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Article Excerpt
In 2002, the stagnant economy, continuing decline in corporate travel, further tightening of travel budgets and ongoing drop in airline traffic over the prior year did the car rental industry no favors.
"It was a very tough year," said Chuck Fallon, executive vice president of revenue generation in sales and marketing for the Cendant Car Rental Group, which owns Avis and Budget. Industrywide, "fleets were tight, prices went up and it was a difficult operating environment. From a business-profit standpoint that's not a bad thing, but it's not a good thing from a customer satisfaction viewpoint."
Certainly, financially speaking there was a vast improvement over the prior year. The stronger firms, intent on cuffing costs wherever they could and exerting strict discipline over their fleets, did surprisingly well, bouncing back from the pit of 2001 with respectable profits. The Hertz Corp. reported $4.97 billion in revenue and reaped a net income of $144 million, compared with just $23 million in 2001. Net income reached a peak in 2000 of $358.4 million.
Avis lost money in 2001, but returned to profitability with net income of $51.6 million. Systemwide revenue was $2.5 billion. Dollar Thrifty Automotive Group, the only standalone publicly held U.S. car rental firm, reported $1.13 billion in revenue, up 7.9 percent from 2001. Dollar Thrifty's revenue figure does not include revenue from franchisees. Its net income was $46.8 million, up from $13.8 million in 2001 and more than half of the $78 million in net income reported in 2000.
On the down side, the three fiscally weak brands, which long have struggled to be profitable, even during the boom years of the late 1990s, were mired in bankruptcy proceedings. ANC Car Rental, which filed for Chapter 11 in late 2001, spent the year in an aggressive restructuring of its National Car Rental and Alamo brands. A cornerstone of that process was the consolidation of the two brands at the rental counter. So far, the company has established a shared rental counter, and shared shuttle bus at the airport, at 195 locations, realizing an annualized savings rate of $70 million to $100 million, according to ANC CEO William Plamondon. Four investor groups thus far have submitted bids to purchase the company, and Plamondon was hopeful a decision would be made within the next month or so.
Meanwhile, Budget Group filed for Chapter 11 bankruptcy protection in July. The company was rescued from its dire straits in November by Cendant, which purchased the ailing firm's U.S. operations for $109 million. As a value, leisure-oriented firm, Budget should prove to be a good complement to Avis, with its focus primarily on the premium, corporate market, according to analysts.
Budget's truck operations, which recently have been established as a separate division, also represent a new niche for Cendant. This February, Avis Europe, a separate, U.K.-based company that co-markets the Avis brand name, purchased Budget's EMEA operations.
Following Cendant's purchase of Budget, lust five companies now control 90 percent of the U.S. car rental business, according to Neil Abrams, president of Abrams International Consulting in Purchase, N.Y. In addition to Cendant and ANC, they are Ford Motor Co., which owns industry leader Hertz; Dollar Thrifty Automotive Group; and privately held Enterprise Rent-A-Car, which dominates the local replacement rental market.
There is no evidence, however, that consolidation of ownership of the major brands into just a handful of firms has been a detriment to the consumer, Abrams said. Instead, the impact has been smaller fleets, more stable rates and more focus on cutting operating costs, according to Jon LeSage, vice president and director of research at Long Beach, Calif.-based Abrams Travel Data Services. More efficiency in the back office is resulting in leaner organizations, he added.
For example, while Cendant management is committed to keeping the two brands separate and distinct, it has consolidated the sales efforts at Avis and Budget and begun an ambitious integration of the two brands' back-office systems and platforms, according to Fallon. For its part, Dollar Thrifty in December launched an initiative to consolidate its back-office systems, including fleet management, IT and corporate-level administration for its two brands. The Thrifty brand, which long has been operated mainly as a system of franchisees, will be transitioning to corporate ownership at many of its locations, as Dollar did several years ago.
Fleets on average are about one-third smaller than they were prior to Sept. 11, 2001, according to the April 2003 Car Rental Market Scan, a quarterly report issued by Abrams Travel Data Services. While purchasing cars has become easier due to low interest rates and numerous incentives by the manufacturers, weakness in the used-car market is making it difficult for car rental firms to dispose of their vehicles.
As a result, some firms are holding on to their cars longer. Whereas five years ago it was unusual for a rental car to have more than 12,000 to 15,000 miles, today some vehicles have accumulated 20,000 to 30,000 miles, Abrams said. At Payless Car Rental, for example, franchisees are keeping cars for a full two years, rather than trading them every nine to 12 months, which was customary before the economic downturn, said Payless president and COO Mike Harley. One cost-saving option some rental car companies are considering is purchasing used cars, Abrams said.
There were fears within the industry that the bankrupt companies would disrupt the market by cutting prices at the airport, but that did not happen, according to Abrams' Market Scan. Though airport rates have decreased, Abrams Travel Data attributed the trend to the fact that "leery business travelers and corporate travel planners remain unwilling to commit to increases in discretionary travel, while corporate earnings and the stock market remain stubbornly unpredictable." The average domestic car rental rate for 2002 was $64, according to TQ3 Travel Solutions' quarterly Data Line report.
In the corporate arena, competition particularly was intense. The bankrupt companies "like to have contracted business in their portfolio so they can rely on it," Fallon said, hinting at price undercutting from some financially stressed competitors. Carol Ann Salcito,...
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