Avis Budget Group reported its fourth quarter and full-year 2021 results this week, capping a series of “best-ever” quarterly performances over the last year. This string will remain intact, according to Avis, as the first quarter of 2022 looks to be another record breaker from a profit standpoint. That’s good news for Avis and the rest of the industry.
It’s remarkable to see businesses successfully ride the ebbs and flows of coronavirus variants and pivot to meet rapidly changing environments. As CEO Joe Ferraro put it in the earnings call, “How do you know what you're capable of if you're not pushed?”
As is the perennial case with earnings calls, Avis was quick to point out its own discipline in managing through this turbulence, and it should be commended for that. But the industry has been riding for close to a year what you could call the car rental trifecta — strong demand, low fleet supply, and high rates.
Omicron spoiled these positive fundamentals, but only for half a quarter. It seems the industry is returning to the same trifecta though to lessening degrees. If that signals a return to “normalcy” — easier fleeting, fewer alarmist headlines on car rental rates, and the ability to put customers in the cars they want — then bring it on.
First, a look at Omicron’s effect: The fourth quarter for Avis started great, carrying the momentum of the second and third quarters. But just after Thanksgiving, the latest variant took hold.
Normally for the travel industry December is the strongest month of the fourth quarter, driven by the Christmas holiday. Yet in 2021 the tables were turned, as December produced the lowest revenue per day (RPD) of the three months. That ruined Avis’s string of quarterly RPD gains. In Q4, RPD dropped 10% from Q3 but was still up 30% over Q4 2019.
Still, and this goes back to management discipline, Avis was able to redistribute fleet after Omicron hit to regions where travel was still strong, like Sun Belt leisure destinations and Mountain resorts. The company’s best fourth quarter earnings in its history demonstrates how good October and November had to have been.
Omicron carried into January. Ferraro surmised that companies reintroducing work-from-home policies affected commercial demand and had a negative effect on rental days. But while RPD fell too in January, it didn’t decline as much as the usual seasonal pattern — most likely because the mix skewed more toward leisure this time, and leisure rentals command higher rates.
Looking ahead: Fundamentals are good. While the first month of 2022 started off shaky, as Omicron recedes Avis predicts a strong President’s Day. Leisure demand is strong. Avis sees pent-up commercial demand as workers return to the office and need to get out on more sales calls. Customers that had been booking closer to their dates of travel are now booking further out, a sign of consumer confidence and strong travel demand.
Like the rest of the business world, Avis is processing labor shortages. Nothing like real pain points to spur technological adoption — the company is ramping up Avis QuickPass, a completely touchless service for loyalty customers that uses connected car technology, a phone app, a QR code, and an automated exit. (Now let’s see if the industry can get the majority of its customers into the same process.)
In Avis’s view, the industry as a whole has more demand than supply. This points to a still-tight fleet situation, but one that’s not producing alarm bells like last year. There are signs that pricing for new and used vehicles may have peaked, but don’t expect any dramatic declines at least for the 2022 model year. (Keep an eye on the 2023 model year when it rolls around to see if some automakers try to grab share by upping incentives.)
Ferraro wouldn’t go into detail on a fleet outlook for 2022 but alluded to a “very fluid” situation, one that “will not be normalized” soon. Avis sees fleet, or what the manufacturers are able to produce, being constricted at least through the 2022 model year. That’s general consensus too.
In the Americas (with U.S. the lion’s share of the segment) Avis grew its fleet size to 435,000 vehicles — more than Q4 2019. There are a few explanations: Fleet that was due to arrive in the third quarter finally showed up in the fourth; Avis has clout to get fleet; and like everyone, it held its cars longer out of necessity.
But even in this tight supply environment, Avis is managing to keep a relatively young fleet. That’s becoming an advantage in a key area, commercial business, which has traditional price pressures based on contracted rates for large accounts — many of which were negotiated before the pandemic. Avis was able to hike rates on non-contracted small to midsized business accounts.
CFO Brian Choi said that post-pandemic, Avis’s large commercial accounts up for renewals are becoming less price driven and more focused on the quality of the fleet and ancillary services and benefits.
Choi also made a related point — that the pandemic has taught Avis to put more into fleet and services and put less emphasis on rental days, which has a negative effect on pricing and erodes profit margins.
One of the lessons of this pandemic is to never get complacent, as new variants and more supply chain disruptions could be just around the corner. This specter is keeping the car rental industry on its toes, resulting in a conservative approach that stresses profit margins over growth for the sake of it. Let’s hope the lessons learned carry into less disruptive times.