Not long ago the U.S. had eight national airlines, each fighting the other for scraps in an economic cycle of boom and bust. Now there are just four, and they make billions of dollars.
While those carriers consolidated in huge takeovers, out in the parking lot the sleepy car rental industry began to take notice. They took a page from the same playbook, and over the past few years pushed through a series of mergers of their own, leaving three large rental companies with more than 90 percent of the market: Hertz Global Holdings Inc., Avis Budget Group Inc., and Enterprise Holdings Inc. The goal? Charging as much as possible—just as airlines do.
The car rental consolidation has been less apparent to consumers because the acquired brands still exist in some form. Airlines tend to erase a target’s branding with a coat of paint; rental car brands are kept alive because of customer loyalty and perceived market niches. Beyond that, the $27 billion industry is following the airline strategy: slashing costs and maximizing the use of existing fleets. The companies are even hiring former airline executives to help, while using Twitter to cherry-pick dissatisfied customers with discounts and special offers.
For an industry once happy to let customers come to them, the burgeoning social media fight is the clearest sign that renting a car will never be the same.
Figuring out the right size for a fleet and how to deploy it efficiently across the country are cornerstones of both air and road travel. In other words, own as few planes and cars as possible and make sure they’re deployed where they’re needed most.
“As long as inventory levels are kept tight, meaning there’s not excess inventory servicing fewer customers, pricing will hold up,” said Neil Abrams, president of Abrams Consulting Group, which specializes in the car rental industry.
Hertz, which in addition to its eponymous brand owns Dollar, Thrifty, and Firefly, shrunk its U.S. fleet by 6 percent in the first quarter of this year, compared with the same period last year. Since the end of 2014, its fleet has decreased by almost 40,000 autos, to 460,000. At Avis Budget, owner of its named brands, as well as Zipcar and Payless, the fleet has stayed roughly flat, with 358,000 vehicles in its “Americas” region as of the first quarter.
Industry behemoth Enterprise Holdings, parent of National, Alamo, and its own brand, has a U.S. fleet of 1.2 million vehicles. Enterprise has traditionally had more of an off-airport focus than others, playing heavily in the local and insurance-replacement rental markets. “They have demands that are a little bit different,” said Chris Brown, executive editor of Auto Rental News. “They’re serving a lot more of the local market than Avis and Hertz.”
A big part of the shift in car rental is taking place on the asphalt acreage surrounding the airport: About 55 percent of the U.S. business is conducted near runways. Like the airline ticket counters inside the terminal, many of these rental locations are now built in food court fashion: rival beside rival. Comparison shopping is exceedingly rare, though, as the vast majority of customers arrive at the airport wanting to start their vacation or work trip as quickly as possible. As a result, matching capacity with demand, by market, is crucial.
Car Rental Cafeteria
As for all the rental brands the big three companies have kept alive, it’s best to think of them as you would types of restaurants. Avis Budget, Hertz, and National are aimed at price-insensitive road warriors who rent frequently as part of their work (fancy steakhouse). Alamo and Budget are for leisure travelers who want more bells and whistles in the cars, such as Sirius XM or navigation gear, and stuff like roadside assistance (bistro fare). Dollar and Thrifty are for leisure travelers on a budget (local diner). Advantage and Firefly are “spartan” brands for those on a very tight budget. (“You want fries with that?”)
“Some people look at this business as a commodity business, but the reality is that each of these brands does have its own customer base,” Abrams said. “Each offers something different.”
The consolidation wave dates to 2012 when Estero, Fla.-based Hertz, the second-largest rental chain, acquired Dollar Thrifty Automotive Group for $2.3 billion. As part of the antitrust review, regulators told Hertz it must divest its Advantage Rent A Car unit, prompting Richard Branson’s Virgin Group to briefly pursue that business and gain entry into the U.S. car-hire market. Hertz started a new “deep value” brand in early 2013, called Firefly.
That huge deal by Hertz prompted Parsippany, N.J.-based Avis Budget to snap up Zipcar’s ride-sharing business in January 2013 for $500 million, followed seven months later by its acquisition of Payless Car Rental. (Avis and Budget merged in 2002 as part of the latter’s bankruptcy reorganization.)
In October 2015, Advantage, now owned by a Canadian private equity firm, acquired a smaller rival, E-Z Rent-A-Car Group Holdings. The deal solidified Advantage’s spot as the fourth-largest player in the U.S. industry, with 85 locations, including outlets at 22 of the top 25 U.S. airports.
United Airlines Veterans
As the merger pace quickened, Hertz began collecting airline industry veterans. Hertz Chief Executive Officer John Tague is a former president and chief operating officer of United Airlines, hired in late 2014 to help oversee the company’s turnaround amid an accounting review that required financial restatements. During his 25-year airline career, Tague was a senior executive at three smaller airlines, including turns as CEO of two. He left United as part of its merger with Continental.
In building his team at Hertz last year, Tague turned to several veterans of the airline business. For chief revenue officer, he hired Jeff Foland, who quit United after a decade in sales, marketing, and product roles. Hertz’s North American chief, Alexandria Marren, spent 25 years at United and later served as chief operating officer at SkyWest Inc., the largest U.S. regional airline. Hertz’s financial chief, Tom Kennedy, is also an airline veteran.
Avis Budget has its own United veteran as CEO. Larry De Shon spent 28 years at the airline, mostly overseeing airport operations, before leaving in 2006. De Shon assumed the top job at Avis Budget on Jan. 1.
With all this airline firepower, the two rivals are looking to absorb lessons already learned in the skies above. The goal at Hertz is to identify “the right capacity for the markets, to match capacity with supply and even slightly below that,” said company spokesman William Masterson, also a former executive at (you guessed it) United. “You don’t want to chase every last renter. Just like an airline … you don’t want to chase every last open seat.”
As they modernize, Avis Budget and Hertz have been investing heavily in ride-sharing and valet-parking companies and are working to tweak their revenue-management systems to be able to price much more quickly, in tune with market demand.
They’ve also begun turning to social media to attract customers. Avis Budget has been courting Hertz customers who express displeasure on social media, offering discounts and other enticements.
Avis Budget didn’t respond to requests for comment on its use of social media. Hertz spokesman Masterson said his company doesn’t use social media “to take a negative stance with any of our competitors.”
Still, despite investments and innovations, the industry’s transformation remains a work in progress. The two publicly traded companies saw soft pricing this past winter and posted losses in the first quarter while affirming estimates for positive net income for 2016. So far this year, Hertz and Avis Budget shares are down 40 percent and 25 percent, respectively.
Much the way airline executives say their industry is fundamentally restructured and primed for consistent profitability, Hertz executives sent a similar message last week: Tague and two other top executives dropped $1.32 million of their own money to purchase company shares. They may be betting that, just as America’s airlines flourished after the takeovers in that sector, so will the car rental business, once the dust has settled.