Playing the Market: Rental Car Companies Go Public

With all the recent spin-offs, break ups and franchise buyouts, the auto rental industry is starting to resemble Europe after the fall of Communism.

Less than a year after Ford let go of Hertz in a leveraged buyout, the company—now called Hertz Global Holdings Inc.—is preparing to go public. Not three weeks after Hertz announced its filing in July did Vanguard, operator of the National and Alamo brands, enter the fray. Purchased out of Chapter 11 bankruptcy in October 2003, the company is expected to IPO by the end of this year as well. Avis Budget Group, the lone remaining piece of the former Cendant empire, started trading on its own in September.

What does the future look like for these pending IPOs and the industry in general? And how could it possibly affect you?

The Changing Landscape
In 2005, the local rental market experienced higher revenues than the airport segment for the first time. Hertz is aggressively pursuing off-airport locations with Hertz Local Edition. Avis Budget is in the midst of stated plans to expand its local market presence by more than 500 locations in three years.

Meanwhile Enterprise, the insurance replacement and local market leader and pioneer, is experiencing double-digit growth in fleet size and revenue at airport locations, and the Dollar Thrifty Automotive Group is buying back shares and gobbling up available franchises across the country.

The industry has finally rebounded from post-9/11 doldrums with pre-9/11 revenues. Yet it still faces considerable challenges: higher interest rates, fleet costs and vehicle prices.

“There hasn’t been a period where there has been so much going on that potentially has a long-term effect on the dynamics and landscape of the business,” says Neil Abrams, president of Abrams Consulting Group. “The old rules of doing business no longer work. They [auto rental companies] are all in this evolutionary stage where they’re moving into markets, revenue channels and business strategies that they’ve not exercised before. The supply chains, disposal channels and types of markets are in the throes of reevaluation.”

The economic boom of the late 90’s gave the travel and transportation industry a boost, with 2000 being a peak year for revenue. And then came 9/11 and the fallout, which only exacerbated the impending implosion of the dot-com industry. During the recession car rental companies, and the travel and transportation industries in general, were jolted into realigning their fleets and reevaluating their whole business model, Abrams says.

Today revenues are finally approaching pre-9/11 peaks, but profits are mixed.

Dollar Thrifty Auto Group reported net income of $37.3 million for the first six months of 2006, compared to $24.3 million over the first half of 2005.

Hertz, Avis Budget and Vanguard, however, saw revenues rise in the first half of 2006, only to experience a steep drop in net income compared to 2004.

Enterprise reported a company record $9.04 billion in worldwide revenues in fiscal year 2006. Because it is privately held, Enterprise does not have to share net income figures. But that it’s the most profitable car rental company is no secret.

Nonetheless, Enterprise faces the same profit pressures as the other majors.

CONTINUED:  Playing the Market: Rental Car Companies Go Public
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