The car rental industry not only offers mobility and convenience to those who do not possess a car, but is a lucrative commuting option for business and leisure travellers. The economic development, a rise in per capita income and rapid transportation across the globe have contributed to a growth in the industry. The sector is estimated to grow at a CAGR of 5.6% during 2016-21 (Source: Lucintel Report). Moreover, in addition to North America, the growth is expected in the APAC region, owing to increase in demand of foreign travel coupled with the large scale urbanisation.
Cars in service and revenue growth
Source: Auto Rental News
The industry can be sub categorised into general rentals and insurance replacement rentals. The former includes the dominant airport travel segment (on-airport and off-airport), and the non-airport traffic (business and leisure); while the latter offer services to customers renting out cars temporarily to substitute their own car that may have been stolen, damaged in an accident, needs repairs or maintenance among others. Enterprise Rent-A-Car, a privately held company, is the leading player in the market, followed by Hertz Global Holdings Inc. and Avis Budget Group Inc. The 3 players presently account for the majority of the sector's revenue as a result of strategic mergers. The mergers have enabled these companies to either add substantial fleets to their existing numbers or instantly gain scale in another segment with a well-established brand.
Source: Televisory’s Research
Source: Hertz Annual Report Source: Televisory’s Research
Hertz rolled out a new ‘fleet refreshment’ strategy in 2014 in an attempt to enhance customer experience and reduce its fleet maintenance costs and out-of-service levels. This translated into CAPEX per fleet increase of 14.2% in 2015 over the previous year.
Avis Budget entered an alliance with airlines such as JetBlue Airways and Southwest Airlines, offering the airlines’ customers with on-airport travel options. The company acquired Zipcar in 2013, which led to a 27% increase in transaction days along with an 8% increase in revenue. Avis also acquired Maggiore in 2015, in a bid to improve its revenue from international operations. These acquisitions were intended to take advantage of the synergies created by way of cost efficiencies in shared maintenance, IT and administrative costs in controlling its operating expenses (OPEX). Both Hertz and Avis are also investing in valet parking companies and ridesharing services in order to generate ancillary revenue streams. These companies have also adopted "sophisticated systems" so as to ensure efficient and quicker pricing that can keep up with dynamic consumer demands.
Source: Televisory’s Research
The transaction days for Avis increased by 8% in 2015, its OPEX increased marginally by 1.6%, resulting in a lower OPEX per transaction day of US$ 51.7, a reduction of 5.6% over 2014. Avis’s OPEX increased primarily due to high insurance and employee costs along with an increase in international marketing costs; these costs were partially offset by realized cost efficiencies. On the other hand, Hertz’s transaction days remained constant while its OPEX fell by 8.4%, resulting in a lower OPEX per transaction day of US$ 41.9, an 8.3% reduction over 2014. Hertz’s OPEX fell primarily due to reduced activity in the U.S. car rental segment (an increase in the global rental segment has offset the decline in U.S. transaction days). Additionally, for another smaller yet comparable competitor, Localiza, transaction days increased by 3% in 2015 and OPEX increased by 3% in its home currency, resulting in higher OPEX per transaction day of BRL 57, a 0.7% increase over 2014. However, due to a significant devaluation of its home currency, in US$ terms, OPEX declined by 14.4% resulting in a lower OPEX per transaction day of US$16.8, a 16.8% reduction over 2014.
Source: Televisory’s Research
Hertz and Avis (the U.S. companies) registered a 6% fall in revenue per transaction day, Localiza registered a 31.5% fall in the U.S. dollar terms. The revenue per transaction day in 2015, stood at US$ 45.2, US$ 59.9 and US$ 43.6 for Hertz, Avis and Localiza, respectively. Further, for Hertz, the decline was driven by a fall in total revenue, resulting from a contraction in the U.S. rental segment and unfavourable FX movement. On the other hand, the decline in revenue per transaction day for Avis was primarily driven by pricing pressures in the international rental segment and Fx fluctuations, this more than offset the gains in transaction days. In constant FX terms, Localiza’s revenue increased c. 14% YoY in 2015 because of competitive pricing in the leisure segment (boosting rental volumes) and a strong demand for corporate fleet rentals. However, in US$ terms, its revenue per transaction day declined despite an increase in transaction days.
Du-Pont Analysis
Source: Televisory’s Research
Avis’s ROE is the highest amongst the three players. This is attributable to Avis’s lower capital base, which led to a higher equity multiplier in comparison with Hertz. Furthermore, Avis could somewhat maintain its asset turnover, though the same was lower than both the Hertz and Localiza. The main driver for Hertz’s ROE was asset turnover while in the case of Localiza, primary drivers were both net profit margin and asset turnover.
The transaction days for the major players may have improved while expanding into international markets, the cost efficiencies have not started to play out as expected either due to a depressed vehicle rental market or competitive pricing pressures. Although low prices in developing markets seem to be the new norm, the players in this sector have also been exposed to the fall in revenues due to the competition from Uber and similar entities. Moreover, given the impact on earnings, like many other sectors, industry players see cost efficiencies as a silver lining that would allow access to a larger customer base with a lower cost per transaction.
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