Reshuffling in the Higher Echelons of Car Rental

Strategic alliances continue to play a key role in the car rental industry, driven by increasing competition and fuel prices, internet penetration and usage, and a sharp drop in business travel in 2009. Car rental companies responded to the recession by cutting costs and refinancing debt, along with strong fleet reduction.

Surprising move

In a surprising move, in June 2011, Avis Budget Group finalised an agreement for the purchase of its European counterpart Avis Europe for US$1.2 billion, creating a dominant global player with revenues of almost US$7 billion and a very strong network in 150 countries.

Emerging markets proved to be very resilient during the downturn, with an ever-growing and more economically-active consumer base. The purchase is therefore expected to strengthen Avis Budget in these markets, diversify its geographic reach in Europe and globally, unifying the two brands Avis and Budget under one owner. In addition, the deal will lead to US$30 million in annual cost savings and improved financial liquidity.

Company backgrounds

D’Ieteren operated two major car rental brands as Avis Europe: Avis and Budget in Europe, the Middle East and Africa. The Belgian-based company owned almost 60% of Avis Europe. Its US parent company operates as Avis Budget Group Inc. Avis Europe’s financial performance in 2010 improved, with profit before tax reaching EUR51 million, compared to EUR35 million in 2009. Avis Europe has 3,100 outlets and 950 Budget locations and is present at 75 European airports.

Group restructuring and a growing corporate division, along with improved trading conditions and the reorganisation of its main brands, contributed to a good performance in 2010. Among its major markets are France, Germany, Italy and the UK, with a presence in 112 countries in total. The company succeeded in increasing its market share in the UK in 2010 by taking advantage of the fact that smaller independent car hire companies lost business throughout the year due to the challenging business environment.

Dollar Thrifty saga

Dollar Thrifty Automotive Group Inc has been the subject of a takeover battle between Avis and Hertz. Dollar Thrifty’s economy car rental operation has become attractive to the leading players due to the difficult economic conditions.

After shareholders rejected the Hertz offer in September 2010, Dollar Thrifty agreed to cooperate with Avis to win anti-trust clearance before signing any merger agreement. Avis had expected US regulators to give their decision on its offer for Dollar Thrifty in Q1 2011. However, Avis faces anti-trust issues in acquiring Dollar Thrifty, as it already has a budget brand Budget to compete with smaller rivals.

In May 2011, Hertz made another bid to buy Dollar Thrifty for US$2.24 billion and began a process of divesture of its Advantage brand to help receive approval and anti-trust clearance from the Federal Trade Commission (FTC).

Avis and Dollar Thrifty, on the other hand, are also working with the FTC to ensure there are no anti-competition issues. As of June 2011, the FTC had not issued a ruling, but a deal may be announced in the second quarter of 2011. As of May 2011, Avis is also in discussion with Sixt Group to establish a partnership. Trade sources reveal that Sixt is expected to take over some Budget and Dollar Thrifty locations in order to help push through regulatory approval by the FTC.

Avis distances itself from the bidding war

The battle between Avis and Hertz to acquire smaller rival Dollar Thrifty Automotive Group, which operates Dollar Thrifty and Thrifty and holds a 7% value share of car rental, could be approaching an end.

The acquisition of Avis Europe, which delivers small integration risk in comparison to the Dollar Thrifty bid, will see Avis Budget distance itself from this prolonged bidding war and weaken its financial capabilities to acquire Dollar Thrifty.

However, competition is expected to intensify as the ongoing effects of the recession will increase the price consciousness of consumers and could lower the average rental duration. Consolidation is likely to continue, with small independent players becoming less financially secure.