All three public companies — Hertz Global Holdings, Avis Budget Group and Dollar Thrifty Automotive Group — reported record results in the third quarter of 2011. Why? In their conference calls last week, they talked about volume increases, cost-slashing initiatives, process improvements and disciplined fleet management. These efforts played a factor, but in Q3, it was all about the used-car market.
And what a market it was — “was” being the operative word. We have essentially worked through the extraordinary supply disruptions brought on by the Japan earthquake and tsunami, and we may never see wholesale prices like that again.
(For a more in-depth look at the wholesale market, click here.)
The effects cannot be underestimated as reflected in fleet costs, depreciation expense and gains on vehicle sales. At Dollar Thrifty, vehicle depreciation expense in the quarter was 26 percent lower than in the third quarter of 2010, while fleet cost per vehicle in the quarter declined to $186 per month compared to $262 the previous year’s quarter.
In the third quarter of 2010, Dollar Thrifty sold 15,800 vehicles for an average return of $632 per vehicle. This year, the company sold almost as many vehicles but for an average gain of $1,125 per vehicle. That’s close to twice as much as the previous year.
Hertz said it booked a $40 million “tsunami benefit” in 2011, while Avis Budget reported a projected 20 percent gain in fleet costs for the full year and a projected net benefit north of $140 million.
These gains, however, were mitigated by a competitive pricing environment. The flip side to the crisis in Japan was that the industry was forced to hold fleet in the second quarter to protect against supply disruptions in order to fulfill summer demand. Ultimately, the canceled orders turned out to be less severe, or just late. The industry ended up carrying excess fleet into the third quarter, which negatively impacted car rental rates.
Hertz said it experienced a 60-day delay on fleet that was supposed to arrive in June, and it reported having trouble getting specialty vehicles such as minivans and Cadillac Escalades. This lack of specialty fleet negatively impacted rates and thus revenue per day (RPD), and even cut a couple pennies on earnings per share. The vehicles finally came in, but too late to impact the summer season.
In the midst of the high season in August, Hurricane Irene cost Hertz $9 million in rental cancellations, the company said.
Hertz said it continues to feel competitive price pressure on-airport and reported its corporate contract rates were down 3 percent in the quarter.
In Dollar Thrifty’s case, revenue per day decreased 1.7 percent, though that’s trending favorably as the company reported it had worked through the excess fleet issues from the summer. This seems to be the trend.
Hertz tightened its fleet this past month and said it was able to up prices on leisure rental transactions. With that, advanced reservations for November and December indicate strong seasonal demand.
Avis noted that longer length of rental (LOR) affected pricing. The company said domestic pricing continued to be down year-over-year in October, but a recent price increase seems to have stuck.
All three companies reported increased LOR. Improved utilization and less cost to churn the vehicles are good things.[PAGEBREAK]
No European Vacation
With the debt crisis in Europe still looming, Avis picked a fine time to buy Avis Europe didn’t it? Actually, Avis Europe is looking at third quarter pretax income growth of 20 percent. Rental volumes shrunk moving through the third quarter as leisure demand softened, though the company does not expect further erosion in European rental volume in the fourth quarter.
Independent of the present turn of events, Avis highlighted the growth potential in its tie up with Avis Europe: the company will take advantage of healthy international air travel growth; it now has a foothold in long-term growth markets such as China, India and Russia; global corporate contracting and international inbound will grow; Budget is under penetrated in Europe and poised for growth.
Avis expects $30 million in cost savings attributable to the usual acquisition synergies (back-office consolidation, combined procurement, etc.) in six months to a year. Interestingly, almost 80 percent of Avis Europe's 2010 pretax income came from licensees, with nearly 50 percent of that coming from outside Europe. A lot of those companies provide long-term leasing.
Hertz said the debt crisis in Europe — where 10 percent of its revenues are tied up — weakened consumer demand there and dragged down operating results. The company said the global economy, and Europe in particular, remain a challenge, though Hertz expects European pricing to improve, along with lowered operating expenses.
Dollar Thrifty’s inbound business from continental Europe “continues to be solid.”
Hertz said it gained momentum in the quarter in its off-airport channels (a seemingly perennial focus for the premium airport-based brand). Insurance replacement volume was up more than 21 percent compared to last year and the company added 54 net new off-airport locations for a total off-airport volume growth of 14.8 percent.
