In an interview with the Motley Fool, investor Whitney Tilson commented on the evolving car rental industry:
Brendan: You’re bullish on both Hertz (NYSE: HTZ) and on Avis (NASDAQ: CAR).
Brendan: You actually said the auto rental industry right now reminds you of railroads about 10 years ago. Could you expand on that?
Whitney: Yes. The auto rental industry in the United States has historically been a pretty terrible industry; cutthroat competition by a half dozen-plus competitors engaging in constant price wars. It’s a very capital-intensive business, generally bad balance sheets, low margins, low returns on equity — everything you would not like to see in an industry — that was the car rental industry.
But by the way, that was the railroad industry until about 10 years ago. What happened there was, there was consolidation. Some of the big players bought the smaller players, and it consolidated into more of an oligopoly, with just a few big players.
All of a sudden, competition started to become a lot more rational. They stopped cutting each other’s throats, and instead started collectively raising prices. Bill Miller, by the way, thinks this is what’s happening in the airline industry, and I think it’s what’s happening in the car rental industry.
More than 90% of the car rental industry today is in the hands of only three players; two public companies, Hertz and Avis, and Enterprise. Enterprise has about 70% of the off-airport market. Hertz and Avis are primarily the airport market in the U.S.
I see some of the same dynamics here. Industry consolidated from, say, eight players down to three. They’re all raising prices — and this isn’t theoretical — last quarter, Hertz and Avis both raised prices a little over 4% in North America, which is their biggest market.
When you consider the impact of a 4% price increase on low-margin businesses, it has tremendous benefits to the bottom line. I see the car rental industry following the same path as the railroad industry over the next 5-10 years.
Even this is a good example of “I missed it.” Both Hertz and Avis have doubled in the past year. I bought them at 52-week highs, after they’ve doubled, because I see another double or two in there over the next few years.
We still think that the bulls like Tilson are too optimistic about rational pricing discipline taking hold in the industry. After all, as we stated in an earlier post, even OPEC could not maintain cooperation. We also think he is too confident that the railroad industry is the correct historical precedent. Nevertheless, this is an interesting issue.