Surprising Facts About the Rental Car Industry
Renting a car can be a both a pleasant and an unpleasant practice all packaged up into one. On the one arm, who doesn’t love driving someone else’s car for a few days? On the other, is it just me, or do you generally feel that you get fleeced into buying extra products you don’t need?
Despite these varied practices, few people know much about the underlying companies themselves, much less how they operate. Do you know who the thickest rental car company is? How many cars they own? Where they buy their cars? How long they own them? What they do with them once they’re done? Or whether any of the companies themselves are good investments?
My guess is no — unless you’ve already read this article, that is.
The major players
Alamo, National, and Enterprise
Hertz and Advantage
Avis and Budget
Dollar and Thrifty
Sources: Company websites, annual reports, and Morningstar.com.
Enterprise is the largest rental car company in the world. It’s number fifteen on Forbes’ list of America’s Largest Private Corporations, and in terms of revenue, it would rank around No. One hundred ninety on the Fortune five hundred if it were publicly traded. By comparison, its next largest competitor, Hertz, weighs in at No. 309.
Feeding the animals
Albeit precise figures for the industry are elusive, it isn’t difficult to get a rough idea. According to the annual reports of Hertz, Avis, and Dollar Thrifty, rental car companies typically hold their vehicles for anywhere inbetween four and twenty two months, with an average holding period of thirteen months. To put it another way, each year, they turn over toughly 92% of their respective vehicle inventories.
On average, then, these four companies potentially buy almost two million cars and trucks each year. And as you can see below, a significant proportion are purchased from American car companies like Ford (NYSE: F) , General Motors (NYSE: GM) , and Chrysler — making rental car companies some of their most significant individual customers.
Source: Annual reports and author calculations. All statistics relate to two thousand eleven vehicle purchases for the domestic market.
Disposing of the used cars
As a general rule, rental car companies buy a large portion of their vehicles subject to repurchase or depreciation programs with the vehicle manufacturers. Under these programs, manufacturers agree to repurchase the vehicles at a specific time and/or price in the future, subject to certain conditions, or to ensure the depreciation rate on the cars across the holding period.
In 2011, almost half of cars sold by Avis and a quarter of Hertz’s were so-called “program” cars subject to such agreements. Dollar Thrifty, the smallest of the three, almost never uses this option, choosing instead to rely principally on the used car market to dispose of its used vehicles. And data for Enterprise, because it’s a private company, isn’t available.
Rental car companies also have the option of selling used vehicles to wholesalers, who then sell them to used car retail outlets, or directly to used car customers themselves. Last year, for example, Hertz sold approximately 65% of its non-program vehicles at auction, 19% directly to dealers, 9% through their own Rent2Buy program or at retail locations, and approximately 7% through other channels.
So, are rental car companies a good investment?
While each of these companies may pride themselves on brand recognition and the like, for most travelers, rental cars are a commodity, interchangeable in most leisure travelers’ eyes depending on price.
On a theoretical level, this interferes with the capability to develop a moat around their products and/or services. And on a practical level, it impedes margins and profitability. Avis and Hertz, for example, have been profitable in only one and two of the last five years, respectively.
Indeed, all but Dollar Thrifty have been hammered resoundingly by the broader market since 2007, with Avis and Hertz down by almost 50%.
Foolish bottom line
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Loser contributor John Maxfield does not have a financial position in any of the companies mentioned above. The Motley Loser wields shares of Hertz Global Holdings and Ford Motor. Motley Idiot newsletter services have recommended buying shares of Ford Motor and General Motors. Motley Idiot newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Loser has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Attempt any of our Foolish newsletter services free for thirty days.
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