Last year, the car rental industry turned into an amusement park of sorts.

With the bankruptcy of a major independent, the pullout of a major funding source, the credit crunch, lessened travel demand, the topsy-turvy wholesale market, the stagnant new car market and the troubles of the auto manufacturers, the auto rental industry suffered one of the worst roller coaster rides in years.

On March 30-31 at the Las Vegas Hilton, more than 400 professionals from the independent, licensee and corporate sides of the auto rental community caught their breath to take stock of the industry during the 2009 Car Rental Show (CRS).

People came looking for answers and opportunity in a radically changed car rental landscape. They found it within two full days of education, entertainment and networking.

Schedule Expanded
This year’s show, presented once again in conjunction with the American Car Rental Association (ACRA), featured an expanded schedule and an interactive format.

In a pre-show seminar on Monday morning, Jim Schalberg and CIRAS (the Center for International Retail Automotive Standards) held the Rental Car Professional Certification workshop, the first accreditation program of its kind in the industry.

“The rental industry now has a standard to gauge ourselves, our employees and our people,” said Schalberg.

Concurrently, the Tennant Group Roundtable, consisting of a select number of non-competing car and truck rental operators, held a session open to all CRS attendees. The Roundtable forum covered a comparison of revenue and expense ratios in actual car rental operations.

Additionally, roundtable members presented a profit idea to the group, who then voted on the best idea. Monty Merrill, a Dollar and Thrifty licensee in San Antonio, Texas, won for his “Road Safe” incremental product offering. (See 4 Profit article.)

The Tuesday breakfast was transformed into a roundtable session. Attendees rotated between 13 tables hosted by a moderator, with topics ranging from “Understanding the Economic Stimulus Package” and “Fleet Financing Challenges in Today’s Economic Climate” to “Is Your Business PCI Compliant?” and “Driving Reservations to the Independent Operator.”

In a separate meeting, a group of operators gathered to strategize on accessing TALF (Term Asset-Backed Securities Loan Facility) funds for auto rental fleets.

The ACRA panel discussion touched on this and other industry concerns, such as the continued fight against predatory excise taxation of the car rental industry, legislation that would require verification of driver’s license information and the challenges to the Graves amendment, which overturned vicarious liability.

The rallying cry on the need for guaranteed reservations was raised once again in several seminars.

[PAGEBREAK]

Barton Receives Russell Bruno Award
Robert M. Barton, executive vice president and COO of Franchise Services of North America Inc. (FSNA), owners of the U-Save brand, was presented the Russell Bruno Award for outstanding service to the car industry by Sandy Miller, FSNA’s co-chief executive officer.

Barton, who also serves as president of ACRA, has worked extensively this year on legislative issues such as funding and excise taxes. Barton worked with ACRA board member Frank Colonna and Sean Busking, ACRA’s executive director, on ensuring that fleet purchase loans were included in the language of a bill designed to reform the Troubled Assets Relief Program.

“Attendees showed a very high level of enthusiasm this year in regard to the networking opportunities, quality presentations and roundtables,” said Barton. “Operators and vendors were able to seek out and exchange new ideas, strategies, products and services to better manage their business in a challenging economy.”

The Inside Scoop
The information presented in the seminars resonated with attendees.

“As a 12-year veteran in the industry, I might think that I know a lot—and I do— but now after opening up my own brand, I am dealing with many more issues on my own,” said Matthew Holowinsky, general manager of Greenberg Rent A Car. “To understand how banks are looking at you as a potential customer and how they qualify new clients in these really tough financial times is the ‘inside scoop’ you can’t get anywhere else.”

“The atmosphere at ground level was ‘the survivors are all here, and the industry shakeup is creating a fantastic opportunity for the survivors,’” said Dino Bavadi of Blue Oval Car Rental.

“The credit problems are a big concern, of course, but that has finally put the industry on course to ask a fair price for the vehicles we rent,” Bavadi said. “The companies still standing now have a better recognition for rational pricing. That is good for everybody.”

