First, a disclaimer: Auto Rental News cautions that these statements are based on the current economic environment and are inherently subject to significant economic, competitive and other uncertainties and contingencies.

Sound familiar? It’s a public company’s way of telling its shareholders that no one really knows what the heck the future holds. That includes the world of auto rental, where the only certainties are annual seismic shifts in ownership and market share, increasing competition and never-ending rate wars.

This year was no exception. Enterprise bought Vanguard and got an instant presence on airports and in the corporate and leisure sectors. Hertz transitioned back onto the public stage and looks to grow its online leisure business. Avis Budget is opening more than 200 neighborhood locations. Dollar Thrifty continues to convert franchises to corporate stores.

On the supply side, the domestic automakers are making good on their promise to reduce rental fleet sales. The RACs are taking the medicine—and it doesn’t taste that bad.

We’ll try to decipher how these reverberations will be felt in 2008. But remember: “Actual results may differ materially from those expressed or implied in these forward-looking statements.” Got it?

Tempering the Cost of Tin

Vehicle depreciation costs ballooned in the past two years as the domestic manufacturers stopped giving away the store to rental fleets to keep factories open. Cost increases will be more manageable in 2008, according to statements Avis Budget Group and Dollar Thrifty Automotive Group made in second quarter earnings calls. Hertz information reflects its third quarter earnings call, made before this issue’s deadline.

While Dollar Thrifty’s vehicle depreciation costs increased by 25 percent in 2007 over the prior model year, 2008 increases “will moderate substantially,” Dollar Thrifty Automotive Group’s President and CEO Gary Paxton said.

Avis Budget estimates fleet costs will rise between 4 percent and 6 percent on a per-unit basis for 2008, which is higher than inflation but lower than previous years’ double-digit percentage increases.

Hertz’s fleet costs are expected to rise in the 3 to 5 percent range, and ameliorate to a net 2 to 3 percent increase by improving fleet efficiency. Hertz reported no problems in obtaining fleet from the manufacturers.

The majors are compensating for higher fleet costs by increasing holding periods.

“We view the increase in our average hold period—to a bit over 10 months—as the pendulum swinging back to a more normal level by historical standards,” Avis Budget Group President and COO Bob Salerno said.

“We could increase holding periods, but for no more than a month on average,” Pam Nicholson, COO of Enterprise, told ARN.

Dollar Thrifty will increase its holding period from seven and a half months to nine months for 2008. Yet the reduction in fleet sales does not seem to be impacting the ability to obtain supply.

“So far, we see nothing for model year 08 and nothing in the future that would tell us that we’re going to have a problem in obtaining enough cars to run our business,” Salerno said. [PAGEBREAK] Risky Business

The more manageable fleet cost increases are in large part a result of the industry’s migration to risk vehicles. Changes in manufacturer repurchase program terms are making risk cars generally more economical than program vehicles. OEM incentives on risk cars are reducing upfront cap costs and thus interest expense.

“Some type of cars, particularly program cars, are carrying higher increases than we are willing to pay,” Salerno said.

Avis Budget expects the risk car portion of its fleet to comprise 50 percent, more than double the percentage in 2007. The company expects reduced fleet sales to cause a bump in risk car residual values in a solid used car market.

Hertz moved its risk fleet from 43 percent on Sept. 30, 2006 to 63 percent one year later, with “no issues in de-fleeting the increased risk units,” Hertz Chairman and CEO Mark Frissora said.

Dollar Thrifty will shift the risk portion of its fleet from 40 to 50 percent, with plans to go higher. The company is also bringing slightly used vehicles to the mix to further mitigate cost increases.

“I wouldn’t be surprised if the entire industry in the next three to five years ends up with a full risk fleet,” Paxton said.

Salerno, however, says Avis Budget is comfortable with its current split. He believes buy-back programs will be around for awhile.

“The buyback program still provides a good amount of flexibility to make a fleet go up and down,” Salerno said, “which is worth the additional costs.”

As an all-risk fleet, Enterprise will surely use its remarketing know-how in disposing of National and Alamo’s cars. As of March 31, 2006, the last public information available, 98 percent of Vanguard’s U.S. fleet consisted of program vehicles. That percentage—it’s safe to say—will change dramatically.

Changes in Fleet Mix

Rental fleets are trending to smaller, lower cost cars with more options. This is driven by customer demand due to higher gas prices and manufacturers requiring rental fleets to buy vehicles with a higher options package.

Enterprise is shifting its fleet mix to lower cost and more fuel-efficient vehicles, while Avis Budget Group is increasing its inventory of smaller units by 7 percent. The company is increasing its percentage of foreign marques and will add Volkswagens to the fleet for the first time.

Hertz is moving its fleet into lower cost cars to support its off-airport and online leisure growth.

Dollar Thrifty’s fleet is 85 percent Chrysler product, though the company is “aggressively pursuing other manufacturers to reduce our dependence on Chrysler going forward,” Paxton said.

Enterprise, Avis Budget and Hertz announced “green initiatives” this year and have added thousands of hybrids to their fleets. Yet the percentage of hybrids in fleet is still small comparatively. [PAGEBREAK] Customer Segmentation Continues

Dollar Thrifty is increasing funding of its “Style Series” high-end product line, though it will remain limited to markets that can support luxury rentals such as Florida,Nevada and California.

Hertz’s Fun, Green and Prestige Collections garner 5 percent to 50 percent more revenue per day than its standard fleet, and those margins are increasing.

Dividing the Pie

The on airport, neighborhood, leisure and corporate sectors continue to morph.

Enterprise, already the largest car rental company in North America, said the Vanguard purchase raises its auto fleet by 42 percent to more than one million cars. Incorporating the National and Alamo brands brings its on-airport market share to about 28 percent, rivaling that of Hertz and Avis Budget.

