In the second quarter, we all found out how Mother Nature can affect not only profits of multinational companies but change the way an industry does business, at least temporarily.
Once again, this is a compendium of nuggets and analysis pulled from the public companies' second quarter earnings calls and is not meant to be a complete financial overview of any company.
Used Car Market
The aftereffects of the Japanese tsunami and earthquake in March drove supply disruptions and thus once-in-a-lifetime aberrations in used car prices. Car rental companies benefitted with residual values at peak historic levels and lower depreciation expense.
Hertz's monthly depreciation dipped nearly 26 percent-$76 per unit-year-over-year to $220 per unit in the second quarter. Avis Budget Group now estimates its fleet costs to be down 18 to 20 percent per-unit for 2011 and 8 to 11 percent in the second half.
Dollar Thrifty experienced a decrease in base depreciation rate per vehicle as well, though total vehicle depreciation expense for the quarter increased 5 percent year over year, because it sold 10,500 fewer vehicles than the year previous.
The used car market is driven by macro conditions that for the most part are out of the control of the car rental companies. But RACs are managing this expectation. Avis said it doesn't need residual values to remain at record levels to earn attractive margins.
Hertz made the point that it is controlling its own destiny, at least two-thirds of it. Hertz said that two-thirds of its gains in the disposition of vehicles were due to its own improvements, such as pumping up its direct-to-consumer Rent2Buy online sales channel.
The wholesale market is normalizing, but the bottom won't drop out. The used car market, unlike the housing market, is not based on speculation. It's based on supply and tangible demand, and supply won't catch up to demand until at least 2013 when the effects of the lack of supply of off-lease vehicles work its way through the market.
But while the Japan crisis pushed the wholesale market to unprecedented levels on lack of supply, it ended up depressing car rental rates for the quarter. Supply disruptions forced RACs to hold onto existing fleet to mitigate the possibility of canceled orders and being caught under-fleeted for the summer season. For the most part, the supply shortages failed to materialize, but it took a while to be able to de-fleet to match demand. Utilization was soft.
As a result, Hertz said that price increases it implemented on both June 1 and July 1 were not sustainable. Avis Budget reported a 2 percent decline in domestic pricing due to over-fleeting.
With the level of over-fleeting in the quarter, Scott Thompson of Dollar Thrifty said the industry showed pricing discipline and he was surprised that pricing wasn't even lower than it actually was.
RACs were forced to hold fleet when they would've sold, but when they did, they made really good money.
Volume increased across the board, but the comp was against a second quarter last year in a world just barely out of the recession.
In terms of a potential merger, Dollar Thrifty said it is working with both Avis Budget and Dollar Thrifty to support their efforts with the FTC, however no deal, written or verbal, is in place with either company.
Hertz only said that the next milestone is to obtain FTC approval. Avis said while it continues to "actively monitor the Dollar Thrifty situation," its "focus remains on planning the integration and completing the acquisition of Avis Europe."
But in a moment of candor (calculated candor, as it was part of a prepared statement) Scott Thompson of Dollar Thrifty expressed frustration with the merger process, calling the current state of uncertainty unacceptable. "The company is cash rich and underleveraged and needs to move forward in a way that enhances shareholder value," he stated. "We have been working on unsolicited merger issues since 2008, and they are expensive and distracting." On questioning, Thompson reiterated the frustration level, though he said the company has not drawn "a line in the sand" with regards to a deal and continues to be "open to alternatives."
I imagine that working with the FTC, a government entity that takes its time and asks the questions but is not necessarily forthcoming with answers, must be very frustrating.
Where the Growth Is
It's important for public companies to show investors that they're growing in areas they have less penetration, but market potential. In car rental, for Avis and Hertz, it's in the local market.
Avis co-branded 200 local market stores in the first half and established a separately managed, dedicated fleet. It expanded its relationship with Sears and partnered with MGM in Las Vegas.
Hertz reported increases in off-airport revenue (now 26 percent of total U.S. rental car revenue) and expects continued growth through 2011.
Hertz opened 71 net new locations in the second quarter, bringing the total to 2,034 locations as of June 30.
