While the pending FTC ruling of an Avis Budget/Dollar Thrifty deal and a new Hertz offer for DTAG loom over the industry, the first quarter conference calls of the public rental car companies provide a glimpse at what the future holds. Between the lines of "adjusted EBITDA" and the usual promises of synergies and process improvements, here a few selected observations and trends to watch.
The High Fuel Factor
The car rental industry put together a strong first quarter, notwithstanding the cancellations caused by three nasty storms in January and February. The travel outlook looks good for the remainder of 2011: The airlines are showing increases in capacity, which always benefits car rentals. Dollar Thrifty reports a longer length of rent, an indication of longer vacations in the recovery.
In terms of high fuel prices, Hertz says the trend has yet to impact volume and pricing, and it won't, as long as GDP (gross domestic product) remains unaffected. Avis reported a similar minimal impact, though high fuel costs should have some effect on the mix of summer leisure demand by vehicle type.
The Used Car Market Stays Strong
Avis reported gains in residual values in each of the first four months of 2011, while Hertz's residual values from January through March were a first-quarter record since becoming a publicly traded company. Lack of supply is driving high residual values, which has caused both Avis and Hertz to lower projections for per unit fleet costs. Dollar Thrifty is more cautious, but sees possible lower fleet costs for the full year as well.
This tight supply environment is based on lower domestic OEM production and fewer sales into rental as well as fewer off-lease vehicles relative to pre-recession levels (and trending downward still).
However, Avis says it has seen in the last few weeks "a certain amount of dealer pushback on pricing, resulting at least initially in lower conversion rates at auction." Avis expects the market to "normalize down to still-healthy levels over the next couple of quarters."
The Japan crisis is the wildcard. Hertz believes the supply chain disruptions for new cars from Japan will keep used-car values high through at least the third quarter. The picture will clear up once the effects of the Japanese supply disruptions are fully understood.
The Japan Crisis Is a Work in Progress
While the Japan crisis is helping used car values, it is hurting supply just as the summer season approaches. These RACs are quick to downplay supply issues. Dollar Thrifty says that only about 5 percent of its fleet is comprised of Japanese manufacturers, while Japanese OEMs represent 6 percent of Avis' expected second quarter deliveries.
Hertz reports some cancellations from the Japanese OEMs, though U.S. manufacturers have made up some of the difference and Hertz has bought fleet direct from dealers as well. Dollar Thrifty reported some cancellations from its Japanese partners and "a few cancellations" from a domestic manufacturer. Avis reports "only a handful of cancellations and delays, all of which are eminently manageable given the age and composition of our fleet."
Hertz and Dollar Thrifty are keeping some cars that had been targeted for sale as a safety cushion against potential shortages. Avis says that more than 95 percent of its fleet has fewer than 30,000 miles, which would allow it to hold onto vehicles if needed.
While the situation right now appears manageable, that could change if the supply of parts and components from Japanese manufacturers becomes a bigger problem for the domestic OEMs.