The Siege of Alamo : High Costs, Low Prices Put Car Rental Firms in a Pinch
Car rental firms like Hertz and Avis are familiar names to travelers, yet the firms’ inner workings are largely secret. Most rental agencies are privately owned or divisions of auto makers, so their sales and profits aren’t for public consumption, thank you.
But Alamo Rent A Car Inc. has given the public a brief peek inside. The nation’s fourth-largest car rental firm by fleet size, Alamo is privately owned but had to issue a prospectus detailing its operations so that it could borrow $100 million through a public note sale. The notes, which were sold Feb. 13, pay a junk-bond yield of 11.75%.
And the prospectus did not present a pretty picture. After enjoying growing prosperity in the 1980s, Alamo has seen its profits drop steadily since 1992, and now they’ve disappeared. For the first nine months of 1995, the Fort Lauderdale, Fla.-based concern lost $21 million on revenue of $1.1 billion.
Alamo is not alone. Its prospectus is a vivid portrait of problems plaguing the entire U.S. car rental industry, which generates combined revenue of $13.8 billion a year.
The major culprit: The agencies are being squeezed between rapidly rising costs--especially soaring prices Detroit is charging them for new cars--and ferocious competition and price cutting among themselves that preclude their revenues from keeping pace with their costs.
Prices of new cars sold to the agencies have nearly doubled over the last three years, yet rental fees charged to drivers have risen only 10% on average, industry executives and analysts said.
That’s kept rates in check for travelers but it is wreaking havoc on the rental firms. “[A] number of other car rental companies [had] decreased profitability, including net losses, during 1995,” Alamo’s prospectus says, although it did not identify the others.
Alamo is 93%-owned by Florida businessman and company Chairman Michael S. Egan.
Simply put, there are more rental cars available than renters in what is essentially a commodity business, with little except price to differentiate one firm from another. The agencies are unwilling to hike prices, for fear of sending customers to their rivals.
“Nobody can afford to surrender any market share” by lifting prices, said Jan Armstrong, executive vice president of the American Car Rental Assn., a trade group in Washington. “I don’t really see a solution unless someone is brave enough to go out and raise prices again, and then be matched by the industry.”
In fact, “they undercut each other constantly on rates,” said Jon LeSage, executive editor of Auto Rental News, a trade publication in Redondo Beach. “It’s like a game of chess they play.”
The rise in car prices came as a shock to the industry. In the late 1980s and early 1990s, General Motors Corp. (Alamo’s main supplier), Ford Motor Co. and Chrysler Corp. sold cars to rental firms at attractive prices, in large part because overall consumer demand for new cars was weak. “They were giving the cars away,” LeSage said.
The agencies would then resell many of the cars to the public only a few months later. But that led to a glut of nearly new cars on the market, which infuriated the auto dealers by cutting into new-car sales. So beginning in 1993--as new-car sales began rebounding--the auto makers began raising prices for cars sold to rental fleets.
Even agencies that are owned by car companies--such as Ford’s Hertz and Chrysler’s Dollar Systems Inc.--have not been shielded from the higher prices.
“It’s pretty much an arm’s-length relationship. . . . There’s no special consideration” given to Hertz, said Craig R. Koch, Hertz’s president and chief operating officer. “The fleet costs have risen about the same for everybody in the industry.”
Vehicle costs account for about a third of an agency’s total expenses, but that leaves the other two-thirds subject to control. And some agencies are doing better than others.
Hertz’s profit last year actually rose 14% to a record $105 million, but Hertz needed a powerful fourth quarter to produce the gain. Its profit for the first nine months of 1995 was down 3% from a year earlier, thanks in large part to a 19% jump in equipment costs, including “higher prices for automobiles.”
Other agencies have shaken up their operations to counter the slump. Budget Rent A Car Corp. earlier this year laid off 20% of its salaried workers, or 500 people, and thinned its senior management to cut costs. Alamo laid off 15% of its headquarters staff last year.
It was Alamo’s pioneering offer of unlimited mileage for rentals that helped the company grow in the 1980s from a regional firm into a major player, even though it has only about 10% of the number of U.S. locations as Hertz and Avis. Alamo, which also focused heavily on the booming leisure travel market in Florida, saw its revenue soar from $171 million in 1984 to $1.3 billion a decade later.
Alamo serves 15 million travelers a year through 295 outlets in the United States, Canada and Europe, including sites at airports in Los Angeles, Orange County, Burbank, Long Beach and San Diego.
Its expansion was guided by Egan, 55, who last year had an estimated net worth of $300 million, according to Forbes magazine.
Now Egan is trying to end Alamo’s losses by negotiating new contracts with car makers, paring personnel costs and shaving advertising costs by directing promotions to specific customers, namely more business travelers. The actions should save Alamo roughly $70 million a year, the prospectus says.
And 1996 could be better for all rental firms, Hertz’s Koch said. The sharp hike in new-car prices is abating, and supplies of rental vehicles are tightening, he said. That should enable the industry to raise prices somewhat, although it won’t happen overnight. More than a third of Hertz’s revenue, for example, is tied to yearlong contracts with governments, corporations and other large-scale users of rental cars.
Nonetheless, Koch said, “when you see companies like Alamo go into substantial losses, one can sit back with a pretty high degree of confidence and predict that soon the pricing is going to have to change.”
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Alamo’s Rocky Road
After years of prosperity, Alamo Rent A Car is struggling. The cost of new cars is rising faster than rental fees--a problem that’s troubling the rental industry overall.
Revenue (In millions)
1995*: $1,070
*
Profit: (In millions)
1995*: -$22
U.S. Fleet Size
Top five rental car companies
Enterprise: 263,000
Hertz: 228,750
Avis: 175,000
Alamo: 150,000
Budget: 135,000
Sources: Alamo Rent A Car, Auto Rental News