“I am excited for the future of car rental,” said Merrill. “Our business model is going back to one that is not reliant on the manufacturer to produce profits for us. Instead we’re adjusting to market needs and a price that will allow us to stand alone.”

Attendance Up
Attendance figures for the 2009 Car Rental Show, the only trade show that serves the entire auto rental industry, show a 10 percent increase over last year.

“This is an amazing achievement given the state of the economy,” remarked Sherb Brown, publisher of Auto Rental News. “It shows that car rental operators and industry personnel are hungry for answers on how to run their businesses more effectively during these uncertain times, and I believe we provided that content.”

The 15th annual Car Rental Show will be held March 29-30, 2010, at the Las Vegas Hilton.

[PAGEBREAK]

Darrah: No Place for Add-on Fees

Matthew Darrah, senior vice president of North American operations for Enterprise Rent-A-Car, National Car Rental and Alamo Rent A Car, delivered the keynote address on Monday.

 

Darrah began by underlining many of the challenges facing the auto rental industry: managing the decrease in new car sales, the decline in consumer demand, the lack of credit to fund vehicle purchases and a used car market that has become “virtually toxic.”

However, Darrah struck an optimistic note. “We have all proven that we can react very quickly to resize our businesses to reflect current realities. Those of us who continue to make the correct decisions now will stand ready when conditions do improve—and they will,” Darrah said.

Darrah highlighted recent positive trends such as the rise in average daily rates as a result of the industry right-sizing fleets, a strong international inbound tour business, the loosening of the credit market and the beginnings of a rejuvenated used car market.

However, Darrah took a firm stand against RAC-initiated add-on fees.

“Unbundling certain costs to obscure them from view and lower the quoted rental price is misleading and, in the long run, is a losing proposition,” Darrah said. “From our perspective, fees like this have no place in our world.”

Darrah cited the institution by some companies of an “energy recovery fee” as a separate charge apart from the rental rate. That fee became popular as gasoline prices soared above $4 a gallon, but was not erased or lowered when gas prices dropped dramatically.

The fees are often intentionally worded in such a way as to mislead customers, Darrah maintained. This not only hurts customer service, but also damages the industry’s credibility in the fight against predatory excise taxes. “If we continue to make these types of ill-advised, short-term decisions, we are inviting government regulators into our house to fix us,” said Darrah.

“Now more than ever, we must be more open—we must be credible and up front in our dealings with the consumer,” Darrah said. “Bundling the legitimate costs of doing business into a single stated rental rate helps provide that.”

[PAGEBREAK]

 

Funding, Funding, Funding

At the Car Rental Show, the credit crisis was the hot topic in the seminars, panels and roundtable discussions.

 

The credit ratings of the majors dipped this past year, and their cost of funds went up. Smaller and larger independents as well as licensees were not immune: bank failures and consolidations and the pullout of a major rental fleet financier have left car rental companies scrambling for alternative sources of credit. And then there are TARP and TALF funds—who has access, and how?

Presenters and panelists explained that the root causes of these troubles are owed in part to external forces in the economy, while many are intrinsic to the nature of the car rental industry.

A Little Understanding
One of the primary complaints of RACs and funders alike is that the car rental industry is still not fully understood.

“The fact that our business is so closely tied to the auto industry gives us a handicap before we begin discussions with the bank,” said Roger Bernskoetter of Kline Corporation in his presentation.

“Most banks don’t understand ‘risk’ and repurchase,” said Mark Eckhaus of Eckhaus Fleet in the fleet planning seminar. “Do you think any bank wants to fund 100 ‘risk’ vehicles?”

Another concern is that car rental operations are highly levered, in many cases greater than 10 to 1 debt to equity. “We have to consistently explain this to banks,” said funding panelist Kent Boskovich of Union Leasing.

“Equity position is the new word on the street,” said Bernskoetter. “Cash is king.”

A Nice Set of Books
All panelists echoed the need for operators to make financial statements more detailed and transparent than ever before to satisfy a bank’s requirements.

