Ouch! It Hertz…It Hertz!
By Julia Vance
10/24/01 8:00 AM ET
The rental car industry is one of many industries negatively impacted by the terrorist attacks of September 11. Already struggling under the weight of a sagging economy, the terrorist activity deepened the downturn for rental agencies by greatly reducing travel activity nationwide, thus curtailing demand for rental vehicles. The downturn in car rental activity has potentially far-reaching effects as sluggish demand conditions in this industry will likely impact vehicle sales through the end of this year and into next.
Following the attacks on the morning of September 11, vehicle rentals plummeted by approximately 50% that day as the FAA's grounding of all flights eliminated the need for rental vehicles at end destinations. Since then, business has rebounded somewhat, but is still 25% to 35% below normal levels.
Some of this falloff in demand was due to an already weak economic environment as shrinking corporate profits have pushed companies to trim expenses by cutting back on business travel. The much-reduced demand for rentals is also driven by the nation's newfound fear of flying, however, as the perception of higher risks has convinced many to cancel or postpone trips. Since the restarting of airline operations, the passenger load factor for airlines is down from a moderately healthy July figure of 77.5% to approximately 50%.
The drop in airline travel is of serious consequence for many rental companies. Some businesses, such as ANC rental, which operates the National and Alamo brands, are mostly stationed at airports and depend on airline traffic for up to 90% of their rentals. In response to the decline in demand from their major source of revenue, agencies have been slashing prices across the board, hoping to stimulate demand through the use of discounting. Data from the Dow Jones Travel Index reports a 30% decline, on average, in daily car rental rates for most major markets throughout the U.S. since last spring. The falloff is even steeper for metro areas such as San Francisco, Los Angeles and Denver, where prices have been cut in half.
In addition to slowing revenue streams, rental agencies are also struggling with rising expenses due to the fallout from the terrorist attacks. For a few days immediately following September 11, demand for one-way vehicle rentals actually spiked and rental agencies in many major cities rented out their entire fleet of vehicles as stranded travelers sought alternative means of transportation to reach their end destinations.
Though this spike in demand certainly pushed up utilization rates, the extra demand did little to bolster profit margins as the majority of demand was for one-way rentals. Such rentals normally require an extra service fee, as the rental agency must later return the vehicle to its origin for further use. Several companies waived the fee in the wake of the attacks, however, and now face the enormous task of reclaiming up to 1.92 million displaced vehicles. As the costs of recouping these assets reach into the thousands for individual branches, many agencies are simply returning vehicles to the manufacturers or selling them to local dealers.
In response to these operating pressures, several companies, including ANC Rental, Budget Rent-A-Car, and Dollar Rent-A-Car Systems, are lobbying Congress for a $1.5 billion aid package. Although not all rental agencies support this request for federal aid, it is clear that the rental vehicle industry is faltering in the aftermath of the terrorist activity. Stock prices for some agencies have declined by upward of 50% since the summer. ANC, Hertz, and Dollar Rent-A-Car are also working to reduce payroll and fleet sizes in light of their new operating environment.
The fallout in demand for rental cars and trucks will undoubtedly benefit the consumer in the near term as prices for rental vehicles continue to fall. The impact on the broader economy is not as rosy, however, as weak demand for rentals will work to stem orders for fleet vehicles in the fourth quarter. Fleet orders account for up to one-fifth of annual sales for the Big Three domestic producers.
The timing is particularly bad as many fleet orders come in the early fall in order to receive the newest models for use in the spring of the next year. Thus far, vehicle sales have held up due to attractive financing and discount packages offered by domestic producers. A weak labor market and falling consumer confidence will not support sales longer term, however, and the dropoff in demand for fleet cars and trucks will only intensify the degree of this slowdown.
The reselling of displaced vehicles also has negative implications for vehicle sales. The addition of so many rental vehicles to the used market will work to drive used car and truck prices down, thus increasing their attractiveness in relation to new vehicles. Growth in used car sales may usurp any remaining momentum in new vehicle sales in the fourth quarter.
Although the worst for rental vehicle agencies will likely play itself out by the end of the year, conditions will remain relatively weak for some time to come. Before the events of September 11, business travel had been expected to rebound by the end of 2001. The further deterioration of business and consumer confidence since then means that airline travel demand may not return to normal until the end of next year. Indeed, airlines and rental agencies alike are making financial plans based on much-reduced travel volumes through the middle of 2002.
