2014 has been a good year for the rental car industry. A recovering economy has meant more car rentals and more miles traveled by consumers. Volume alone isn't responsible for the rental companies' recent success, though. Each of the big three rental chains has been able to raise prices, thanks to the consolidation of an industry that they now collectively control 98% of.
Bloomberg reports that Avis Budget Group, Enterprise, and Hertz Global Holdings have been able to raise prices thanks to a combination of less competition and better inventory management. They haven't been particularly coy about their increase in leverage over the market. The CEO of Avis Budget recently declared during a conference call with investment analysts that "I'm probably more enthusiastic about our business than I've ever been. And one of the reasons is the meaningful change in pricing that we've now seen play out over the past six quarters." His company's stock has gained in value 50% over the last year, and is now a Wall Street favorite. Currently trading at close to $60, some analysts think there's still plenty of room for growth. A report released Wednesday by the MKM Partners market research firm pegs the true value at between $75-80 a share.
"Rival" firm Hertz hasn't been doing quite so well, but isn't exactly hurting for business. That company's stock is down slightly as it recovers from a major accounting snafu dating back to 2011. In 2013 Hertz swallowed Dollar Thrifty in a $2.3 billion deal that drew the attention of antitrust regulators in the Federal Trade Commission. Despite concerns about reduced competitiveness in the industry, the deal was allowed to go forward after Hertz agreed to spin off its Advantage sub-brand. Advantage lasted a mere four months on its own before going bankrupt. It was sold to a capital investment firm and then spun off yet again, surviving today as a niche player in select cities.
Avis has also scarfed up competitors. In 2011, the company acquired Payless Car Rental for $50 million, and a few months later bought out Zipcar for $500 million. Some consolidation in the industry was probably inevitable following the 2009 recession. But trade observers now agree that the FTC dropped the ball when it allowed Hertz to buy out Dollar Thrifty. The competitive situation in the car rental business now represents the "Golden Age" of the Detroit 3 automakers in the 50s and 60s: a mostly stable oligopolistic arrangement where everyone has their own slice of the pie, nobody upsets the apple cart, and a few oddballs pick up the scraps.
As an entitled and obstinate Millennial that hasn't developed the proper respect for the gently used and reasonably priced wares of the rental chains, I find myself wondering how this comfy arrangement might be disrupted. Although still in their infancy, car-sharing services like Lyft and Uber may grow into feasible alternatives to rental cars. One sign that the nascent ridesharing market is worth taking seriously is the interest shown in it by the big rental companies. Besides Avis' aforementioned acquisition of Zipcar, Enterprise bought Zimride, the predecessor company of Lyft, last year. In any case, from a consumer's perspective the rental car business could use a little more competition.
The post Rental Car Oligopoly Increasing Profitability at Consumers' Expense appeared first on The Truth About Cars.
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