Hertz Global Holdings Inc. (HTZ), awaiting final U.S. antitrust approval for its acquisition of Dollar Thrifty Automotive Group, is among rental-car companies enjoying price increases not seen since before the recession.
Both Hertz and Avis Budget Group Inc. (CAR) reported price and revenue increases during the first quarter in their respective earnings calls last week. Hertz’s $2.6 billion purchase of Dollar Thrifty consolidated most car-rental revenue under Hertz, Avis and Enterprise Holdings Inc.
Even with Hertz’s required divestiture of its Advantage brand and 29 other locations intended to preserve competition, consolidation gives those top three companies the “incentive to focus on profitability instead of market share,” Whitney Tilson, co-founder of New York-based hedge fund T2 Partners LLC, said in a presentation to investors in Las Vegas this week.
“The market underestimates the improved pricing environment,” Tilson told investors. “There can be a decade-long tailwind of strong top-line growth combined with improved pricing, margins and return on capital, leading to rapidly rising earnings.”
Tilson compared the auto-rental industry with railroads about a decade ago -- a capital-intensive, low-margin, low-return industry that consolidates and slowly becomes more profitable. Tilson recommended buying Hertz and Avis, which each reached 52-week highs this week, to take advantage of a market dominated by just three companies. Enterprise, the largest U.S. car-rental company, is closely held.
Hertz increased 1.2 percent to $24.85 at the close yesterday in New York while Avis rose 2.5 percent to $30.93. Hertz and Avis each have gained 87 percent from the end of October. The Standard & Poor’s 500 Index has climbed 16 percent during the same period.
Hertz solidified its position as the second-largest U.S. rental-car chain when it bought Dollar Thrifty in November after receiving conditional approval through a consent decree with the U.S. Federal Trade Commission.
The FTC has withheld final approval of Hertz’s purchase of Dollar Thrifty, which typically would have been granted in December following a 30-day comment period. The agency continues to investigate the sale of Hertz’s Advantage brand along with additional locations designed to recreate a fourth competitor that could maintain price discipline, two people familiar with the matter said April 4.
The FTC ordered Hertz to divest extra locations in addition to the Advantage business to protect consumers, citing the $11 billion spent to rent 50 million vehicles at U.S. airports each year. Without the divestitures, the merger would have hurt competition at 72 airports around the U.S., the FTC said when it initially approved the transaction Nov. 15.
Rising prices show that the commission should do more to preserve competition, said David Balto, a Washington-based antitrust attorney who represents consumer groups and isn’t involved in the transaction.
“The FTC’s delay in taking action is costing consumers every day,” he said. “The FTC must take the most aggressive action to fully restore competition to this market.”
The agency is concerned that Macquarie Group Ltd., whose private-equity arm bought Advantage from Hertz in a joint venture with Franchise Services of North America Inc., isn’t following through on commitments it made to expand and strengthen Advantage, two people familiar with the matter said April 4.
FTC officials were troubled by Macquarie’s Dec. 7 ouster of Sanford Miller, an industry veteran who was to run Advantage under the agreement, said the people, who asked not to be named because the investigation is confidential.
The company and Miller have filed lawsuits against one another over his firing. U-Save Auto Rental of America Inc., the company with which Miller had his contract, alleges Miller was terminated for cause in a March 1 lawsuit filed in Mississippi.
Miller claims that the private-equity firm used him to win FTC approval of the Advantage transaction with the intent of pushing him out as soon as it controlled the assets, in a lawsuit against Macquarie filed with the Supreme Court of the State of New York May 3.
“It’s uncommon for the FTC to take five months to review the comments of a consent decree that was put out for public review,” said Billy Vigdor, an antitrust lawyer with Vinson & Elkins LLP in Washington, who served at the FTC for six years. “It suggests they are trying to ensure that the order will fully resolve their concerns.”
Officials in the FTC’s compliance office discussed their concerns about the state of Advantage’s operations with Macquarie officials during a May 6 meeting in Washington, two people familiar with the matter said. The staff hasn’t yet made a formal recommendation to the commission about how to proceed, the people said.
FTC officials are deciding whether the Advantage transaction needs to be scrapped or restructured to ensure the new company can compete with its larger rivals, said the people, who asked not to be named because a final decision hasn’t yet been made. The Dollar Thrifty acquisition itself is unlikely to be challenged, they said.
Together, Hertz, Dollar Thrifty, Enterprise Rent-A-Car and Avis Budget control about 98 percent of total airport car rentals in the U.S., the FTC said in the November statement announcing the consent decree. That figure includes the budget Advantage brand and the locations Hertz has divested.
Under terms of the Nov. 15 consent decree, if the FTC decides the buyer of the Advantage assets isn’t acceptable, commissioners can vote to rescind the Advantage sale and order the asset be resold “to an acquirer or acquirers that receive the prior approval of the Commission.”
The agency has designated a monitor trustee, Roger Ballou, who has been reporting to the FTC on the status of the Advantage business. Ballou declined to comment on the nature of those reports.
In the meantime, the rental companies are enjoying the biggest price increases since the U.S. recession. Hertz said in an April 30 conference call to discuss first-quarter earnings that revenue per day in the U.S. rose 4.8 percent. Avis said first-quarter prices rose 4 percent on a May 2 earnings call.
Hertz said the pricing increases were tied to higher vehicle costs, which they were able to pass along to consumers; Easter and spring break falling in March compared with April the year before; and growth in ancillary revenue, such as navigation-system rentals.
“Industry conditions continue to be ripe for good prices and good price increases,” Chief Executive Officer Mark Frissora said on the April 30 call. Hertz began its pursuit of Dollar Thrifty in April 2007 before finally acquiring the company last year.
In the first quarter of this year, Avis raised prices six times. CEO Ron Nelson attributed the increases in part to Hertz’s acquisition of Dollar Thrifty. Since the transaction, “the basis of competition in our industry has become better balanced between service and price than it has been in recent years,” Nelson said on the May 2 call.
Avis also said leisure rental-car pricing increased 8 percent in the quarter, its biggest gain since the recession. The increase excluded prices for Zipcar Inc., which Avis bought in March.
“It’s too soon to say how summer pricing will shape up, but we are hopeful that the four factors that drove our pricing in the first quarter will be evident during the summer,” Nelson said.
The Miller employment termination cases are: U-Save Auto Rental of America Inc. v. Miller, 3:13-cv-127, U.S. District Court, Southern District of Mississippi (Jackson) and Miller v. Macquarie Group Ltd. (MQG), 651612-2013, Supreme Court, State of New York (New York).