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.