In the second quarter, we all found out how Mother Nature can affect not only profits of multinational companies but change the way an industry does business, at least temporarily.
Once again, this is a compendium of nuggets and analysis pulled from the public companies' second quarter earnings calls and is not meant to be a complete financial overview of any company.
Used Car Market
The aftereffects of the Japanese tsunami and earthquake in March drove supply disruptions and thus once-in-a-lifetime aberrations in used car prices. Car rental companies benefitted with residual values at peak historic levels and lower depreciation expense.
Hertz's monthly depreciation dipped nearly 26 percent-$76 per unit-year-over-year to $220 per unit in the second quarter. Avis Budget Group now estimates its fleet costs to be down 18 to 20 percent per-unit for 2011 and 8 to 11 percent in the second half.
Dollar Thrifty experienced a decrease in base depreciation rate per vehicle as well, though total vehicle depreciation expense for the quarter increased 5 percent year over year, because it sold 10,500 fewer vehicles than the year previous.
The used car market is driven by macro conditions that for the most part are out of the control of the car rental companies. But RACs are managing this expectation. Avis said it doesn't need residual values to remain at record levels to earn attractive margins.
Hertz made the point that it is controlling its own destiny, at least two-thirds of it. Hertz said that two-thirds of its gains in the disposition of vehicles were due to its own improvements, such as pumping up its direct-to-consumer Rent2Buy online sales channel.
The wholesale market is normalizing, but the bottom won't drop out. The used car market, unlike the housing market, is not based on speculation. It's based on supply and tangible demand, and supply won't catch up to demand until at least 2013 when the effects of the lack of supply of off-lease vehicles work its way through the market.
But while the Japan crisis pushed the wholesale market to unprecedented levels on lack of supply, it ended up depressing car rental rates for the quarter. Supply disruptions forced RACs to hold onto existing fleet to mitigate the possibility of canceled orders and being caught under-fleeted for the summer season. For the most part, the supply shortages failed to materialize, but it took a while to be able to de-fleet to match demand. Utilization was soft.
As a result, Hertz said that price increases it implemented on both June 1 and July 1 were not sustainable. Avis Budget reported a 2 percent decline in domestic pricing due to over-fleeting.
With the level of over-fleeting in the quarter, Scott Thompson of Dollar Thrifty said the industry showed pricing discipline and he was surprised that pricing wasn't even lower than it actually was.
RACs were forced to hold fleet when they would've sold, but when they did, they made really good money.
Volume increased across the board, but the comp was against a second quarter last year in a world just barely out of the recession.
In terms of a potential merger, Dollar Thrifty said it is working with both Avis Budget and Dollar Thrifty to support their efforts with the FTC, however no deal, written or verbal, is in place with either company.
Hertz only said that the next milestone is to obtain FTC approval. Avis said while it continues to "actively monitor the Dollar Thrifty situation," its "focus remains on planning the integration and completing the acquisition of Avis Europe."
But in a moment of candor (calculated candor, as it was part of a prepared statement) Scott Thompson of Dollar Thrifty expressed frustration with the merger process, calling the current state of uncertainty unacceptable. "The company is cash rich and underleveraged and needs to move forward in a way that enhances shareholder value," he stated. "We have been working on unsolicited merger issues since 2008, and they are expensive and distracting." On questioning, Thompson reiterated the frustration level, though he said the company has not drawn "a line in the sand" with regards to a deal and continues to be "open to alternatives."
I imagine that working with the FTC, a government entity that takes its time and asks the questions but is not necessarily forthcoming with answers, must be very frustrating.
Where the Growth Is
It's important for public companies to show investors that they're growing in areas they have less penetration, but market potential. In car rental, for Avis and Hertz, it's in the local market.
Avis co-branded 200 local market stores in the first half and established a separately managed, dedicated fleet. It expanded its relationship with Sears and partnered with MGM in Las Vegas.
Hertz reported increases in off-airport revenue (now 26 percent of total U.S. rental car revenue) and expects continued growth through 2011.
Hertz opened 71 net new locations in the second quarter, bringing the total to 2,034 locations as of June 30.
Avis' Small Business initiative resulted in 10,000 new account activations (!!) with more room to grow, especially with the Budget brand.