Wholesale Market Drives Q3, But Will Record Rental Revenues Last?
The three public car rental companies posted healthy third quarter results last week. While the quarter was characterized by price competition, healthy volumes and fleet rightsizing, the key driver was the used-car market. But what does the future look like?
November 7, 2011
All three public companies — Hertz Global Holdings, Avis Budget Group and Dollar Thrifty Automotive Group — reported record results in the third quarter of 2011. Why? In their conference calls last week, they talked about volume increases, cost-slashing initiatives, process improvements and disciplined fleet management. These efforts played a factor, but in Q3, it was all about the used-car market.
And what a market it was — “was” being the operative word. We have essentially worked through the extraordinary supply disruptions brought on by the Japan earthquake and tsunami, and we may never see wholesale prices like that again.
(For a more in-depth look at the wholesale market, click here.)
The effects cannot be underestimated as reflected in fleet costs, depreciation expense and gains on vehicle sales. At Dollar Thrifty, vehicle depreciation expense in the quarter was 26 percent lower than in the third quarter of 2010, while fleet cost per vehicle in the quarter declined to $186 per month compared to $262 the previous year’s quarter.
In the third quarter of 2010, Dollar Thrifty sold 15,800 vehicles for an average return of $632 per vehicle. This year, the company sold almost as many vehicles but for an average gain of $1,125 per vehicle. That’s close to twice as much as the previous year.
Hertz said it booked a $40 million “tsunami benefit” in 2011, while Avis Budget reported a projected 20 percent gain in fleet costs for the full year and a projected net benefit north of $140 million.
These gains, however, were mitigated by a competitive pricing environment. The flip side to the crisis in Japan was that the industry was forced to hold fleet in the second quarter to protect against supply disruptions in order to fulfill summer demand. Ultimately, the canceled orders turned out to be less severe, or just late. The industry ended up carrying excess fleet into the third quarter, which negatively impacted car rental rates.
Hertz said it experienced a 60-day delay on fleet that was supposed to arrive in June, and it reported having trouble getting specialty vehicles such as minivans and Cadillac Escalades. This lack of specialty fleet negatively impacted rates and thus revenue per day (RPD), and even cut a couple pennies on earnings per share. The vehicles finally came in, but too late to impact the summer season.
In the midst of the high season in August, Hurricane Irene cost Hertz $9 million in rental cancellations, the company said.
Hertz said it continues to feel competitive price pressure on-airport and reported its corporate contract rates were down 3 percent in the quarter.
In Dollar Thrifty’s case, revenue per day decreased 1.7 percent, though that’s trending favorably as the company reported it had worked through the excess fleet issues from the summer. This seems to be the trend.
Hertz tightened its fleet this past month and said it was able to up prices on leisure rental transactions. With that, advanced reservations for November and December indicate strong seasonal demand.
Avis noted that longer length of rental (LOR) affected pricing. The company said domestic pricing continued to be down year-over-year in October, but a recent price increase seems to have stuck.
All three companies reported increased LOR. Improved utilization and less cost to churn the vehicles are good things.
Posted @ Monday, November 7, 2011 12:00 AM