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Car Rental Companies Driven to Consolidate

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Building on its acquisition of Zipcar earlier this year, Avis Budget Group (NASDAQ: CAR  ) just announced it is buying deep-value rival Payless Car Rental, the sixth-largest car rental company in North America, in a $50 million deal. The deal marks the continued consolidation of the car rental industry, one that is already heavily rolled up into just a few hands.

Following Hertz's (NYSE: HTZ  ) acquisition of Dollar Thrifty this year, there are just three car rental companies controlling 95% of the market. While airport car rentals are the biggest drivers for the industry, accounting for 70% of revenues for both Avis and Hertz, the overall industry leader is privately held Enterprise Rent-A-Car, which has a decidedly more neighborhood-oriented approach and owns 70% of that market. 

The off-airport market is an $11 billion industry, but it's dominated by the premium and mid-tier value propositions. Avis is following Hertz's lead by going after the deep-value market, which is represented by brands like Payless, Sixt, and Advantage (which Hertz sold to get the Dollar Thrifty acquisition past regulators).

With its $80 million in annual revenues, Avis is looking for Payless to help cut into Enterprise's neighborhood reign. It won't be easy, since the industry giant has more than 5,500 locations across the country, but analysts anticipate that with a stronger economy, the North American car rental market will grow at a compounded annual rate of 5.5% between 2013 and 2017 as Americans take more leisure-related trips.

That's borne out by the results achieved by online travel agent (NASDAQ: PCLN  ) , which purchased a car rental business a few years ago and has seen it become a strong part of its online booking business. Last quarter the OTA saw domestic gross bookings grow 9% primarily because of growth in its domestic rental car reservations as rental car days increased sequentially from 37% to 43%.

The Payless deal isn't a game changer for Avis, but does represent management's holistic view to driving its business. Having acquired the leading name in car-sharing services, it now adds a top player in the underutilized deep-value market that ought to chip away at Enterprise's dominance, even if it means consolidating the industry further.

The car rental market represents one way to play an improving economy and consumers' willingness to spend more. Yet China has quickly become the world's largest auto market -- and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.

Editor's note: Sixt is a family-owned company, not a Hertz company. The Fool regrets the previous error. 

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  • Report this Comment On July 16, 2013, at 3:24 PM, Topekazoology wrote:

    Sixt is not a Hertz company. Sixt is "Family-owned and operated since 1912." The author probably means Dollar Thrifty Automotive Group, which was acquired by Hertz in a deal finally approved by the FTC just this month.

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