101-year-old car rental business nearing twilight
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.”