Public RACs: 2009 Report Cards

The numbers are in — and while 2009 was a bumpy ride, fourth quarter and full year earnings reports for the public majors show some positive trends for 2010.

Again, revenues fell in the fourth quarter and full year for Hertz Global Holdings (HTZ), Avis Budget Group (CAR) and Dollar Thrifty Automotive Group (DTG). However, cost-cutting measures and a strong used-car market helped Dollar Thrifty post a quarterly profit, while Hertz and Avis Budget narrowed losses.

In earnings calls, all three companies were cautiously optimistic about demand, residual values and fleet operating costs.

2009 Q4 and Full Year Earnings

For the fourth quarter, Hertz reported a net loss of $30.9 million, compared with a loss of $1.21 billion a year ago. Revenue for the quarter fell about 3 percent to $1.74 billion.

Worldwide revenue for the full year 2009 was $7.1 billion, a decrease of 16.7 percent over the prior year. Adjusted net income was $116.6 million, a 14.1 percent decrease from 2008.

Avis Budget reported revenue of $1.2 billion for the quarter and a net loss of $49 million, compared with a loss of $121 million a year ago. Revenue fell 8 percent to $1.16 billion.

For the full year, Avis Budget recorded $5.13 billion in revenue, compared with $5.98 billion in 2008. Avis Budget’s net loss for 2009 was $47 million, compared with a loss of $1.12 billion for the year previous.

For the fourth quarter, Dollar Thrifty’s net income was $11.5 million, compared with a net loss of $72.2 million a year ago. Total revenue fell 3 percent to $345.3 million.

For the full year, Dollar Thrifty reported revenue of $1.55 billion, compared with $1.70 billion in revenue for 2008. Net income was $45 million in 2009 compared with a loss of $347 million in 2008.

2009 Was a Whole Lot Better

As 2008 was one of the toughest years in car rental — driven by unprecedented macroeconomic forces — 2009 fared a lot better comparatively. It was a year characterized by cost cutting, transaction profitability and a new fleet discipline.

Fleet costs declined again in 2009 over 2008, a far cry from the 15 percent year-over-year spike in costs fleet experienced before the bad economy.

The industry did more with less: The 1.1 million vehicles purchased by the car rental industry last year were half the number of cars purchased in 2006.

RACs continued to vary fleet mix further away from the domestics. Share of the Detroit 3 dropped from 73.3 percent in 2007 to 60.5 percent through 2009. Chrysler experienced the biggest drop in market share, from 25.5 percent to 15.1 percent in those two years. Dollar Thrifty eliminated its 75 percent Chrysler purchase requirement in 2009 while entering a long-term supply agreement with Ford.

The shift to risk vehicles continued. Dollar Thrifty reduced its program vehicles from 35 percent to 10 percent last year. At the end of 2009, Hertz’s fleet was 67 percent risk. However, Avis Budget said it’s comfortable with maintaining a 50 percent mix of risk and program units for resale flexibility.

If 2008 was the year rental cars were making friends with Rip Van Winkle, RACs have been rethinking high-mileage units.

In 2009 Dollar Thrifty extended hold periods to lower fleet costs. However, Avis Budget said its fleet now has an average age of less than seven months, with 95 percent of its vehicles having less than 30,000 miles.

By the end of the year the average age of Hertz’s U.S. fleet was 8.5 months compared with 9.7 months the year previous. U.S. risk cars at the time of sale currently average 21 months, the company said.

The industry is embracing remarketing technology and new channels to sell cars.

Hertz has reduced its dependence on traditional auctions in favor of dealer-direct sales and online auctions. The company is also piloting a direct-to-consumer Internet sales program called Rent-to-Buy, which is now licensed in 13 states.

[PAGEBREAK] Looking Forward

Continued improvement in the overall economy, combined with ongoing recovery in the credit markets and sustained high pricing in the used vehicle markets are expected to result in low-single-digit growth in transaction days and moderate price increases in revenue per day in 2010.

Fleets will remain tight, which should help pricing. However, some purchase normalization is occurring. Through the first two months of 2010, rental fleet sales have rebounded from an abysmal 2009 comparison, though sales are still only about 65 percent from two years previous.

In its earnings call, Avis Budget said it expects rental transactions in the first quarter to be lower than in the year-ago period. The company, however, expects year-over-year pricing comparisons and rental volumes to trend positive moving forward in the year.

Avis Budget sees per-unit fleet costs declining 4 percent to 6 percent year-over-year.

Dollar Thrifty said demand for value-oriented leisure brands and continued industry pricing discipline will push its 2010 vehicle rental revenue up 2 percent to 4 percent.

Hertz will invest in its infrastructure by revamping its top U.S. airport locations this year with interior and exterior enhancements, as well as opening 150 new off-airport locations.

Hertz has been pleased with Advantage’s growth since acquiring the discount brand last spring. Hertz’s goal is to open 25 more airport locations in 2010. The Simply Wheelz experiment has been folded into Advantage.

RACs seem to have processed the Toyota recall with little impact on profits, though the impact, if any, on a potential drop in resale values of those affected models has yet to be felt.

The View from Wall Street

“We believe the stocks are at the start of a multi-year recovery in earnings that is not wholly reliant on a recovery in travel volumes,” writes financial analyst Christopher Agnew of MKM Partners.

Agnew and fellow analyst John Healy of Northcoast Research Partners note that airline and hotel industry conference calls have forecasted improvements in travel volumes (particularly corporate), which will benefit car rental as well.

“[Northcoast Research Partners notes] that 12 months ago, the outlook for car rental industry fundamentals was very bleak and industry participants have made great progress in curtailing industry capacity, pushing price increases and maximizing vehicle holding costs,” writes Healy. “We are optimistic that rental operators can continue to build on this momentum in 2010.”

Agnew designates Avis Budget, Dollar Thrifty and Hertz as stock “buys.”

Healy maintains “neutral” ratings on Avis Budget and Hertz and a “buy” on Dollar Thrifty.

A neutral rating indicates the stock is forecasted to perform in line with the S&P 500 index. Buy and sell ratings indicate the stock will outperform or underperform the S&P 500.

Sidebar: Avis Budget Statement on No-show Fees

“… We’ve asked our booking partners to make sure their systems can support steps for us to require a credit card for reservations as well as collect a non-cancellation fee. No-shows have always been a problem of varying degrees for the industry, and we’ve seen industry participants take small steps to address this in recent months.

Our counterparts in Europe, Avis Europe and Budget Europe, have each moved forward with a credit card requirement and non-cancellation fees, primarily in the leisure space. Other competitors have built into their channels the option to provide a credit card at the time of reservation in return for a discount. In our case, if you wanted to reserve a specialty vehicle like a passenger van at a major vacation destination this past summer, our call center would ask you for a credit card to hold the reservation.

All of these would seem to naturally lead in the direction of a non-cancellation fee. We’ve been pleased with the results of the various initiatives undertaken this past summer, and our plan is to expand the implementation of non-cancellation fees albeit carefully and prudently.”

From Avis Budget Group Q4 2009 Earnings Call. Transcript courtesy of www.seekingalpha.com.