Did Uber Hurt Rental Car Companies in 2016?
Popular wisdom and widely held beliefs must always be put to the test particularly in the market. One popular belief that definitely needs to be closely examined is the thesis that Uber is hurting the business of rental car providers.
There is some circumstantial evidence that certain classes of travelers prefer ride-hailing apps to rental cars. Uber accounted for 43% of the ground transportation transactions listed on North American expense reports in fourth quarter 2015 according to data from the software maker Certify.
Rental cars still accounted for 40% of the business travel ground transportation expenses, a Bloomberg article on Certify’s findings indicates. Certify’s shows that most of Uber’s growth is at the expense of taxicab drivers.
Cab use dropped from around 37% of ground travel expenses in fourth quarter 2014 to less than 15% in first quarter 2016. Rental car use increased slightly in first quarter 2016 rising from around 38% to 40%.
Uber is growing like a Weed
The rate of Uber growth should certainly worry rental companies, the number of trips grew by 8 million between June and July 2016. Around 54 million Uber trips were taken in June 2016, while 62 million were taken in July, Expanded Ramblings reported.
The service is also widely available; Uber installed on 21% of the Android devices in the US in August 2016, according to Expanded Ramblings. There were also around 40 million active Uber riders in October 2016, which makes for a large ecosystem and customer base.
The available data certainly adds credence to the argument that Uber threatens rental car companies. Yet does financial data show that rental car organizations are losing money because of ride-hailing services? When one looks at the revenues of the two publicly traded car rental specialists the answer is sort of.
At Hertz Global Holdings (NYSE: HTZ) revenues dropped slightly during the last quarters. Revenues fell from $10.89 billion in December 2015; to $10.75 billion in March, to $10.70 billion in June to $10.67 billion in September.
On the other hand revenues at Avis Budget (NASDAQ: CAR) rose slightly over the course of the year. Avis reported revenues of $8.502 billion in December 2015; $8.533 billion in March, $8.603 billion in June and $8.682 billion in September. This might be because Hertz is more exposed to the business travel market than Avis Budget, which is more popular with vacationing families.
Are Rental Car Companies Making Money?
Despite that the net income revenue shows that rental-car organizations are making less money because of Uber. Avis reported a net income of $313 million in December 2015; that fell to $271 million in March and $164 million in June before picking back up to $189 million in September.
That seems to confirm my thesis that Avis Budget gets more vacation business. Its net income picked up over the summer vacation season. Still Avis’s income in September was still over $100 million less than they were just nine months earlier.
Hertz is in much worse shape because its’ net income took a nose dive in 2016. Hertz began the year with a net income of $273 million in December, that rose slightly to $292 million in March, then fell to $213 million in June and $18 million in September. Disturbingly that figure was better than September 2015 when Hertz reported a negative net income of -$31 million.
My guess is that Uber is having an impact here by cutting into the demand for more expensive cars that the rental services make more money from. Families are still renting their minivans for vacations; and technicians are still renting economy cars for service trips, but executives are taking out fewer Mercedes and Cadillacs.
Are Rental Car Companies Losing Money?
A major problem for rental companies is that Uber appeals most to affluent travelers with more disposable income or expense reports to pad. Uber is effectively taking the higher-end business and leaving Hertz and Avis with the bargain basement.
This can be seen in Hertz’s free cash flow which was -$972 million in September 2016. Since Hertz also reported $3.118 billion in cash from operations and $1.43 billion in cash and short-term investments during third quarter, it looks as if the company has little or no float. Avis also reported a negative free cash flow of -$656 million in addition to $2.647 million in cash from operations and $985 million in cash and short-term investments.
These figures clearly show us that rental car companies are struggling to stay afloat in today’s market. It looks as if both Hertz and Avis will need to reorganize and cut back on some aspects of their business. An obvious change might to reduce the number of cars at airports or dump the rental of high-end vehicles completely.
Another might be to start renting cars to Uber and Lyft drivers. There were 160,000 active Uber drivers in January 2015 according to Expanded Ramblings.
Do Car Rental Companies Have a Future?
Car rental companies’ future might be brighter than we think because Uber’s business model is not yet profitable.
The ride-hailing giant’s losses for 2016 will be $5.5 billion, an anonymous source told Bloomberg Technology. Uber is expected to generate $3.76 billion in revenue in 2016 but not be able to cover those expenses. Uber’s losses for the third quarter of 2016 were estimated at $800 million.
There is no way to confirm thee claims because Uber is a tightly held private company but they might give rental car companies hope. If Uber were to suddenly collapse Hertz and Avis might find themselves facing a windfall.
Automakers not Uber might be the real threat to Car Rental Companies
Or the car-rental companies might find themselves facing a greater nightmare. If Uber were to collapse, a major automaker might buy it and Hertz and Avis would find themselves competing directly with Ford (NYSE: F), Toyota (NYSE: TM) or even Volkswagen.
This potential threat is not hypothetical Ford CEO Mark Fields has pledged to develop the first truly autonomous car for the riding hailing industry by 2021. General Motors (NYSE: GM) has developed its own ride-share app called Maven, invested heavily in Lyft and bought the defunct ride-hailing company Sidecar in 2016. Unconfirmed news reports indicate that GM also tried to buy Lyft over the summer but its offer was turned down.
Such competition would be a nightmare for car-rental companies because of automakers’ resources. Those resources include factories, lots of engineers, dealership networks, extensive financing capabilities and vast amounts of cash.
Ford reported having $34.16 billion in cash and short-term investments on September 30, 2016. Toyota had $42.18 billion in the bank on the same day, Volkswagen (OTC: VLKAF) had $49.21 billion in cash and short-term investments on the same day and General Motors reported $24.1 billion. Even Fiat-Chrysler Automobiles (NYSE: FCAU) – the sick man of the auto business – had $19.75 billion in cash and short-term investments.
Stay Away from Car Rental Stocks
The danger for car rental companies that automakers will move from a business model of selling vehicles directly to renting or leasing on a short-term basis. Statements from executives like Fields, GM’s interest in Lyft and Fiat-Chrysler’s willingness to participate in Google’s self-driving minivan project indicate this is the auto-industry’s long-term plan.
My advice then is for investors to stay away from car-rental companies. Even though they survived 2016, Avis-Budget and Hertz face a bleak future. Uber has damaged them heavily, and a far graver threat in the form of next-generation automakers is waiting in the wings.