Naturally, the headlines generated from quarterly and annual earnings reports focus on the big picture of a company’s financial health. But mining the conference calls associated with those reports also provides insights into those companies’ strategies and initiatives, which are good barometers of the market in general.
The 2017 fourth quarter and full-year conference calls of Avis Budget Group and Hertz Global Holdings offer such a look into the car rental. (Of course, this is not a complete picture, as Enterprise Holdings is privately held.)
What forces are impacting car rental moving forward?
Market dynamics are positive for continued fleet right sizing.
Following a general industry trend, both Avis and Hertz are making good on their pledges to keep their fleets in line with demand. Hertz’s U.S. fleet declined last year, and for its 2018 buy Avis has “consciously contracted for fewer vehicles compared to model year 2017.”
Outside dynamics are also pushing this discipline, particularly from automakers and their restraint in rental fleet sales. Both Hertz and Avis seemed to welcome this restraint for its positive impact on residual values.
Fleet costs are manageable. But watch out for rising interest rates.
Speaking of residual values, they’re facing continued pressure from the overhang of supply working its way through the wholesale market (remember that off-lease tsunami?). However, rental companies are ramping up their initiatives to mitigate fleet holding costs, such as better alignment of fleet mix to consumer preferences (sedans to crossovers) and remarketing outside of auctions (50% of Avis’s units are now remarketed elsewhere; Hertz used auctions for only 27% of its units in the fourth quarter). Hertz says its shift in car-class balance “is essentially now complete.”
This translates into an expectation that per-unit fleet costs will be essentially flat for this year. However, both mentioned rising interest rates as a headwind — Hertz incurred a $14 million increase in vehicle interest expense in the fourth quarter alone. Moving forward, Avis predicted rising interest rates will ding vehicle expenses by $20 million in 2018.
Pricing remains buoyant — leisure pricing, anyway.
Overall pricing for the industry turned positive in the second half of 2017 and that trend is continuing. Leisure pricing is the driver, while corporate travel/commercial business pricing remains essentially flat. We’ve been hearing this broken record for years. In light of positive corporate travel trends, will commercial pricing ever improve?
This begets a few thoughts: Hertz and Avis are implementing big-data systems with demand/yield/fleet algorithms. These systems are built for the highly fluctuating leisure market, but have a smaller effect on corporate (mostly contracted) accounts. Uber and Lyft have taken a share of corporate travel. Do contracted accounts have a negotiating chip with Uber and Lyft as alternatives, and will ride hailing continue to take share from the corporate travel pie?
Hertz indicated it had regained some lost corporate share based on its fleet refresh and counter bypass plan (Ultimate Choice) rollout. Is a revitalized Hertz one more player to compete against on price?
Volume is the key, and commercial volume has been flat for Avis. Avis is focusing on smaller and mid-market accounts, as it has in the past, which would drive higher rates. Let’s see what it yields.
Renting to ride hailing drivers is now a business segment, and it’s profitable.
Uber and Lyft drivers need wheels, and car rental companies can fill this need. But getting the formula right — understanding the best vehicle types and mileage bands, drivers’ needs, in-fleeting and de-fleeting, creating the partnerships — this all needed some tinkering. Hertz has found the sweet spot with off-rental units that run from 40,000 to about 70,000 miles.
These ride-hailing designated units drag on overall revenue per day, but their lower operating costs, longer lengths of rent, and higher utilization more than compensates. In 2017 Hertz grew its dedicated ride-hailing fleet exponentially to 22,000 units, and expects further growth.
Ancillary revenue opportunities are changing, and rental companies must adjust.
Both Hertz and Avis admitted that ancillary sales have not been as strong as they’d hoped. This is partly attributed to the evolution of how consumers book rental cars and accelerates the need for mobile-centric strategies.
Avis and Hertz have restructured their websites to better capture products and services sales. The Avis mobile app allows vehicle upgrades at any point before taking the keys — with the added benefit of higher Net Promoter Scores, the company reported.
Hertz is “introducing new products that represent real value” to its customers, though it did not reveal specifics. Hertz is also coaching staff on identifying upsell opportunities as renters increasingly bypass the counter through the Ultimate Choice program.
Hertz has even ditched the term ancillary sales in favor of the more consumer-friendly “value-added services.” This shifts the focus to customer benefits, particularly when these services will be increasingly selected without human intervention.
Autonomy won’t happen tomorrow, but the strategies must form today.
In the U.S., Avis has been the most public about its mobility initiatives, announcing the opening of a “mobility lab” and furthering its partnership with Waymo to manage its autonomous fleet.
Rental companies have built-in advantages when it comes to managing fleets, which should carry over to an autonomous environment. This initiative is a good first step, at least behind the scenes. But when autonomy finally arrives, who touches the consumer? Can car rental companies leverage their loyalty programs to get consumers to use their autonomous service app, as opposed to offerings from shiny new things such as Uber, Lyft, ReachNow or Maven?
Zipcar, with its size and status as a carsharing pioneer, has an advantage in that consumer-facing foothold. Avis seems to understand that the floating carsharing model is the future, and is expanding into this type of service in Europe. Zipcar’s new commuter program is taking steps to understand that “shared-use” is a key component of the transportation evolution.
Partnerships are essential, as each player comes from different core competencies. It’s important to make those partnerships to entrench that advantage now.