Business still isn't great for Hertz or Avis, but at least they aren't hurting as much anymore. The next few quarters will prove whether they can burst out of a multiyear slump or will continue to muddle forward.
Car rental companies are still trying to pull out of a funk inflicted by the rise of ridesharing — with mixed results.
Avis Budget Group posted steady results for the first quarter of 2019. The company beat earnings estimates while reporting lower revenue than expected, which decreased by 2 percent year-over-year. Both domestic and international business declined slightly compared to the first quarter of 2018.
The big question from analysts on the company’s earnings call revolved around its prospects for the rest of the year; in the past, Avis has had a tendency to overestimate how many cars it would need in its fleet. This leads to increased costs at a time when demand for rentals should be high.
“I would say fleet sizes for the industry in the U.S. are very good,” said Larry D. De Shon, CEO of Avis Budget Group. “As you looked at the first quarter, of course, the first month of the quarter, you’re always, as an industry, going to be over-fleeted because you come out of the biggest peak of the year and then you go into a slow period… I would say that fleets look good in the industry in the United States, and that helps me be more optimistic as we think about summer. There should be no reason why fleets won’t be right-sized as we go through the summer months.”
Avis’ struggles point to the reality that competition with ridesharing companies and its car rental rivals has made it difficult to raise prices while competing for customers. The company is seeing corporate customers renting for a longer span of time, but it lacks the ability to raise prices and drive more revenue.
“Corporate… volume has finally now flattened out or [is] starting to get a little bit better,” said De Shon. “Pricing is still under pressure, particularly in the large commercial segments, but we are growing length. And particularly this last quarter, we grew length fairly significantly in the small business segment. And of course, that doesn’t help pricing, but it does help the profitability of the business overall. So we’re all for that when we can grow length and grow into more profitable rentals. So we need to continue working on growing the volume back now that we’ve kind of plateaued on the volume decline that we’ve had previous, and we’ve got to start kind of growing our rate per day.”
The company also wants to avoid a repeat of last year, when adverse weather led to a lack of demand in Europe that hurt its profitability during what should have been its strongest quarter in the region.
Hertz Corporation’s financials showed nearly the same story, missing on revenue but narrowing the losses expected by analysts. U.S. business, in particular, grew 7 percent year-over-year, but international revenue also declined 7 percent. The company’s fundamentals were strong with respect to pricing and fleet management, even if the business outcome was mixed.
An Alternative to Rideshare
Much has been made of the ways Uber and Lyft have helped erode car rental’s position in the ground transportation marketplace. Both Avis and Hertz are now renting cars to ridesharing drivers and learning how to best manage their fleets as demand increases. There’s also the nascent opportunity regarding autonomous vehicles, but that will take years before reaching significant scale.
There was also some background on the financial effect ridesharing has had on the car rental sector. Eating away at short-term rentals was a problem for the companies, but those rentals never made much money anyway.
“I would say back in the past, years ago, when [ridesharing first emerged], it probably hit mid-to-high single digits erosion of our business,” said Kathryn V. Marinello, CEO of Hertz. “It was, generally speaking, very short-term rentals, which, frankly, aren’t that great for us between turning around, cleaning them, fueling them. The longer length to keep, the better. To that end, we probably saw an erosion of about that much. If you look at that size of our fleet now and how that’s growing, I think we’ve more than replaced it and made up for it with profitable business by leveraging the opportunity.”
Now that Lyft is public and Uber is soon to be, increased pricing could prove to be an opportunity for car rental providers to claw back market share. As pressure mounts for rideshare companies to drive revenue, car rental may prove to be a more affordable option for travelers, particularly if rates remain as low as they have been.
“If anything, they’ve tried to ratchet it up a little bit so their drivers can make money,” said Marinello. “So going out there, very low cost. But in order to continue to attract and retain drivers, they’ve added in tipping. They have the surge pricing tools. If anything, what some of our companies have found is sometimes, there are deals with us in the rental space that are more productive and effective from a cost perspective.”
Maybe it’s wishful thinking for renting a car to be seen as an alternative to ridesharing, instead of the opposite. Travelers tend to vote with their wallets, though, and a period of cheaper rentals could drive more demand for struggling car rental brands just as ridesharing becomes more expensive.
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Photo credit: A Hertz car rental location. David Welch / Bloomberg