The first quarter conference calls for the public car rental companies are in the books. Continuing what is now tradition here are my key takeaways on the car rental market, taking the data, statements and outlook from Hertz, Avis Budget Group and Dollar Thrifty Automotive Group in aggregate. I’ll admit, I get way too geeked out on this stuff, and spend a little too much time on these analyses than my job warrants — but make use of what you will.
The used car market is stronger than expected.
Everyone expected the used car market to simmer down as inventory levels returned from last year’s disasters, though the market didn’t cool, it only went from scalding to a nice cup of hot tea. Wholesale prices are being propped up by tight OEM production levels, low off-lease supply and greater demand brought on by an improving economy.
That’s excellent news for car rental, for now. The three public companies reported stronger than expected residual values, and depreciation per vehicle that actually decreased, rather than increased as originally projected.
Avis Budget Group reported a 21% decline in per unit fleet costs on an easy comparison to last year. Avis expects to see “modest and manageable increases” to monthly holding costs for program cars and the purchase prices for risk cars. Current fleet costs at Avis are more in line with the pre-Recession days prior to 2007.
At Hertz, depreciation per-unit, per-month improved $32 compared to last year’s first quarter.
Dollar Thrifty reported that fleet costs declined to an amazing $136 per vehicle per month from $251 in the first quarter of 2011. All three companies have revised residual value assumptions and fleet costs to reflect this positive trend.
Hertz’s fleet is now 84% risk. Avis’s risk fleet is close to 60% and might go higher. That’s on the low end these days for car rental companies; however, Nelson admits to being a little more conservative on buying risk, as he referenced the fourth quarter of 2008, “when we couldn’t sell a risk car.”
Rental volume is good; leisure is outpacing corporate.
On another high note, U.S. rental car volume is healthy. Hertz saw a 10% total increase in volume in the quarter, with greater increases off-airport and in leisure rentals. Hertz pointed out that American Express data shows that U.S. consumers are planning to spend 11% more on vacations in 2012 compared to last year.
Avis saw a 7% increase in total volume in North America. At Avis, commercial volume in the quarter was up 3%, with growth in corporate accounts, small business and inbound commercial rentals partially offset by a decline in insurance replacement.
All three companies increased fleet in the quarter, though each made sure to point out that those increases stayed under demand, which squeezed utilization even higher.
Corporate competition and strong residuals are putting pressure on rates.
Pricing hasn’t fared as well, with a number of contributing factors. Commercial pricing is as competitive as ever. At Hertz, U.S. airport corporate pricing fell 3.6% year over year; at Avis commercial pricing fell 2%, with a 3% total decline in pricing in North America. This is a continuing trend from the previous quarter.
“All three of us — Avis National and Hertz — are competing very fervently for corporate accounts, and everyone continues to be very aggressive with our pricing,” said Ron Nelson on the Avis call. Nelson also brought up that procurement departments are taking an increasingly larger role in negotiating car rental rates and travel contracts, which tend to drive rates down.
High residual values also tend to push prices down, especially in the “deep-value segment” (as Hertz calls it). Advantage pricing has suffered, and Mark Frissora of Hertz called out the regional discount brands that are playing hard on price because the strong used car market is providing a profit cushion for them. Frissora pointed out the cyclical nature of these things — when residuals normalize, prices will rise. But when that happens, will the discount players still be able to compete? “We feel the long-term profitability prospects of the whole rental market are strong, and will continue to be strong, because OEMs have rationalized their capacity, and we have a much better OEM universe,” Frissora said on questioning.[PAGEBREAK]
Avis Budget, however, hasn’t seen the same aggressive pricing from the Tier Three (Avis’ term) players. Avis reported improved leisure pricing toward the end of April, and Nelson said that Enterprise led a price increase that Budget benefitted from — noting that Enterprise and Budget are not in the same discount arena as Advantage, Payless and Fox.
Avis admitted it was somewhat over-fleeted in January and February, as mild winter temperatures put a damper on the ski season, led to fewer insurance replacement rentals and tempered an exodus to sunny Florida to escape the cold. This led to a 5% decline in leisure pricing. That was comfortably offset by a 13% spike in leisure volume in the quarter, driven by double-digit growth in international inbound business. Pricing improved moving through the quarter, Avis reported.
As expected with pricing pressure, revenue per day took a hit. Dollar Thrifty saw revenue per day decrease by 4.2% while revenue-per-unit, per-month declined marginally to $1,115 for the first quarter 2012 from $1,131 for the first quarter of 2011. At Hertz, total revenue per day declined 3.9% in the quarter.
The off-airport penetration continues.
What would a Hertz or Avis Budget conference call be without trumpeting off-airport expansion? Hertz opened 69 net new off-airport locations in the quarter while increasing off-airport revenue by 8.2% year over year, with growth in leisure and insurance replacement volumes and revenue.
Avis continues its local market co- and tri-branding initiative. The company ended the quarter with 520 combined stores, up more than 50 stores from year end.
Europe is still a headwind, but improving.
The economic situation in Europe is still difficult, but improving. Hertz closed “several European car and equipment rental locations” and reduced its workforce by 65 people. Travel demand in Europe appears to be stabilizing, with continued softness in the Mediterranean countries.
Avis is hot on launching Budget into the European value segment, which is primarily served by independent rental companies that represent 35% of the market. The company expects Budget penetration will mitigate the sustained headwind in Europe in the second quarter. “Our summer res build in Europe is off to a strong start, but it's still too early in the booking season to get excited,” Nelson said.
Elsewhere, Avis China is booming, having opened its 70th location, with 40 to 50 additional locations slated to open this year. Interestingly, Avis doesn’t see the Olympics as a great car rental opportunity, with London this summer no exception.
Who gets non-U.S. locations in an Advantage sale?
At the end of the prepared remarks, Frissora took a page from Steve Job’s playbook with the remark that Hertz has “agreed materially to terms” with an Advantage buyer. Even in light of a potential sale, Hertz has been beefing up Advantage; 40 locations opened globally in the past 12 months and expansion plans include new affiliate and franchise partners around the globe.
However, as the reason to divest in Advantage was to comply with the Federal Trade Commission’s mandates to smooth the way for a Dollar Thrifty acquisition in the U.S., what will become of the work Hertz has done internationally with Advantage? I’d bet they’re not part of the deal. We’ll see.
What wasn’t said on the calls?
Avis Budget did not expound on its virtual car program, while Hertz had nothing to say regarding its car-sharing initiatives on this quarterly call. And not unexpectedly, Dollar Thrifty was moot on any takeover talk, except to say, “We continue to execute on our standalone plan.
Bottom line: It was a very good quarter for the public car rental companies.
Revenue per unit, utilization, rates, fleet size, residual values, length of rental, volume and demand all affect each other, and it’s dangerous to judge the market based on one of those factors. Demand increases and rates may suffer as companies compete for those renters. When fleet size is small, utilization is through the roof — but revenue might be left on the table. When length of rental increases, it often negatively impacts RPD — but generating more total revenue. It’s a cyclical tug of war with all these factors.
If you want to wring your hands about pricing, go ahead, but revenues and bottom-line profits are very healthy, and these three companies have revised their revenue and profit estimates upward.
Eventually, residuals will normalize — most likely when post-recession leases enter the wholesale market in 2013. How would that normalization affect profits? Indeed, during the Hertz call, an analyst raised the idea that the industry “might be over-earning to some degree” because of the unusually strong used car market.
For the answer, look to the macro fundaments: Fleets are right-sized, the manufacturers are not overproducing and demand is steady. Right now, the industry is looking as good as it has in a long time.