This blog was updated on Nov. 20 to reflect changes made in the acquisition completion announcement.
The government has spoken. And yes, the Federal Trade Commission had serious issues regarding the anticompetitive effects of Hertz’s proposed acquisition of Dollar Thrifty. So much so that Hertz will not only divest its Advantage brand (we knew that) but also give up the right to operate 26 Dollar Thrifty on-airport locations. Of those 29, 13 will be turned over to FSNA and Macquarie, the Advantage buyers. In the Consent Order issued by the FTC yesterday, Hertz was directed to divest 13 more Dollar Thrifty airport stores new buyers, either FSNA/Macquarie or someone else.
The FTC will not yet disclose the airport locations that Hertz must divest, though the rumors are swirling. Those locations won’t be officially revealed until after the Hertz acquisition of Dollar Thrifty is finalized. The FTC also released a list of the 72 airports in play; you can bet some of the biggest airports in the country will be on the list of divestitures.
Still, the mother ship won’t have to give up any of its counters. The market share divestiture, though not insignificant, is much smaller than if a Hertz store had to go, as Hertz’s airport market share (about 26%) more than doubles Dollar Thrifty’s shares combined. Wall Street sources estimate the total revenue impact of losing Advantage and the Dollar Thrifty stores to be about $400 million, though the pre-tax earnings hit should be about $40 million. That’s a drop in the bucket compared to the upside. Hertz can live with that.
So who gets those vacated airport desks? The land rush is on. However, you can count on Elmo’s fingers the companies that are ready to step in. Those players are FSNA, Fox, Payless and Sixt. FSNA (owners of the U-Save brand) will already have its hands full trying to make Advantage work. Payless has a few corporate stores but it would probably take a very motivated franchisee to go after some of those locations. Fox will be there. The discount rental company staked a claim in Florida this year and is poised to expand further.
And then there is Sixt, the fourth largest European brand that has opened seven U.S. airport locations within a year. When speaking about American competition, Hertz lumps Sixt in with the “deep value” segment. Don’t confuse Sixt’s low rates today with its potential to move. From its corporate muscle in Germany and global ties to airlines, travel agencies and distribution systems, to its new American fleet on down to its counter agents in designer uniforms, Sixt will be a player.
We should have some clarity within six months on 10 of those additional 13 airport concession agreements and within 90 days of that for the other three, according to Hertz's agreement with the FTC. Whatever happens, those counters will not remain empty, you can make book on that.
So this deal dragged on for more than two years in part because the FTC needed to vet its impact on competition. Ultimately, then, what will happen to rates?
By acquiring Dollar Thrifty, Hertz will have a lot less pressure to discount and can avoid resorting to Priceline and other opaque channels. Similar to Avis and National, Hertz can operate a premium brand and let the discount business trickle down to other brands in the stable.
But on the lower end of the spectrum, the FTC will get what it asked for. Advantage is moving into new locations and the rest of those empty counters will most likely be taken up by discount brands – brands already looking for market share in other markets.
There have been some major mergers and acquisitions in car rental in the last 20 years (the Cendant deals and Enterprise’s acquisition of Vanguard), yet none of this magnitude and that rearranged the chess pieces in such a dramatic fashion. It may take two years to see how it all plays out and which companies are successful in their new shoes. But after that, expect the U.S. airport car rental market to be locked down for years to come.