Pricing Was Bad But It’s Improving

The industry was over-fleeted in the first few months of 2016, which was the main driver of lower pricing. Moving into the summer, however, fleet size is conservative relative to strong peak-season demand — which bodes well for pricing. Looking at car rental supply and demand, these are the key takeaways from the first quarter conference calls from Hertz and Avis Budget Group. Enterprise Holdings is a privately held company.

Both Hertz and Avis contended that the industry as a whole had excess capacity in the first quarter, exacerbated by a few factors: a mild winter that affected insurance replacement rentals, somewhat weaker business travel, and constricted international inbound to major leisure destinations, particularly in Florida and Arizona, due to the strength of the U.S. dollar. (Though Hertz said international inbound overall saw modest growth in the quarter).

“Pricing in the first quarter was tougher than we thought it would be,” said Larry De Shon, CEO and director of Avis Budget Group, adding that pricing ended up down 5% year-over-year for the quarter.

There were attempts to raise prices in the first quarter that were not successful, primarily because of loose fleeting, De Shon said.

While overall volume grew, it was driven by leisure. Avis grew leisure volume by 7% in the Americas in the first quarter while commercial volume fell 3%. The company expects this year’s volume growth to be driven by leisure rentals. Hertz saw softening in corporate travel as well.

In the U.S., Hertz’s first quarter car rental revenue declined 8% due to industry pricing pressures and also the closure of unprofitable airport locations in the second quarter of 2015, said Tom Kennedy, Hertz’s CFO. Off-airport, Hertz similarly closed 200 stores in a strategy to boost profits.

Positive Outlook

Avis said that the unusually soft pricing in the quarter is an anomaly, not a new normal. Both Hertz and Avis saw sequential improvements in pricing moving further into spring.

“Overall, the published pricing environment was obviously quite challenging during the quarter and while still not yet considerably healthy, early signs of improvement are evident in the second quarter, especially as we head towards the peak summer season,” said Kennedy.

With the used car market still softening, both companies expect fleet costs to rise. The silver lining is that fleet cost pressures would be a tailwind to push pricing to offset margin pressures, said De Shon. Meanwhile, a return to wholesale market normalcy would positively restrict fleet levels.

To offset increased fleet costs, Avis said it would extend its fleet hold time “anywhere from two weeks to eight weeks,” though it would sell risk vehicles in the same 30,000 to 40,000 mile band.

Unfavorable currency exchange rates may still hurt inbound travel from Canada and Central and South America, though this would mostly impact the winter months; reliance on international volume declines through the summer, De Shon said.

Avis revised its full-year pricing for the Americas to be down about a point this year. While this might raise an eyebrow, pricing for the year will have been dragged down primarily by the unusually negative first quarter. Avis sees a gradual ramp up in pricing for the remainder of the year, primarily on strong leisure volume.

Regarding the near future, “It appears that the industry seems to be shifting to a better alignment of fleets with traveler demand,” said De Shon. “We'll be trying to fleet basically underneath the demand for the summer and keep our utilization improving.”

Hertz is intent on driving utilization gains, perhaps to historic levels, said Kennedy. Overall utilization came in at 77% for the first quarter, compared to historic peak fleet utilization for Hertz and Dollar Thrifty, as separate companies, of about 82%.

With sophisticated fleet management tools, Kennedy believes the company could “drive utilization above those 82% peak levels. … We clearly should be able to beat that historical peak.”

Transcripts courtesy of Seeking Alpha.

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