Rental Car Firms Hit a Bumpy Road
The car rental business, a low-profit sector in the best of times, is being battered by the same hurricane that’s roiling the rest of the travel industry, and the storm could speed an anticipated industry consolidation.
ANC Rental Corp. is studying the possibility of a sale, while Hertz Corp., Avis Rent A Car and other chains are considering staff cutbacks and trying to cut expenses by slowing the delivery of new vehicles.
“In the short-term, the drop is pretty devastating,” said Jon LeSage, vice president of Long Beach-based Abrams Travel Data Service. “If airplanes are at 40% capacity now, that’s as damaging a factor for rental cars as it is for hotels.”
In the longer-term, some rental car companies may be unable to survive. “There are too many cars out there right now,” said Cathy Stephens, executive editor of Torrance-based Auto Rental News. “The industry could benefit from a little consolidation.”
ANC is perhaps the most troubled of the major rental car companies. The parent of the National and Alamo rental car companies cut its work force by 700 employees earlier this year and hired Lehman Bros. to study a possible sale of the company. Now, ANC is considering a 35% reduction in the size of its fleet and is meeting with creditors to discuss its options.
The Fort Lauderdale, Fla.-based company has been especially hard hit because 90% of its business comes from airport sales counters. ANC, though, isn’t alone in coming to grips with the dramatically reduced number of airline passengers. The industry has been building off-airport locations, but 57% of the sector’s $20 billion in 2001 revenue will be driven by the flying public.
Part of the problem is the ready supply of rental vehicles--about 1.8 million at the end of 2000. The big chains operate thousands of rental counters and also must fend off lower-cost regional and local players.
Now, with revenue plunging, rental car companies have joined the airline and hotel industries in a round of price cuts designed to help jump-start business. The industry also has joined the long line of distressed industries seeking federal assistance. Perhaps the only sign of normality is the Car Rental Show, which started as planned Monday at the Riviera Hotel & Casino in Las Vegas.
Some competitors will fare better than others during coming months. Privately held Enterprise Rent-A-Car caters largely to drivers who have their cars in the shop for repairs or who are renting vehicles at off-airport sites. It won’t be hurt as badly by the plunge in air travel, observers say, and its close ties to insurance companies make it difficult for competitors to move in on its market.
A handful of companies are owned by larger corporations--Hertz, for example, is owned by Ford Motor Co., and Cendant Corp. owns Avis. Analysts say those firms might be able to rely upon the parent company’s deeper pockets.
The industry also will benefit from close ties to Detroit’s Big Three auto makers. Foreign manufacturers feed a trickle of vehicles into the rental industry, but the domestic fleet is dominated by Ford, DaimlerChrysler Corp. and General Motors Corp. DaimlerChrysler, for example, provides 85% of the Dollar Thrifty Automotive Group’s fleet.
Detroit traditionally has relied upon business leasing and rental fleet deals to help smooth out profits. Rental and business fleet sales, for example, drive about half of Ford Taurus sedan sales. So it’s to Detroit’s benefit to keep rental companies going.
Car rental companies also can react more quickly to the new travel and tourism reality than the airlines and hotel sectors. It’s not easy to dispose of underutilized aircraft or empty hotel rooms. But rental car companies are negotiating with auto makers to delay new deliveries and speed the return of leased vehicles that account for 70% of the domestic fleet.
The unexpected flow of rental vehicles into the resale market will have an impact on new-car sales.
“Obviously, it would be detrimental to overall sales if rental car fleets sustain a long-term lack of use,” said Paul Taylor, chief economist for the National Automobile Dealers Assn. “But at this point, the industry is still on its way to selling between 16.2 million and 16.5 million cars.”
The industry’s struggles come at a time when some competitors already were weakened by tough competition.
ANC, for example, was a wholly owned subsidiary of AutoNation Inc. until June 30, 2000. Business at its Alamo and National brands began to suffer early this year because of a “competitive pricing environment.”
ANC said it had won creditor approval to delay a $70-million payment due Monday. The company also recruited former Budget Rent a Car Corp. President William N. Plamondon to serve as chief restructuring officer. Former National President Lawrence J. Ramaekers, who spent the last 25 years managing turn-around situations, also agreed to serve as a consultant.
Other major players also are responding with fleet and staffing reductions. “Certainly, air travel is a pipeline for the major rental car companies,” said Ted Deutsch, Avis’ vice president of corporate communications. “The last few weeks have had a major impact upon demand. The good news is that this week was better than the week before, so things are starting to improve.”
“We’ve begun to make a modest comeback,” said Hertz spokesman Richard Broome. “But we’re nowhere near where we were on the 11th. We have implemented a new rate program that’s designed to stimulate car rental travel. But, from our perspective, what’s really got to happen is that people must become comfortable with air travel again.”
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Reuters was used in compiling this report.
