In the United States automobile era, a Nebraska man named Joe Saunders had an idea: he would rent his Ford Model T to the traveling vendors.
Today, 101 years later, his heirs (Saunders sold the business to a Chicago guy named Hertz) face an existential question: Can the US car rental business thrive in the Uber-Lyft era and, perhaps someday, in that of autonomous vehicles?
The answer, so far, is not very pleasant. Losses that Hertz Global Holdings Inc. have been experiencing are mounting and Avis Budget Group Inc. has just reduced its earnings forecast. Investors have paid a very high price. Problems with rental fleets are one of the reasons . In recent years, Hertz bought more cars than it needed and has been struggling to get rid of them at a decent price.
However, perhaps the most worrying thing is that car rental companies are facing the same situation that one day had Blockbuster, which ended up disappearing by new technologies in the form of digital video and Netflix.
There will always be a market for rental vehicles, but for an increasing number of business customers, even for casual consumers, that seems to be in reverse. Why wait for a queue, pick up the keys, refill the fuel tank and return the car when an application can do it?
The work of the industry showed that situation when the red numbers were presented for the third consecutive quarter. The loss of USD 0.63 per share for the period ended in June was worse than the Bloomberg projection . One day before this presentation, Avis reduced its profit forecast for the entire year.
” The transportation business is evolving, ” said Neil Abrams, president of Abrams Consulting Group, which provides consulting services to the car rental industry. “Companies that are unemployed are left in the dust.”
Undoubtedly, the difficult times in the industry may have to do more with poor management than with the presence of Uber, Lyft or any other company of that type. Hertz, in particular, set up a fleet with too many vehicles to rent. To keep those cars and generate revenue, the company had to lower rental rates.
Companies have had to reduce their fleets at the worst time. Millions of vehicles are ending their lease contracts when the automotive industry has been continuously growing for several years.
That big deal is hampering the sale of old rental cars in the second-hand market. Hertz moves to get rid of cars quickly have accelerated depreciation rates in the rental industry. CEO Kathryn Marinello took over in January 2017 to fix this situation weeks after billionaire investor Carl Icahn increased his stake.
” Hertz management has hit the industry harder,” said Jim Tennan, director of Tennan Group, another consultant in the rental industry.
Marinello said the company is now reducing its fleet because it had increased too much. ” Of course, hard work always comes before we bear fruit and that is reflected in the results of our second quarter ,” Marinello said in a statement announcing the results.
The progress the CEO described gave a break to investors who had seen Hertz shares fall 72 percent from the highest point in the last year.
As companies struggle to manage the core business, Hertz and Avis are also going to have to navigate a nebulous future. While the business traveler has to get on a bus, wait for a queue, get the car, inspect it, sign the papers and then drive, making a car trip through an app seems like a more viable option
At this point, Uber and Lyft have only managed to control 3 to 4 percent of the revenues of car rental companies, mostly made at airport counters, as estimated by Hamzah Mazari, an analyst of Macquarie. Some investors believe they can steal 25 percent of the market share, although they expect a 5 percent to 7 percent cut in coming years.
In rough estimates, it is estimated that Hertz and Avis could lose up to USD 200 million in revenue. Each company contributes about USD 8.6 billion per year .
” As it gains momentum out of big cities, it could have a bigger impact. It could be bigger especially if millennials are more comfortable with the vehicle they share, ” said Mazari.