Avis Budget Group released its fourth quarter and full year 2021 results this week, capping a string of “best” quarterly performances over the past year. This chain will remain intact, according to Avis, as the first quarter of 2022 appears to be another record high from an earnings perspective. This is good news for Avis and the rest of the industry.
It is remarkable to see companies successfully riding the ebbs and flows of coronavirus variants and pivoting to adapt to rapidly changing environments. As CEO Joe Ferraro said in the earnings call, “How do you know what you’re capable of if you’re not being pushed?”
As is always the case with earnings calls, Avis was quick to point out its own discipline in handling this turbulence, and it is to be commended for that. But the industry has been riding for nearly a year on what might be called the car rental treble – high demand, low fleet supply and high rates.
Omicron spoiled these positive fundamentals, but only for half a quarter. It looks like the industry is returning to the same trifecta, but to lesser degrees. If that signals a return to “normalcy” — easier navigation, fewer scaremongering headlines about car rental rates, and the ability to put customers in the cars they want — then do it.
First, a look at the Omicron effect: the fourth quarter for Avis has started well, carrying the momentum of the second and third quarters. But right after Thanksgiving, the latest variation took hold.
Normally for the travel industry, December is the strongest month in the fourth quarter, boosted by the Christmas holidays. Yet in 2021, the tables were turned, as December produced the lowest revenue per day (RPD) in three months. This ruined Avis’ quarterly RPD earnings streak. In Q4, RPD fell 10% from Q3, but was still up 30% from Q4 2019.
Yet, and this goes back to management discipline, Avis was able to redistribute the fleet after Omicron hit regions where travel was still strong, such as Sun Belt leisure destinations and hill stations. The company’s best fourth-quarter results in its history show just how good October and November must have been.
Omicron postponed to January. Ferraro speculated that companies reintroducing work-from-home policies affected business demand and had a negative effect on rental days. But while the RPD also fell in January, it did not decline as much as the usual seasonal pattern – likely because the mix was more leisure-oriented this time around and leisure rentals charge higher rates. .
For the future: the fundamentals are good. As the first month of 2022 has started shaky, as Omicron pulls back, Avis predicts a strong President’s Day. The demand for leisure is strong. Avis sees pent-up sales demand as workers return to the office and need to make more sales calls. Customers who used to book closer to their travel dates are now booking further away, a sign of consumer confidence and strong travel demand.
Like the rest of the business world, Avis deals with labor shortages. Nothing like real pain points to drive tech adoption – the company is accelerating Avis QuickPass, a completely contactless service for loyal customers that uses connected car technology, a phone app, QR code and automated exit . (Now let’s see if the industry can engage the majority of its customers in the same process.)
According to Avis, the industry as a whole has more demand than supply. This indicates a fleet situation that is still tense, but not ringing the alarm bells like last year. There are signs that prices for new and used vehicles may have peaked, but don’t expect dramatic declines at least for the 2022 model year. (Keep an eye on the model year 2023 when it rolls out to see if some automakers try to take a stake by increasing incentives.)
Ferraro would not go into detail on the fleet outlook for 2022 but hinted at a “very fluid” situation, which “will not be normalized” soon. Avis sees the fleet, or what manufacturers are capable of producing, being restricted until at least the 2022 model year. That’s also the general consensus.
In the Americas (with the US the lion’s share of the segment), Avis increased the size of its fleet to 435,000 vehicles – more than in Q4 2019. There are a few explanations: the fleet that was due to arrive in third quarter finally appeared in the fourth; Avis has influence to obtain a fleet; and like everyone else, he held his cars longer out of necessity.
But even in this tight supply environment, Avis manages to maintain a relatively young fleet. This becomes an advantage in a key area, commercial activities, which are under traditional price pressures based on contract rates for large accounts – many of which were negotiated before the pandemic. Avis was able to raise rates on small and medium business accounts without a contract.
Chief Financial Officer Brian Choi said that post-pandemic, Avis’ large commercial accounts awaiting renewal are becoming less price-focused and more focused on fleet quality and ancillary services and benefits.
Choi also made a related point: the pandemic has taught Avis to focus more on fleet and services and less on rental days, which has a negative effect on prices and erodes profit margins.
One of the lessons of this pandemic is to never be complacent, as new variants and other supply chain disruptions may be imminent. This spectrum keeps the car rental industry on its toes, resulting in a conservative approach that emphasizes profit margins rather than growing for the sake of it. Hopefully the lessons learned continue in less disruptive times.