In our opinion, 2013 was one of the more interesting years in our coverage of the rental car industry.
Avis Budget led a flurry of mergers and acquisitions, Hertz began initial efforts to integrate Dollar Thrifty and fundamental factors drove operators to begin to manage a moderating used car market in addition to a demand environment impacted by curtailed government travel.
All of this considered, we view 2013 as a successful year for most in the rental industry, and we are optimistic that the industry is in a better place than it was just a few short years ago.
As we close the book on 2013, we wanted to provide the readers of Auto Rental News with a view of key items the investment community will likely be watching as it relates to industry trends in 2014.
WILL CONSUMER CONFIDENCE REBOUND IN 2014 AND ALLOW FOR A MORE PRONOUNCED PICKUP IN DEMAND?
Leading indicators appear positive, and we note a number of airlines, after curtailing capacity in recent years, are leaning toward increasing capacity. Additionally, fuel prices have declined year-over-year, which could help discretionary spending trends and lift the spirits of leisure travelers.
This noted, we also highlight that comparisons should be easier as the industry will not likely experience the same headwinds year-over-year — ones created by the government sequestration and the fall shutdown.
CAR COSTS AND RENTAL RATES — ARE THEY RELATED?
We spend a tremendous amount of time discussing the used car market and rental rates with investors. Oftentimes, investors will develop views related to the future trajectory of each of these metrics independent of one another.
While fleet costs are ultimately something the used car market drives and operators manage, we believe it is unreasonable for investors to analyze fleet costs without contemplating utilization and pricing.
As we look to 2014, we expect industry capacity to contract a bit, primarily a function of Hertz working through fleet realignments with Dollar Thrifty as well as Avis Budget integrating the Payless operations.
Additionally, we believe that profitability per-car per-month is an important measure for many operators. If input cost (car costs) increase, output pricing should move higher as well.
ARE THERE INCREMENTAL GROWTH OPPORTUNITIES OUTSIDE OF THE U.S. AIRPORT RENTAL MARKET?
Our answer is yes. We expect two markets to provide this incremental growth in 2014. We look for further expansion by operators into the developing car-sharing marketplace as well as further brand expansion by operators into international rental markets, primarily Europe.
Car sharing continues to gain speed and traction among millennials and young adults. We look for the acquisition of Avis by Zipcar to pay additional dividends as membership levels and profits benefit from increased fleet availability and operational integration efforts.
Do not think Avis is at it alone; we note that Hertz remains committed to its Hertz 24/7 offering and Enterprise appears to be increasingly more visible in the marketplace.
Outside of car sharing, we expect U.S. rental operators to look to Europe for incremental growth. We view the European rental car market as one in which operators will look to gain share due to the high level of market fragmentation. U.S. rental operators will also benefit from the rising tide of travel trends likely to develop due to Europe finally coming out of its economic doldrums.
We would highlight that independents/regional firms control about 40% of the European rental car market and, in our opinion, this level of fragmentation opens the door for growth investments by brands such as Budget, Thrifty and Firefly, which all remain under-represented in the market.
All of this considered, we at Northcoast Research remain of the view that it is a very good time to be in the rental car business. I hesitate to do this, but I will make one bold prediction for the next 12 months.
That prediction is, and always will be, that running a rental car business will remain more difficult than predicting trends for a rental car business. On behalf of Northcoast Research and Auto Rental News, we wish you luck and prosperity in 2014!
ABOUT THE AUTHOR
John Healy is an equity research analyst covering the rental car industry among other service-based companies for Northcoast Research. Northcoast Research is an independent, full-service institutional equity research firm headquartered in Cleveland.