Rumors of the car rental sector's demise may have been greatly exaggerated. Fundamentals have improved for Hertz and Avis, while partnerships with ridesharing companies and autonomous vehicle innovators bring potential for sustained growth.
The struggles of the car rental sector in recent years have been well-documented, with ride-sharing and shifting consumer behavior leaving it in a lurch.
There are signs, though, that the two biggest public players are finally back on the path to growth. Hertz Global Holdings’ stock rose 25 percent after announcing second quarter 2018 earnings on Tuesday, boasting a 7 percent year-over-year revenue increase while beating analyst expectations with $2.4 billion in revenue. Its profit is back to 2016 levels, as well.
How are they starting to turn it around? For one, more people are renting cars than in previous years. And in Hertz’s case, it has gotten smarter about how it deploys its fleet.
“U.S. revenue is growing again across all brands,” said Kathryn Marinello, president, CEO, and director of Hertz Global Holdings. The secret? Marinello said Hertz improved its ability to match its car fleet with demand, bought new cars at lower prices and improved efficiencies in how it rotates its fleet.
One of the other major aspects of this improvement stems from an improved market for selling used cars. Rental cars depreciate quickly, so car rental companies sell them off annually to make some money and create room for new models that are more attractive to high-spending customers. The market for used car sales, though, had been particularly soft in the last two years during a time when car rental companies had purchased more vehicles than they needed.
This forced Hertz to get smarter about when it sells off parts of its fleet, and this approach has paid off with sale prices finally improving. It opened more retail lots to offload vehicles and improved its online retailing operation while purchasing cars it expects to yield higher returns once sold off.
“If we see a great environment for a certain car at a certain mileage,” said Marinello, “we’ll rotate that car out. So we’ve developed a great dealer network and good relationships with the [car manufacturers] where we’re able to add cars and delete cars pretty effectively.”
There is also the promise of future growth for the first time in years. Beyond better e-commerce tools for consumers and fleet management technology, Hertz announced in late July a partnership with automated car technology provider Aptiv to help operate and manage the company’s operations in Las Vegas.
These represent ways to make money off its fleet when consumers aren’t renting, although the company wouldn’t specify if its existing partnership with Uber is driving significant revenue.
“We’re seeing, with the ride-hailing business, that the win-win we create for those drivers is a good thing for them, but it’s reducing the overall cost of their business,” explained Marinello.
Avis Budget Group is riding the same wave, as well. Its revenue grew 4 percent year-over-year to a record high, although its stock was slightly down after announcing earnings, likely due to softer increases in volume and a slight reduction in revenue per day in the Americas region. It also doesn’t help that Hertz posted such a spectacular quarter.
Avis is trying to develop better mobile solutions to upsell to customers and is seeing ancillary revenue tick upwards as a result of its efforts.
“Customers today want to transact when it’s most convenient for them,” said Larry D. De Shon, chief operating officer and director of Avis Budget Group. “For us, that meant we needed to do a better job of offering our ancillary products and services on our website and mobile devices and not rely solely on our counter sales functions when customers are in a hurry to get their cars. With ancillary revenue on both avis.com and budget.com growing in the quarter, I believe we’re on the right path.”
They’ve had to deal with commonsense tweaks to the way they upsell to customers; nobody really wants to pay extra for a GPS unit, for instance, since smartphones are now ubiquitous. Nobody wants to overpay so they don’t have to deal with refilling the tank before dropping off a car. At the same time, increased mobile engagement gives these companies an opportunity to market and upsell more effectively.
Avis also expanded its partnership with Lyft, offering up more cars to drivers, and wants to form more partnerships with ridesharing and mobility providers going forward. Its partnership with Waymo has garnered headlines and also presents the opportunity for growth in the burgeoning autonomous vehicle sector.
“We are watching all the peer-to-peer platforms that are out there, and the different product offerings that are being offered,” said De Shon. “As you said, they have been offered for actually for a number of years on the [car manufacturer] side. And we are also in discussions with the number of the different platform companies as well to see if there’s a place for us in all of that. I do think that as peer-to-peer grows, that there will be an opportunity for us to think differently about peer-to-peer as a product offering in our portfolio. So it’s something that we’re not ignoring, it’s something that we’re actually taking a look at to see what opportunities that may present for us downline as well.”
This could be the beginning of a new period of growth for car rental giants, if demand holds up. It helps that the companies have become smarter about sizing and deploying their fleets following years of mismanagement. Now that the basics are back in order, the companies can start to innovate.
“After two long years of industry over-fleeting, declining used car values and lower pricing, we are now poised to capitalize on the opportunities that lie ahead,” said De Shon.
Photo credit: A car in a Hertz rental lot. Hertz Global Holdings posted strong earnings in the second quarter of 2018. David Welch / Bloomberg