Three things make the car rental community happy: pricing, pricing and pricing. The car rental community has a reason to be happy these days.
On Avis Budget Group’s second quarter conference call on Aug. 5, Ron Nelson, chairman and CEO, drove home the point that sustained positive pricing has been driving the company’s recent impressive performance. “I’m probably more enthusiastic about our business than I’ve ever been,” Nelson said in prepared remarks.
Across the Board
In North America, pricing increased in the company’s three brands — Avis, Budget and Payless — in on- and off-airport locations and in both the leisure and commercial segments.
Leisure pricing was up 6% in the second quarter while commercial pricing was up 2%, led by growth in the small business segment. Large commercial pricing, a notoriously tough nut to crack, flipped from modestly negative to modestly positive.
The company “put its money where its mouth is,” so to speak, by raising its guidance on 2014 revenues from $8.6 billion to $8.7 billion, an 8% to 10% increase over 2013. Full-year adjusted earnings before taxes are forecasted to be even better: $860 million to $910 million, an increase of 12% to 18% compared to last year.
“The principle driver for the increase in our projected earnings is clearly the strength we’ve seen in North American pricing,” Nelson said.
Nelson was asked on questioning if he saw the positive pricing as an industry trend. In short, yes. The similar fundamentals — cost structures, business models, business mixes and capital requirements — across car rental companies in North America dictate a similar experience, he said.
And, in terms of sustainability, “I think six quarters does constitute a trend,” Nelson said.
Better pricing came amid “a reasonably healthy demand environment in North America,” Nelson said, in which rental volume grew 8%.
International inbound revenue, Avis Budget’s most profitable segment, increased 17%. Small business revenue increased 10%; with pricing that was more than $10 per day higher than its average large commercial rates.
Avis continued to expand its higher margin specialty and premium fleet, resulting in a 10% increase in revenues in that segment.
Revenue from local market operations increased 11%, with pricing up 4%, as a result of the company’s strategy to focus on general-use leisure and commercial rentals over insurance replacement business.
The Recall Impact
Avis also gave unprecedented insight into how manufacturers’ recalls impact the company, in light of a record-setting pace for recalls this year in North America.
Through July 31, Avis reported that it had to rectify recalls on 225,000 units, or about one-third of its peak fleet, compared to 70,000 for all of last year. “And the recalls are still occurring,” Nelson said.
A sure cause for heartburn industrywide, “Some cars have been grounded for literally months because of inability to get parts,” he said.
Avis Budget Group’s policy (along with the other majors) is to ground recalled vehicles immediately. As such, Avis cited issues with recalls such as increased labor costs to correct the problems and shift fleet appropriately, and the impact to utilization as the company holds extra cars to meet peak summer demand.
But the greatest hit came in the auction lanes, as Avis was forced to hold both program and risk cars that would have been remarketed in the hot selling season of late spring.
Though “we’re expecting a record third quarter,” Nelson said, “expectation should be tempered” due to recalls, which “will impact overall fleet costs.”
When pressed on the total cost impact of recalls, “At least through July … it’s an eight digit number,” he said.