Hertz added a net 29 global Advantage locations. The discount brand, now operating 75 locations worldwide, experienced a 30.9 percent increase in volume in the quarter.
These trends, however, put downward pressure on revenue per day, which dipped 5.9 percent in the quarter. But this isn’t necessarily a bad thing, Hertz repeated, and is inherent in its vehicle mix shift strategy. Any growth in off-airport or discount leisure business will drive lower RPD, though lower fleet costs (based on more economical vehicles and longer depreciation periods) combined with longer transaction lengths more than offset the lower prices.
Having closed the Donlen deal on Sept. 1, Hertz reported one month of Donlen revenues going to its bottom line.
In the U.S., as part of its “Asset Light Strategy,” Hertz plans to add 150 kiosks to airport and off-airport locations in the fourth quarter, in addition to the 50 kiosks already installed.
On questioning regarding franchising, Mark Frissora, Hertz’s chairman and CEO, said Hertz had “irons in the fire” coming to fruition for 2012 in three European countries as well as the U.S.
Interestingly, Frissora mentioned that Hertz has “a couple of other acquisitions in the works right now that should be announced in the fourth quarter.”[PAGEBREAK]
Avis now has a name for its “virtual car rental” initiative: Avis On Location. Whether you call it car sharing or call it “automated car rental,” Avis On Location’s focus is the corporate campus. Some 25,000 cars will operate with the technology by the middle of next year. Among other things, Avis is using the in-car technology to collect precise fuel data. (Imagine being able to measure fuel tank usage accurately and charging the customer accordingly?)
Avis Budget’s local market focus continues to be on dual-branding of vehicle rental centers, offering rentals of both Avis and Budget cars as well as Budget trucks. The company added 98 co-branded stores in the quarter, bringing its co-branded locations to more than 400. Local market operations now have their own dedicated fleets, which airport locations can’t pilfer when they need cars. Avis said it grew its local market revenues to $750 million to $800 million from almost nothing three years ago.
In terms of insurance replacement, Avis said it is happy to let the other guys duke it out.
Avis’ small business rental volumes are up 14 percent year-to-date, driven by Budget’s growth, while international inbound rental revenue is up 18 percent.
Now, 30 percent of Avis Budget customers receive online rental receipts and mobile device reservations “are growing substantially.”
Fleet costs can’t possibly be as good as they were for most of 2011, creating some tough comps next year. You can bet you’ll be hearing echoes of the tsunami effect for quarters to come.
Dollar Thrifty expects fleet costs for 2012 to come in at $215 to $225 per vehicle per month, adding an extra $40 to $45 million in fleet costs versus 2011.
Hertz expects monthly depreciation per U.S. rental vehicle to increase 2 to 3.5 percent in 2012.
The outlook on volume looks positive, even in light of feeble enplanement growth. However, pricing will remain tough in the near term. Dollar Thrifty expects “slight downward pressure on rate per day” in the fourth quarter. Avis said pricing will remain flat in the fourth quarter. Commercial demand has slowed but will hold stable.
On questioning, Frissora of Hertz said that while pricing would improve moving out of the third quarter, he expects it to be “a little negative.” He said aggressive pricing is “being led by one competitor in particular and people have to match that competitor.”
In macro, Frissora was cautiously optimistic that, while the economy was not growing as fast as we’d like, “fears of a double-dip recession are waning.”
And RACs are confident their fleets are rightsized to demand. Expect high utilization and longer rental lengths to continue.
All three companies are confident in a continued strong used-car market in 2012, which will keep values high. Dollar Thrifty is basing depreciation calculations on a Manheim index “in the low 120s.” On the front end, the company does not expect cap costs “to meaningfully increase on a year-over-year basis on the new cars that will be coming into the fleet.”
Dollar Thrifty expects revenue growth of 1 to 2 percent for the fourth quarter, with full-year 2011 rental revenues up about 1 percent. The company expects earnings (corporate adjusted EBITDA) to come in at $270 to $290 million for the full year 2011.
And what, finally, of the Hertz/Dollar Thrifty merger? On that point, all companies were essentially mute, though Dollar Thrifty reported a decrease in merger-related expenses that helped its bottom line. For my thoughts on the possibility of a new merger deal, read my next blog (insert smiley face here).