“I’d do everything I can to get the lender educated on my business,” said Bernskoetter. “Banks are looking to keep their life simple and if there is any risk in lending, they find it very easy to say no to the applicant. You must have a great set of books with a clear balance sheet and an accurate profit and loss statement. When a lender sees gaps between the reports that do not make sense, they will be hesitant to move any further with that business.”

Problems should be disclosed immediately. “Our gut is a big indicator,” said Boskovich, “so it’s important to be honest and upfront.”

“We won’t turn away from someone who made one bad mistake or had one bad year. Your failure costs us a lot of money,” said Wayne Yocum of Automotive Finance Corp.

Boskovich suggests that for operators who aren’t 100 percent comfortable discussing their financials, it’s a good idea to build a partnership with an outside accountant or bring in a numbers person to talk to the finance agency.

“It is not a sign of weakness to say ‘my accountant knows more than me,’ so call him,” Yocum concurred.

[PAGEBREAK]

Develop Multiple Lines
Seminar presenters stressed the importance of establishing multiple credit lines to protect against a primary bank pulling funding. “Don’t let the grass grow under your credit lines,” said Yocum. “Get a second line, even if the rate is higher.”

The larger the credit line, the more detailed the financials should be, according the funding panel. Smaller lines can still get approved with one signature, but larger ones need to be reviewed by a credit board or executive committee and could take up to two weeks.

A local bank is a good place to start, said Joe Opferman of 1st Source/Trucker’s Bank, because they have your deposits, which minimizes their risk.

“Talk to local banks but have others out there,” said Yocum.

Stay Flexible and Diversified
Opferman stressed that banks look favorably on a company with a flexible fleet plan that can adjust to market conditions.

“Your ability to rightsize quickly is important,” said Opferman. “When we look at fleet plans, we want to know if vehicles are aged properly so at any given time, the operator can reduce his fleet size by 10-15 percent. If he doesn’t, he could be out of business.”

Repurchase cars used to provide some of that flexibility, but it’s getting harder with the move to all-risk fleets, Opferman said.

Optimally, banks look for cash flow of 15 percent or more to cover a company’s debt, though Opferman admitted he doesn’t see that very often in car rental.

Also, funders look positively on a fleet made up of a diversified mix of manufacturers, said Yocum.

Utilization figures are analyzed, but revenue per unit is more important. In general, RACs should be at 40-45 percent of the cost to finance the vehicle per month compared to RPU, said Yocum.

TARP and TALF
The Troubled Asset Relief Program (TARP) did its job to stabilize the banks, Opferman said. However, the program requires banks to pay a 5 percent yearly dividend on that money, which makes it prohibitive to reinvest in, say, Treasury bills. That means banks that took it, such as 1st Source, must be aggressive in finding good loans.

“Some were saying banks won’t loan that money,” Opferman said. “They can’t afford not to.”

TALF (Term Asset-Backed Securities Loan Facility) is geared to help financial markets dealing with consumer asset-backed securities by loaning to businesses, including car rental companies. However, any company looking to access those funds must have AAA credit, the highest rating—and car rental companies are not rated that high.

Moreover, the bill prohibits a company going through a third party with higher credit. It is possible to put cash out for the cars and have a third party rate the deal at AAA, but the down payment is a difficult proposition for companies in the highly leveraged car rental industry, Opferman said.

These issues, and the collapse of the securitization market, are forcing people out of lending to car rental, Opferman said. “The securitization market isn’t going to come back until people get confidence in the credit markets, and that won’t happen shortly,” he said. “That’s what is hurting our industry right now.”

Funding Available
Opferman expressed optimism in the fact that rental rates are going up and should continue to this summer, which will help improve companies’ financials. Plus, the dispersal of TARP funds is getting banks to loan.

Though funding choices are more limited than a year ago, Yocum, Opferman and Boskovich stated that there are credit lines available now to qualified candidates.

“We’re looking for new business,” said Opferman.

0 Comments