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WIKI ANALYSIS
Avis Budget Group is the largest publicly-traded car rental company in the U.S. It manages a fleet of approximately 410,000 cars and trucks through 6,700 locations and two brands, Avis and Budget. In 2006, Avis Budget generated over 80% of its revenue from airport locations.[1] Its Avis and Budget brands combined command over 30% market share in the airport car rental business, just ahead of the Hertz (28%).[2] However, privately-held Enterprise Rent-a-car is more than twice as large as runner-up Avis Budget by market share. Enterprise generates most of its revenue from local, off-airport locations.
With so much of its business at airports, the company is highly dependent on the airline travel industry. Things that hurt air travel - including terrorism, recessions and increased oil prices - can dramatically affect demand for rental cars. [3] Furthermore, because the company purchases 74% of its fleet under special repurchase or guaranteed depreciation programs (whereby they can sell vehicles back to the manufacturers at a certain price) with Ford Motor Company (F) and General Motors (GM), they are subject to risks related to these manufacturers financial troubles.
Business Overview
Avis Budget rents its approximately 410,000 cars and trucks through 6,700 locations, drawing most of its revenue (81% in 2006) from airport locations.[4] The company's two brands, Avis and Budget, target different segments of the market, with Avis primarily a business/upscale leisure option and Budget a value-oriented brand targeted toward more cost-conscious consumers. Individually, they enjoy a 19.9% and 10.4% market share, respectively.
The company also services the residential hauling and moving market with its local or one-way Budget rental trucks operated from its 2,400 dealers nationwide.
Financial Performance
Below are revenue and operating metrics for the company. While most of the company's recent losses have been the result of one-time write-offs and costs associated with its spin-offs of Wyndham Worldwide (WYN) and Realogy (H), Avis has still struggled to remain profitable, effectively hovering around the break-even point.
Trends and Drivers
- Airline Travel. Over 80% of the company's car rental business in 2006 came from travelers who rented vehicles upon reaching their airport destination. Indeed, the Avis and Budget brands combined enjoy the largest market share and substantial brand recognition at airports.[6] During periods of heavy traveling and vacationing, the company benefits from the tailwinds of increased traffic at its airport locations. Conversely, disruptions to travel, including terrorist attacks, natural disasters, or recessions (during which consumers and businesses cut spending on non-essential travel and vacation) adversely affect the company's bread-and-butter car rental business. Presumably, the Avis brand is more resilient than the Budget brand during times of recession and generally poor travel as it targets both businesses with more regular travel needs and a generally higher-income customer.
- The company is subject to problems associated with domestic auto manufacturers. The majority of the company's rental vehicles are purchased from Ford or GM. CAR enters into repurchase or guaranteed depreciation programs, in which they can sell vehicles back to the manufacturers at a certain price for the car after a certain period of use. The arrangements mitigate the risk that the value of the cars falls below expected levels after the company is through using them (i.e. "residual risk"). But the continuation and success of these arrangements depends on the ability of the manufacturers to pay their obligations when the company wishes to sell back vehicles. They also depend on the ability of the manufacturers to be financial willing and able to offer vehicles on terms with low residual risk. Because these companies have been struggling with credit problems and operating deterioration, Avis Budget faces the trickle-down risk of these firms' continued troubles.[7]
- Demand for asset-backed securities largely determines the attractiveness of financing available for the company's fleet. Like most car rental companies, Avis Budget finances its fleet of vehicles with substantial debt, often packaging and securitizing debt in the form of an asset-backed security using the financed cars as collateral. If Wall Street's appetite for these securities dissipated or if interest rates rose due to factors such as rating agency downgrades, collateral impairments, or credit insurer financial deterioration, Avis's ability to raise capital on good terms can be adversely affected. Currently over $5 billion of Avis' $7 billion+ indebtedness is asset-backed debt.[8] This heavy leverage places the company at greater risk of failing to meet debt covenants and greater risk of not being able to raise more capital on favorable terms.
