Rate Hikes Rev Up Car Rental Firms’ Stocks

It’s an old cliche in the car rental business that renting a $25,000 vehicle for a day costs less than renting a tuxedo. But the gap is steadily closing--much to the delight of the rental companies and their stockholders.

After abruptly calling a truce to a decade of price wars, the $17-billion auto-rental industry began gradually raising prices last year and has continued doing so in 1999, just ahead of the busy summer travel season.

And with travel remaining strong, the higher prices haven’t dented consumers’ demand for rented vehicles. So the companies’ earnings and stockholder returns are rapidly getting fatter.

Indeed, since Hertz Corp. announced another $3-a-car average price increase for U.S. rentals Feb. 26, its stock has soared 49% because investors expect the higher prices to translate into even higher earnings. Avis Rent a Car Inc.’s shares have surged 56%, and the stock of Dollar Thrifty Automotive Group Inc. has jumped 68%.

Consumers also can look for prices to keep rising, albeit slowly, because rental demand is expected to stay high and because car rental prices were depressed for so long, analysts said.

“These guys didn’t raise prices for 10 or 15 years,” said analyst Dean Gianoukos of J.P. Morgan Securities in New York. “Every other industry in the world was raising prices, and these guys didn’t, so they have a lot of room to catch up.”

Until two years ago, most of the major car rental companies were divisions of the Big Three auto makers, which saddled the rental firms with huge stockpiles of cars. To move those cars off their lots and to grab market share from one another, the rental firms waged price wars for years.

That meant the firms weren’t keeping up with inflation--namely, the rise in their operating costs--and they suffered heavy losses as a result. But it was a bonanza for the consumer.

Since then, though, several of the leading rental agencies were sold or issued stock to the public, and their new owners and managers are now focused on turning a profit and boosting their stocks. Hence, the higher prices.

“We need to get pricing up so that we can continue to improve our returns,” said Joseph Nothwang, Hertz’s executive vice president for U.S. rentals and leasing.

Still, renters aren’t feeling sticker shock, partly because renting a car is still a bargain when prices are adjusted for inflation. Average prices rose about 5% last year and will probably climb 3% or so further in 1999, said Jon LeSage, research director at Abrams Travel Data Services, which tracks the industry.

“The consumer has not been hit hard at all,” said Gianoukos, who estimates that the average daily U.S. rental rate is now around $40. Hertz Chairman Frank Olson has said his company considers $50 to be a reasonable daily charge to cover the company’s costs, but that level probably won’t be reached for at least two years, Gianoukos said.

Hertz, a Park Ridge, N.J.-based operator with more than 6,000 outlets worldwide, recently posted its best first quarter results in history, with earnings shooting up 38% from a year earlier on a 15% gain in revenue. Also, the company said advance reservations point to a strong summer, especially in Florida, Hawaii and New England.

Avis, meanwhile, said its first-quarter profit soared 48% from a year earlier (excluding one-time gains), and the Garden City, N.Y.-based concern attributed part of the upswing to its ability to maintain “more attractive price levels.”

The biggest threat to the rental companies and their effort to raise prices would be a major slowdown in travel overall. But that doesn’t appear on the horizon, observers said.

“We don’t see any reduction in commercial traffic,” said Hertz’s Nothwang. “When you have the kind of robust economy we’re enjoying right now, people need to go to those meetings and make those sales calls, and car rental is a vital component of that.”

Indications from the airline industry also show that although the carriers have been trimming their growth plans in case the economy softens, they’re still adding airline seats for both business and vacation travel--and therefore making room for more potential car rental customers.

More than 40% of the car rental industry’s sales now occur away from airports, thanks in good part to the rapid growth of Enterprise Rent-a-Car Inc., which caters to consumers needing a car while theirs is being repaired, or who want a different vehicle for weekend trips.

Privately held Enterprise, in fact, is now the nation’s biggest rental agency, with U.S. revenue of nearly $3.5 billion last year, according to the trade publication Auto Rental News.

“That means that even if the travel market would soften, the car rental industry isn’t as vulnerable as it used to be,” when 70% or more of the industry’s sales were based at U.S. airports, LeSage said.

* OUT AND ABOUT: Americans plan record number of summer trips. C4

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Rental Run-Up

Car rental stocks have soared this year in response to rising rental prices, which are boosting the major rental companies’ earnings. Monthly closes and latest:

Tuesday closes:

Hertz: $59.44

Avis: $35.88

Dollar Thrifty: $19.94

Source: Bridge

Car Rental Market Share

Percentage of U.S. rental revenue in 1998:

Enterprise: 20.1%

Hertz: 17.4%

Avis: 14.0%

National: 10.5%

Budget: 9.6%

Others: 28.4%

Source: Auto Rental News