Posted on: Sunday, August 17, 2003
Fund may buy Alamo, National
By Patrick Danner
Knight Ridder News Service
MIAMI — A New York hedge fund is in line to gain control of Alamo Rent A Car and National Car Rental System, a move that would continue the trend of car-rental companies ending up in some very deep pockets.
Approved by the Delaware bankruptcy judge last week, Cerberus Capital Management's purchase of ANC Rental Corp. — parent company of Alamo and National — is slated to close by the end of September. The deal by Cerberus, which has $9 billion under management, would mark the second time in less than 10 months that a top-five car-rental company has been sold. Budget Rent A Car Corp. was acquired out of bankruptcy by hotel and real estate conglomerate Cendant Corp., the parent company of Avis Rent A Car System, in November.
The sale of ANC's assets would leave Enterprise Rent A Car as the only remaining stand-alone company among the five largest car-rental brands. Hertz Corp. is a subsidiary of Ford Motor Co.
The deals are expected to bring some stability to an $18 billion industry that has been wracked by a slowdown in travel. That was exacerbated by the Sept. 11 terrorist attacks, and prolonged by a frail economy, the Iraqi war and the outbreak of severe acute respiratory syndrome, or SARS.
With the national terrorism index periodically ratcheted up and down a notch, many remain skittish about traveling.
All this has the travel industry wondering when travelers — particularly those on business — will return to the highways and skies as they did just a few years ago amid robust economic growth.
Still, some observers say the car-rental industry may be heading for a rebound after more than two years of upheaval.
"I would say the worst is probably over," said Betsy Snyder, an analyst with Standard & Poor's in New York.
Car-rental companies have coped with fewer travelers in the latest slump by reducing their fleet size. And the industry — not known for its pricing discipline — lately has been raising rates, albeit slowly.
The car-rental industry has always been a difficult business, and not just because it's at the mercy of the traveling public, said Michael S. Egan, ANC's chairman, who doesn't have a hand in day-to-day operating responsibilities. Egan built Alamo from a small, regional player into a national brand. He sold his 93 percent stake in Alamo to what is now AutoNation for $580 million in 1996.
"First of all, it's a low-margin business," Egan said. "Secondly, it's a business that oftentimes has oversupply problems, due to car manufacturers putting deals out that seem too good to pass up." That means too many cars relative to demand.
"When you have oversupply in the market, you can no longer manage yield effectively," Egan added. "You're faced with pricing to the lowest common denominator to be competitive."
Car-rental companies may be wising up. After peaking at 1.83 million vehicles in 2000, U.S. car-rental fleets fell to 1.64 million vehicles last year, Auto Rental News reports.
"They have a lot more flexibility than the airlines because they can reduce their fleet purchases and turn vehicles back to the manufacturers," Snyder said. Airlines also are struggling to adjust to fewer travelers.
When customer demand slackens, so do prices. Industry revenues were $17.9 billion last year vs. $19.4 billion in 2000, according to Auto Rental News.
The industry may have reason to be hopeful, though. Average rates for vehicles rented at airports have steadily climbed since April, according to figures from Abrams Travel Data Services, a Long Beach, Calif., market-research firm that tracks the car-rental industry. At one point in July, rates topped an average of $56 a day.
Rates for rentals at locations other than airports, known as the "local" market, also are rising. They still trail last year's pace, however. The latest figures from Abrams put the average at just under $41 a day, or about $3 less a day than the same period a year ago.
Historically, summer is the busiest season for car-rental companies.
However, a critical question hanging over the industry is whether commercial travel will return to previous levels.
Business people aren't flying as much as they used to, which adversely affects car-rental companies.
The number of people boarding planes was down 3.6 percent in the first half of the year compared with a year ago, according to figures from the Air Transport Association of America.
Fifty-eight percent of 204 travel managers surveyed by the National Business Travel Association in July said their companies were spending less on travel compared with 2002.
"The industry may have to learn to live with a smaller base of revenue from the business-travel sector," said Jon LeSage, Abrams research director.
Hertz Chief Executive Craig Koch doesn't buy into the idea that commercial travel won't return to previous highs.
"It will definitely get back to 2000 levels, but it won't be this year or next year," Koch said. "Most likely it will be 2005 or 2006, barring some catastrophic event."
"There is no magic or secrets in this industry. They are not going to come out of Chapter 11 with any unusual cost advantages," Koch added.
While industry observers say the purchases of Alamo, National and Budget provide some balance for the car-rental business, they know all it takes for the industry to spin out of whack is a price war or steep discounts by manufacturers on vehicle sales.
"Stability is a relative term in the car-rental industry," said Abrams' LeSage.