- Rising oil prices. An increase in fuel prices has two adverse effects on the company. First, it directly discourage use of rental cars, since customers must fill the tank during the period they rent the vehicle. Second, it leads to drops in airline travel, which, as mentioned above, is a driving force of the company's business. Because the rental industry is so price competitive and because drivers will avoid frequent travel and driving given high oil prices, passing costs on to customers is difficult to impossible.
- New Home Construction and the U.S. Housing Market. The company's Budget truck rental business is driven by demand for moving furniture, household items, etc. New Home Construction and robust demand in the housing market mean that more consumers will require Budget's truck rentals.
Competition
The auto rental industry is highly competitive. The company's main car rental competitors are Hertz Global Holdings (HTZ), Dollar Thrifty Automotive Group (DTG), Vanguard Brands, and Enterprise Rent-a-Car. [9]. Generally, the company competes primarily with Hertz and Dollar Thrifty for airline-related rental business. Enterprise, which is privately held, has a U.S. market share nearly double that of Avis Budget and sports a larger car fleet and higher revenues. The company focuses on off-airport business, including "loaners" and other travel.
The domestic auto rental industry is estimated at around $20 billion per year and includes nearly 2 million cars.[10] The industry tends to be consolidated in a few large players and then fragmented with several smaller companies with significantly less market share. Below is a comparison of relevant operating metrics for each of the major players in the auto rental industry.
| Company | US Rev. 2006 ($M)[11] | Domestic Fleet | International Fleet | Revenue/Domestic Car | US Airport Market Share[12] | Total US Market Share[13] |
| Avis Budget Group (CAR) | $4,109 | 329,350 | 53,310 | $12,476.09 | 30.3% | 19.6% |
| Hertz Global Holdings (HTZ) | $4,385 | 310,000 | 180,000 | $14,144.60 | 28.4% | 18.4% |
| Vanguard Brands | N/A | 209,400 | N/A | N/A | 19.7% | 12.4% |
| Dollar Thrifty Automotive Group (DTG) | $1,660 | 142,857 | N/A | $11,620.01 | 11.6% | 8.5% |
| Enterprise Rent-a-Car | $9,000 [14] | 630,066 | 247,934 | $11,109.95 | 7.6% | 37.4% |
Market Share
Avis operates among three other competitors in the U.S. rental car industry of which Enterprise Rent-A-Car dominates with nearly twice the market share of its closest competitor, Hertz.[15] Avis follows closely behind Hertz and both companies have almost three times the market share of Dollar Thrifty.[16]
Footnotes
- ↑ Avis 2006 Annual Report, "Business," pg 1
- ↑ HTZ 2006 Annual Report, pg 17
- ↑ 2006 CAR Annual Report, "Risk Factors," pg 17
- ↑ Avis 2006 Annual Report, "Business," pg 1
- ↑ All figures compiled from 2006 Avis Annual Report
- ↑ 2006 HTZ Annual Report, pg 17
- ↑ CAR 2006 Annual Report, "Risk Factors," pg 16
- ↑ 2006 CAR Annual Report, pg 45.
- ↑ 2006 CAR Annual Report, "Competition," pg 11-12
- ↑ Auto Rental News 2006 Report
- ↑ Figures compiled from company annual reports or, where not available, Auto Rental News estimates
- ↑ Data from HTZ 2006 Annual Report, "Competition," pg 17
- ↑ Data compiled from fleet sizes of Auto Rental News 2006 Report
- ↑ Fortune Magazine, "The big surprise is Enterprise", June 2006. Estimate based on fiscal year ending 7/31/06.
- ↑ IBIS World Industry Report - Rental Car Services & Leasing in the US "Key Competitors" pg.20
- ↑ IBIS World Industry Report - Rental Car Services & Leasing in the US "Key Competitors" pg.20
- ↑ IBIS World Industry Report - Rental Car Services & Leasing in the US "Key Competitors" pg.20
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