101-year-old car rental busi­ness near­ing twi­light

The Denver Post - - BUSINESS - By David Welch

At the dawn of Amer­ica’s au­to­mo­bile age, a Ne­braskan by the name of Joe Saun­ders came up with a wild idea: He’d rent his Ford Model T to trav­el­ing sales­men.

To­day, 101 years later, his fig­u­ra­tive heirs — Saun­ders later sold out to a Chicagoan named Hertz — con­front an ex­is­ten­tial ques­tion: Can the U.S. car-rental busi­ness thrive in the era of Uber, Lyft and, one day, au­ton­o­mous ve­hi­cles?

The an­swer, so far, isn’t pretty. Losses at Hertz Global Hold­ings Inc. are pil­ing up and Avis Bud­get Group Inc. just di­aled back its profit fore­cast. In­vestors have paid a heavy price. Prob­lems with rental fleets are one rea­son. In re­cent years, Hertz bought more cars than it needs, and it’s been strug­gling to un­load them at de­cent prices.

Per­haps more trou­bling, how­ever, is that car-rental com­pa­nies face the kind of threat that felled Block­buster, which was un­done by new tech­nol­ogy in the form of dig­i­tal video and Net­flix.

There will al­ways be a mar­ket for rental cars, but for a grow­ing num­ber of busi­ness cus­tomers, and even some ca­sual con­sumers, they seem like a throw­back. Why wait in lines, pick up keys, fill up and drop off, when you can tap an app in­stead?

The tra­vails of the in­dus­try were driven home yet again last week when Hertz re­ported its third straight quar­ter of red ink. The 63 cents-per-share ad­justed loss for the pe­riod that ended in June was worse than the low­est an­a­lyst pro­jec­tion in a Bloomberg sur­vey. A day ear­lier, Avis cut its earn­ings pro­jec­tion for the full year.

“The trans­porta­tion busi­ness is evolv­ing,” said Neil Abrams, pres­i­dent of Abrams Con­sult­ing Group, which does ad­vi­sory work for the rental car in­dus­try. “The com­pa­nies that stand still are left in the dust.”

To be sure, the in­dus­try’s tough times may have more to do with mis­man­age­ment than Uber, Lyft or new mo­bil­ity com­pa­nies. Hertz in par­tic­u­lar built up a bloated fleet of too many cars to rent. To keep those ve­hi­cles gen­er­at­ing rev­enue, the com­pany had to drop rental rates.

The com­pa­nies have had to slim down their fleets at the worst pos­si­ble time. Mil­lions of ve­hi­cles are com­ing back off leases from when the U.S. auto in­dus­try was on its years-long growth spurt.

Chief Ex­ec­u­tive Of­fi­cer Kathryn Marinello took over in Jan­uary with the task of fix­ing the com­pany a mat­ter of weeks af­ter bil­lion­aire in­vestor Carl Ic­ahn boosted his stake.

At this point, Uber and Lyft have only taken about 3 per­cent to 4 per­cent of rev­enue from car-rental com­pa­nies, mostly from busi­ness done at air­port coun­ters, es­ti­mates Hamzah Mazari, an­a­lyst with Mac­quarie. Bear­ish in­vestors think they can steal 25 per­cent, Mazari said, though he ex­pects more like a 5 per­cent to 7 per­cent cut.

He es­ti­mates Hertz and Avis could each lose $200 mil­lion in rev­enue. Each com­pany now brings in about $8.6 bil­lion a year.

“As it gains mo­men­tum out­side big cities, it could have big­ger im­pact,” Mazari said of ve­hi­cle hail­ing and shar­ing. “It could get big­ger es­pe­cially if mil­len­ni­als are more com­fort­able with car shar­ing.”

Avis’s Zip­car unit is leas­ing cars to Uber driv­ers through a pi­lot pro­gram in Bos­ton. The com­pany also has a part­ner­ship with Waymo, the au­ton­o­mous driv­ing di­vi­sion of Google’s par­ent com­pany, Al­pha­bet Inc., to man­age its fleet of self-driv­ing cars in Phoenix.

Ap­ple, mean­while, has cut a deal to lease Lexus RX450H sport-util­ity ve­hi­cles from Hertz’s Donlen fleet-man­age­ment unit to test its au­ton­o­mous driv­ing sys­tem on the ve­hi­cles.

There’s a role for rental com­pa­nies to play in the fu­ture, said Michael Mill­man, founder of Mill­man Re­search As­so­ciates. They have large lots in ma­jor cities, air­ports and tourist at­trac­tions, and staff to main­tain them. Their only real com­pe­ti­tion, he said, will be other rental com­pa­nies like closely held En­ter­prise Hold­ings Inc. and Gen­eral Mo­tors Co.’s Maven unit.

“I think they are go­ing to ben­e­fit from this,” Mill­man said. “These pi­lots will grow into busi­nesses and bring in new rev­enue.”

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