While Enterprise gobbles up airport territory, others look to grab more neighborhood business. Hertz is keen on neighborhood business, where fleet costs are lower and utilization rates are higher than on airport. Off-airport revenues are up 22 percent year-over-year, and Hertz’s market share has grown from 10 to 20 percent. By the end of 2007, Hertz expects to have opened more than 200 off-airport locations.

Avis Budget increased its off-airport footprint even more. The company said it is on track to open 200 local market stores in 2007.

Dollar Thrifty continued its corporate growth strategy by acquiring 10 Thrifty franchises and one Dollar franchise in 2007. The company has begun a moderate expansion of its local market business with a target of opening 50 new stores in the coming months.

Enterprise reports it is seeing a continued shift in business and leisure travelers renting in local markets.

Hertz and Dollar Thrifty are experimenting with hourly rentals in Boston and Manhattan.

Enterprise now offers hourly rentals in Manhattan and seven other cities. The hourly rental trend represents a tiny fraction of the $20 billion auto rental market, though it serves a growing niche of car-less urbanites and students. Filling the Franchise Void The franchise space being vacated by DTG is increasingly being filled by the independents.

Texas-based Advantage Rent a Car began licensee operations in 2007 and has targeted 35 of the top 50 airports for franchise opportunities. U-Save Auto Rental, which went public after a reverse buyout of Rent A Wreck Capital Inc. of Canada in late 2006, continues to open franchises in the U.S. and in foreign markets.

Rent-A-Wreck of America (no affiliation) is under new ownership to Maryland mega-dealer Jack Fitzgerald. The company won a lawsuit and is weathering two more. Fitzgerald told ARN his immediate goal is to improve franchise operations.

Will SimplyWheelz Work?

The impetus for Hertz’s SimplyWheelz discount self-service operation is to grab more of the leisure market pie. The obvious question is whether Hertz will cannibalize its own lucrative corporate accounts with a cheaper deal.

Frissora said he expects some Hertz business customers will use Simply Wheelz instead of the corporate discount. Yet he believes the cost model—self-service kiosks, rentals of four days or more, limited fleet selection and shorter transaction times—will reduce costs by 50 percent and thus preserve profits.

Though its too early to report earnings, Hertz says advanced bookings in Orlando have exceeded expectations, and some SimplyWheelz customers have been lured upmarket to Hertz’s Specialty Collection. “The response has been very positive, ”Frissora reported.

If the experiment goes well, the system will be rolled out to 12 key leisure destinations. [PAGEBREAK] Swimming Upstream and Online

Public companies, in their ongoing attempt to appease shareholders, are on a never-ending quest to cut costs by trimming staff and implementing new technology.

Dollar Thrifty eliminated 25 percent of its management positions this year.

Hertz Global Holdings Inc. cut more than 2,000 jobs, primarily in U.S. car-rental operations. Frissora said the company improved internal processes to cut the time from de-fleeting to sale from 36 to 15 days.

Avis Budget went live with new insurance replacement software and has expanded its relationships with the top auto insurance carriers.

Enterprise is rolling out its Automated Rental Management System (ARMS), a Web-based system that allows insurance adjusters to monitor the repair status of a customer’s vehicle. The company hopes to reduce the duration of the rental and prevent unnecessary additional rental costs.

Dollar Thrifty is installing “fleet optimization software” this fall. The company has also outsourced information technology services and a significant portion of its call center operations.

On the remarketing front, Avis Budget and Dollar Thrifty entered the online auction arena through partnerships with ATCOnlane, a wholesale Internet-based auction company for automotive dealers.

This new “upstream” remarketing channel is designed to reduce the time the vehicles are out of service before the sale.

Navigation Stays Hot

An increasing percentage of ancillary revenues will come from navigation unit rentals and electronic toll collection.

Avis Budget reports that the take rate for its Where2 navigation unit is more than 7 percent at available locations. The company increased the price by $1 a day in many locations with no take rate impact. The company expects $30 million in nav. unit revenues this year, virtually all incremental, as Where2 was introduced late in 2006.

Dollar Thrifty continues its navigation unit rental rollout. Ancillary revenues from Hertz’s Neverlost and Sirius satellite radio increased by more than 15 percent. The company anticipates even stronger demand in 2008.

Dollar Thrifty offers prepaid toll service in Dallas and Houston and has expanded to Denver and Florida through a partnership with Rent A Toll. The company will add more locations as new cities implement the service.

Avis, Budget and Hertz customers can use electronic toll collection services from PlatePass at most major east coast airports as well as in Chicago and Houston, Florida and Colorado. Avis began implementing the Avis Chauffeur Drive program in 10 major cities and rolled out Avis Connect, an in-car WiFi hotspot program, in eight locations this year.

Now Entering from Left Field

We’ve heard the distant cries of “the Chinese are coming!” for a few years now. This year Chrysler signed an agreement in principal with Chinese manufacturer Chery to import a small sedan to the U.S. badged as a Chrysler. No definitive import plans have been announced.

Meeting U.S. emissions and safety requirements has been a major stumbling block. Still, many feel it is inevitable that Chinese vehicles will land on U.S. shores before the end of the decade. For a dealer, rental fleets would be the quickest shortcut to sales and a way to gain fast exposure to the American public.

“Introducing new models through rental fleets is a traditional play,” says Neil Abrams of Abrams Consulting Group. “But Chinese manufacturers would most likely have to offer them on a very short program with subsidized residuals.”

This would all happen during a continued growth slump of the American auto market. A flood of Chinese cars could drive down retail prices across the board. “I would suggest in that environment, economic conditions would be favorable for someone to be selling program vehicles aggressively again,” says Bob Barton, CEO of U-Save.

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