At the dawn of America's automobile age, a Nebraskan by the name of Joe Saunders came up with a wild idea: He'd rent his Ford Model T to traveling salesmen.
Today, 101 years later, his figurative heirs -- Saunders later sold out to a Chicagoan named Hertz -- confront an existential question: Can the U.S. car-rental business thrive in the era of Uber, Lyft and, one day, autonomous vehicles?
The answer, so far, isn't pretty. Losses at Hertz Global Holdings Inc. are piling up and Avis Budget Group Inc. just dialed back its profit forecast. Investors have paid a heavy price. Problems with rental fleets are one reason. In recent years, Hertz bought more cars than it needs, and it's been struggling to unload them at decent prices.
Perhaps more troubling, however, is that car-rental companies face the kind of threat that felled Blockbuster, which was undone by new technology in the form of digital video and Netflix.
There always will be a market for rental cars, but for a growing number of business customers, and even some casual consumers, they seem like a throwback when a person can just tap an app instead of waiting in line, picking up keys, filling up and dropping off.
The travails of the industry were driven home yet again Tuesday when Hertz reported its third-straight quarter of red ink. The 63 cents-per-share adjusted loss for the period that ended in June was worse than the lowest analyst projection in a Bloomberg survey. A day earlier, Avis cut its earnings projection for the full year.
"The transportation business is evolving," said Neil Abrams, president of Abrams Consulting Group, which does advisory work for the rental car industry. "The companies that stand still are left in the dust."
Rental-car companies have had to slim down their fleets at the worst possible time. Millions of vehicles are returning off leases from when the U.S. auto industry was on its yearslong growth spurt.
That big supply is making it difficult to sell old rental cars in the used market. Hertz's moves to shed cars quickly have accelerated depreciation rates for the rental industry. Chief Executive Officer Kathryn Marinello took over in January with the task of fixing the company a matter of weeks after billionaire investor Carl Icahn increased his stake.
"Hertz management has hurt the industry the most," said Jim Tennant, principal of the Tennant Group, a consultant to the rental industry.
Marinello said the company is now done slimming its bloated fleet. "Of course, the hard work always comes before the pay off as reflected in our second quarter results," Marinello said in a statement announcing the results.
The progress the CEO described led to a day of respite Wednesday for investors who had watched Hertz shares plunge 72 percent from their high point over the past year, reached last August. Shares of Hertz Global Holdings surged $3.29, or 23 percent, to close Wednesday at $17.57 in New York.
As the companies struggle with managing the core business, Hertz and Avis also are going to have to navigate a hazy future. Whereas the harried business traveler has to schlep bags to a bus, ride that to a rental counter, wait in line, get the car, inspect it, sign the papers and then drive off, ride-sharing allows people to click an app and get picked up.
At this point, Uber and Lyft have only taken about 3 percent to 4 percent of revenue from car-rental companies, mostly from business done at airport counters, estimates Hamzah Mazari, analyst with Macquarie. Bearish investors think they can steal 25 percent, Mazari said, though he expects more like a 5 percent to 7 percent cut.
In rough numbers, he estimates Hertz and Avis could each lose $200 million in revenue. Each company now brings in about $8.6 billion a year.
"As it gains momentum outside big cities, it could have bigger impact," Mazari said of vehicle hailing and sharing. "It could get bigger especially if millennials are more comfortable with car sharing."
There's a role for rental companies to play in the future, said Michael Millman, founder of Millman Research Associates. They have large lots in major cities, airports and tourist attractions, and staff to maintain them. Their only real competition, he said, will be other rental companies like closely held Enterprise Holdings Inc. and General Motors Co.'s Maven unit.
"I think they are going to benefit from this," Millman said. "These pilots will grow into businesses and bring in new revenue."
That will require the rental companies to show they can transform a business that has been run the same way for decades -- a major undertaking, Tennant said.
"The car rental companies are not really good at change," he said.
Business on 08/10/2017