1990s. Another problem has been huge costs associated with building up a corporate network in Europe. Budget since has either disposed of or absorbed its acquisitions—the integration of Ryder Truck, the most ambitious purchase, has just been completed—and it has sold off most of its corporate locations in Europe to franchisees. The overall falloff in travel has exacerbated its woes.
The most likely purchaser of the distressed car rental firm is Cendant, which reportedly has offered more than $100 million for the company, plus assumption of the debt, although neither Budget nor Cendant would comment. Mulcahy noted, however, that Budget also is in discussions with other possible suitors, including an investor buyout group. She said an announcement is expected within the next few weeks.
Neil Abrams, president of Abrams Consulting Group in Purchase, N.Y., said that a Cendant acquisition represented the best value proposition. In addition to benefiting from the "tremendous resources" of the travel company giant—which, aside from the Avis Rent A Car brand and a large vehicle leasing business, owns numerous lodging, timeshare, real estate and travel technology brands—Budget would be a good complement to corporate-oriented Avis. Abrams pointed to its truck rental business, which Avis lacks, penetration of the local market and strength in the leisure segment.
Budget also would dovetail nicely with other Cendant brands. As a value-oriented brand, it would be a natural fit for possible synergies with Cendant's nine lodging brands, which are aimed at budget travelers. Both its rental cars and trucks could be brought into an alliance with Cendant's real estate subsidiaries, Abrams said.
Whatever the extent of Budget's problems and whomever buys the company, analysts said it was highly unlikely the brand would disappear. But one possible outcome of a Cendant acquisition would be a continual trend toward more consolidation of car rental brands at airport counters, said Jon LeSage, vice president of Abrams Travel Data Services in Long Beach, Calif.
As part of ANC's restructuring, National and Alamo have been doing just that at dozens of airports, sharing counter space, shuttle buses and the parking lot. Dollar Thrifty Automotive Group has been making noises about exploring this cost-saving option at certain airports.
LeSage expected Avis and Budget might do the same, despite possible difficulties due to the different makeup of the fleets. Avis' fleet is mainly supplied by General Motors, while Budget's primarily consists of Ford Motor Co. vehicles. More combining of brands at the airport could pose new challenges to industry leader Hertz, which, along with Avis, has been fighting the National-Alamo airport consolidations in a series of lawsuits.
The ultimate outcome of a Cendant purchase of Budget and one less independent player in the marketplace would be higher base corporate rates, said LeSage. As it is, with business travel down, the corporate sector is "brutal," he noted. Car rental firms are "getting a $35 negotiated rate for an intermediate car, compared with $50, at the regular rate, so the rates are lower, it's very competitive and it's expensive to service."
Despite the bankruptcies of Budget, National and Alamo, conditions actually seem to have improved overall in the industry, due to tighter fleets and higher rates.
Noting that Budget's core car rental operations essentially were sound, Mulcahy said rates are up 6 percent to 7 percent this summer, compared with a year ago. Transactions are down 18 percent to 20 percent, compared with the period before Sept. 11, but the fleet also is down 18 percent to 20 percent.
The best news came from Dollar Thrifty, which reported net income of $17.5 million for the second quarter, an improvement over the $12.4 million reported in 2Q01. Revenues for 2Q02 were $302.5 million, up 4.2 percent. Hertz reported a 2Q profit of $53 million, down from $59 million in 2Q01, although its parent, Ford Motor Co., stated business was "starting to recover due to the pickup in summer travel."
Cendant doesn't break out Avis from the vehicle leasing business and fuel-card services in its earning statements, but it reported "car rental revenues improved significantly in the second quarter, reflecting increases in pricing and marketshare." Revenues for its vehicle services division basically were flat compared to second quarter 2001—approximately $1.03 billion in both quarters—but the EBITDA of $123 million was up 10 percent from 2Q01.
EBITDA refers to earnings from continuing operations before non-program related interest, income taxes, non-program related depreciation and amortization, and minimum interest. Cendant didn't provide net income figures.