Avis' Small Business initiative resulted in 10,000 new account activations (!!) with more room to grow, especially with the Budget brand.[PAGEBREAK]
I'm still very geeked out on the potential for technology to change the way we rent cars. It's being driven by upstarts in the car sharing space and seeping into traditional car rental.
Avis says it has about 5,000 vehicles (primarily in the Northwest) testing its "virtual car" technology, which allows the rental process to happen via smartphone. The system decentralizes the rental into unmanned areas, like the car sharing model. While car sharing is largely urban leisure, Avis sees opportunity for incremental business with its corporate customers, especially traveling to and from airports.
Hertz rebranded its car sharing division from Hertz Connect to Hertz On Demand to reflect a newer, more immediate and flexible rental model. Mark Frissora of Hertz said that Hertz's goal in four to five years is to put the same technology in all of its fleet-that's 330,000 vehicles-to be able to turn any car on or off as a regular rental or hourly rental. It's car rental anytime, anywhere and for any length of time, Frissora said.
I'll reserve judgment on that timeline for rollout. But you have to appreciate the audacity of the statement and the vision.
Both initiatives have enormous potential-let's see the initial results!
Both Dollar Thrifty and Hertz are actively franchising. Dollar Thrifty granted an additional 10 franchises during the quarter and total of 16 franchises in 13 new markets through June.
Hertz has a number of franchise agreements pending that it will announce next quarter. Frissora said the company expects to exceed $100 million in revenues from franchising this year.
This mindset by both companies seems to indicate that any merger deal would not result in a wholesale buyout of existing franchises of either company. I'm sure the FTC wouldn't be too keen on that either.
Vehicle sales gains will moderate in the third quarter, by virtue of the fact that they couldn't get much higher than they did in the second quarter. But while the used car market is coming off its high, RACS are expecting a favorable used car market through 2011, softening slightly for 2012. Dollar Thrifty actually pegged an assumed Manheim Index of 123 for long-term planning and residual value assumptions.
Dollar Thrifty said capitalized costs per vehicle look about the same for 2012 versus 2011. The company forecasts 2011 rental revenues to be about equal to 2010 revenues, with revenue growth offset by competition on rates. Rental days should grow in 2012. The company lowered its 2011 fleet cost target to $215 to $225 per vehicle per month.
Dollar Thrifty does not have significant contracted corporate business is thus subjected to greater short-term rate swings. The company said rates are looking up for the third quarter but still slightly negative to last year.
Avis likes the travel economy compared to the economy at large. Avis sees increases in air travel and travel demand growing in the second half of 2011 over 2010. Leisure business is outpacing corporate. Avis sees strong travel volumes for the rest of the summer and relatively stable pricing.
Avis is keeping its risk/program mix about the same for 2012 and anticipates that model year 2012 program cars will wind up costing less than 2011.
Hertz sees a strong September and overall demand for the rest of the year, with mid-single digit growth in commercial travel against tough comps year-over-year.
Hertz raised its full-year earnings guidance by about 7 percent. "Net-net, we're cautiously optimistic about the second half of the year," said Frissora.
- Avis is excited about the possibilities for synergies in regards to its pending purchase of Avis Europe. Now the combined company can go after business from multinational corporations and global airlines, and can grow Budget in Europe as well as both brands in emerging European car rental markets.
- Advantage's overall revenue was up 69 percent and 43 percent domestically in the second quarter on a 50 percent increase in volume. Hertz opened six new U.S. and nine new European locations in the second quarter. There are now a total of 68 Advantage locations and 14 affiliates worldwide.
- The flurry of positivity over prepaid rentals seems to have died down. Only Avis made mention on questioning, saying it is still growing every month.
- Both Hertz and Avis Budget put extra money into advertising in the quarter.
- Speaking of Mother Nature, Hertz reported difficult quarterly car rental revenue comps in Europe, as last year's volcanic ash cloud drove thousands out of airplanes and into rentals.
- More Mother Nature: Avis Budget incurred nearly $7 million of hail damage in the quarter.