The fourth quarter and full-year 2011 earnings reports are out, as is my quarterly tradition recapping where the industry has been through the eyes of the public car rental companies. And so once again, we read the tea leaves and between the lines to prognosticate on the coming year.
First, some fourth quarter headlines: Revenue per day (RPD) was down and pricing was (and still is) under pressure. RPD in the fourth quarter suffered from the latent effects of last summer's over-fleeting, corporate pricing pressures and new entrants in Florida.
In Dollar Thrifty's earnings conference call, Scott Thompson downplayed Florida, saying those airports are continually volatile and competitive. In Avis Budget Group's call, Ron Nelson made the point that Florida comps are tough because the previous year was so tight on fleet.
However, RPD does not exist in a vacuum. RACs are quick to point out that pricing is a function of fleet size. If you're under-fleeted, your RPD is going to look great, but you're probably leaving business on the table and overall revenues will suffer, as was the case during the recession when it was hard to get cars.
The move in the industry is toward "asset light," as Hertz calls it; or low overhead, less brick and mortar and more technology such as "virtual kiosks." This move is often a function of off-airport business initiatives, which incur lower rates along with lower costs and a longer length of rent - hence a net gain to the bottom line.
And hopefully this headline isn't lost: Volume is strong across the board, and higher volumes and utilization usually translate to lower RPD. Hertz achieved record volume worldwide in 2011, and Avis Budget and Dollar Thrifty reported similarly solid numbers. In regards to Florida, "I'd rather have 10,000 rentals at $450 (a week) than 6,000 at $600," Nelson of Avis said. Touché.
Bottom line, Avis Budget's profits were negatively impacted by its integration with Avis Europe and financial climate in the region, and to some extent, weak pricing in North America. Hertz, however, broke income and revenue records in 2011. And at Dollar Thrifty, Scott Thompson's rock star team continues to post solid earnings while keeping expenses - particularly fleet costs - low.
Here's what each of the public companies chose to tell us in their earnings calls:
For Avis Budget, it's all about the integration of Avis Europe, and the economic climate there isn't helping. Revenues in Europe were flat, and Avis Budget made sure to present mitigating factors, such as stable income from long-term leasing, growth in China, licensee profit outside Europe and fleet flexibility. In a reverse of North American trends, volume was down in the fourth quarter, though pricing was up and corporate travel is looking good.
Avis Budget reported traction in small business initiatives in the U.S., as well as off-airport growth. The major initiatives there are co- and tri-branded (with Budget Truck) stores and a separately managed fleet for its local market operations. (Note: For both Hertz and Avis Budget, off-airport business is an ever-present opportunity. Both companies will be sure to report growth to investors on every earnings call.)
Avis Budget spent a bunch on advertising and will continue to do so in 2012. It paid off with a 10% growth in leisure volume, though some in Wall Street raised the red flag of playing the market share game.
In its call, Nelson mentioned "a major technological change in the industry," in the form of virtual rental technology, smartphone interactions displacing check-in desks and direct-to-consumers sales partnerships. All exciting stuff, but not tied to any numbers yet.
Over at Dollar Thrifty, the company kept its eyes on the prize - the leisure traveler at airports. The company continued to keep fleet costs in check. Fleet size held steady while demand went up, resulting in an increase in utilization.
While pricing declined, with fewer corporate accounts Dollar Thrifty is not suffering the same commercial pricing pressures as Hertz and Avis Budget.
Just so you know how well Dollar Thrifty does at selling its cars: In the fourth quarter, the company sold 8,600 units at an average gain of $436 per vehicle. That's up from an average loss of $17 per vehicle on the sale of 7,900 units in the fourth quarter of 2010.
At Hertz, Donlen (its newly acquired commercial leasing division) is now contributing to its bottom line, and more synergies and cost savings are being realized.
Hertz continues to grow its discount Advantage brand, independent of any divestiture talk. Revenue and profits are up 32% in Europe, as Advantage gained 35 net new locations. Advantage now sits on 44 of the top 65 airports in the U.S.
Hertz opened up 247 net new off-airport locations and made inroads with insurance companies for replacement business.
Where Avis divided its airport and local fleets, Hertz said its ability to share fleet between Hertz, Advantage and insurance replacement operations drove utilization up to 78.6% worldwide - a record since going public. The company set a record low in depreciation in 2011 at $265 per vehicle.
Equipment rental was a bright spot. HERC experienced strong growth as the world starts building again, and seeing the growth potential, Hertz acquired some smaller equipment rental companies in 2011.
Hertz is strong on franchising; its franchise network now represents 43% of total international revenue, though only 4% of U.S. rental car revenue. In the U.S., Hertz franchised four locations last year. The company wants to franchise 1-2% of worldwide rental car revenues in 2012.
For the franchisees out there, on questioning, Mark Frissora said that Hertz has "a lot of deals under consideration." And, interestingly, he said that its franchisees have equal or better Net Promoter Scores (a function of loyalty) than corporate stores.
The Crystal Ball
While the needle seems to be stuck in the commercial sector, our public companies seem to be more optimistic about leisure pricing moving forward as the economy improves. Avis Budget is in the midst of a leisure price increase, and reports that initial increases have been followed by other companies. Let's be sure to revisit this next quarter to see if the trend holds.
Hertz believes worldwide car rental RPD will be slightly negative, with Europe as a factor. Avis Budget expects only "modest growth" in Europe this year, driven by the company's initiative to grow Budget, a relative unknown over there.
The used car market will stay strong in 2012 on lower auction volumes and this will benefit fleet costs. Though in 2013, this may become a "headwind," as they like to say, as the market assimilates the return to leasing in 2010.
Nonetheless, volume is looking great in 2012. People are renting cars - let's just hope price wars don't drive down RPD even further.
Did someone say merger? As we move away from the action last year regarding scooping up Dollar Thrifty, the hullaballoo fades into silence once again.
Both Hertz and Dollar Thrifty had two scripted sentences on the topic and would not comment further.
Before the conference call, Dollar Thrifty amended its shareholder rights plan - a stock-buying plan intended to ward off a hostile takeover. During the call, Scott Thompson said, "The company has not received complete clarity on certain competitors' intentions or the status of FTC activities involving these competitors. ... Keeping the plan in place will ensure the Dollar Thrifty board maintains the power necessary to act in the best interest of all of our shareholders."
The lack of clarity around the FTC's activities seemed in contrast to Mark Frissora's more neutral to upbeat note: "We continue to work forward constructively with the FTC on getting a consent decree, and once we get that consent decree, our intention is to work with the Dollar Thrifty board in order to try to consummate a transaction that makes sense to both companies."
Whether a deal will happen at this point is anyone's guess.