End of the road for Hertz?

Hertz shares rose more than 13 per cent after it was reported that the car-rental company has cut a deal with Apple to lease Lexus sport utility vehicles.
Hertz shares rose more than 13 per cent after it was reported that the car-rental company has cut a deal with Apple to lease Lexus sport utility vehicles.PHOTO: AGENCE FRANCE-PRESSE

The car-rental company is struggling with mismanagement and the rise of ride-sharing

DETROIT • Is it the end of the road for car rental companies?

At the dawn of America's automobile age, a Nebraskan by the name of Joe Saunders had come up with a wild idea. He would rent his Ford Model T to travelling salesmen.

Today, 101 years later, his figurative heirs - he later sold out to a Chicago man named Hertz - confront an existential question.

Can the United States car-rental business thrive in the era of Uber, Lyft and, one day, autonomous vehicles?

The answer, so far, is not pretty.

Losses at Hertz Global Holdings are piling up and Avis Budget Group just cut its profit forecast.

In recent years, Hertz bought more cars than it needs and has struggled to unload them at decent prices.

"The transportation business is evolving," said Mr 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."

To be sure, the industry's tough times may have more to do with mismanagement than Uber, Lyft or new mobility companies delivering a glancing blow.

Hertz, in particular, built up a bloated fleet. To keep those vehicles generating revenue, it had to drop rental rates.

The companies have had to slim down their fleets at the worst possible time.

Millions of vehicles are coming back off leases when the US auto industry was on its years-long growth spurt. That big supply is making it difficult to sell old rental cars in the used market.

As Hertz and Avis struggle with managing the core business, the companies are also going to have to navigate a hazy future.

Whereas the harried business traveller has to get 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 taken only about 3 to 4 per cent of revenue from car-rental companies, mostly from business done at airport counters, said Mr Hamzah Mazari, an analyst with Macquarie.

He estimates Hertz and Avis could each lose US$200 million (S$270 million) in revenue.

Each company now brings in about US$8.6 billion a year.

"As it gains momentum outside big cities, it could have a bigger impact," he added of vehicle hailing and sharing. "It could get bigger especially if millennials are more comfortable with car-sharing."

In the near term, according to Avis chief executive officer Larry De Shon, falling used-car prices that have made the resale of out-of-service rental cars costly are starting to stabilise and rates for rental cars are picking up.

In the long run, he has a plan to stave off increasing competition from the likes of Uber and looming threat from self-driving robotaxis.

Avis' Zipcar unit is leasing cars to Uber drivers through a pilot programme in Boston.

The company also has a partnership with Waymo, the autonomous driving division of Google's parent company, Alphabet, to manage its fleet of self-driving cars in Phoenix.

Apple has cut a deal to lease Lexus RX450h sport utility vehicles from Hertz's Donlen fleet-management unit and test its autonomous driving system via the vehicles.

The day Bloomberg News reported the deal, Hertz shares rose more than 13 per cent.

There is a role for rental companies to play in the future, said Mr 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 and General Motors' Maven unit.

"I think they are going to benefit from this," he noted.

"These pilots will grow into businesses and bring in new revenue."

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A version of this article appeared in the print edition of The Straits Times on August 12, 2017, with the headline 'End of the road for Hertz?'. Print Edition | Subscribe