Avis: Cash Flow Boom and the Swing in Car Rental

Excerpt from Footnotes and Flashbacks Week Ending Feb 17, 2023

Avis reported record revenue and EBITDA the past week with the benefits of a larger base of earning assets (rental fleet), materially stronger pricing in 2022 and 2021, and plunging costs per unit that came with the soaring value of used vehicles. During the past cycle, a lot of investors got familiar with the concept of vehicle depreciation as a cash cost to a car rental company (i.e., to reimburse the vehicle fleet funding operation). The upside of the cash benefits for Avis shows up in the metrics we detail below. The mix of moving parts (spiking prices and much lower fleet costs) falls into one of those small buckets (shot glass?)  that contains “six standard deviation events.”

The car rental industry is going through many changes beyond the legacy business of airport rental as car ownership patterns change, “mobility” becomes a multi-layered services sector, fleet management becomes a more crucial business for the future with changing technologies, and the next generation of auto tech creates a need for more operational plans to exploit the revenue opportunities from EV to AVs.

The customer and operational sides of car rental are both intertwined with the rise of connected vehicles, new revenue models and fleet analytics used to optimize fleet (size of fleet, model mix, geographic distribution, etc.), and pricing strategies (how much to charge for what and where to charge it). The whole story gets more complicated the more you look at it, but the tech strengths flow back directly into revenues and costs.

Avis and Hertz are now a distant #2 and #3, respectively, behind investment grade Enterprise with its much more efficient use of capital to fund fleet (i.e., not a HY rated ABS funder).  The new industry lineup is now showing Hertz as #3 behind Avis.  Avis and Hertz have been on a wild ride in recent years with Hertz obviously in a class by itself given its adventures in Chapter 11 and its brinkmanship around the auto fleet lease structures that are the cornerstone of fleet financing for both Avis and Hertz. We will review that history at another time in other research, but the ending was good for all in the industry and salvaged the fate of bondholders for those who stayed the distance in the cash markets (see Not Your Father’s Hertz 2-7-23).

Avis and Hertz are two of those names that touch upon mobility services nuances, travel volumes overall, the evolution of auto technology, and the potential for more dramatic shifts in car ownership practices. The customer channels will make car rental service providers crucial linchpins in raising customer awareness of EVs as an option for a “tryout.” Hertz has already jumped into EVs with a lot of fanfare, and Avis and Enterprise will be on the job in EVs as well. 

Given that broad reach of car rental, we throw Hertz and Avis in with a hybrid peer group for stock watching. We include travel and leisure and some mobility services. We include Carvana even if just as a used car proxy that is also involved in car rental fleet remarketing with Hertz.  The used car remarketing channels continue to face challenges in the volatile used car market given a constantly changing lineup of the players.

The running stock returns above underscore that Avis has been the place to be since the Hertz Chapter 11 exit date at the end of June 2021. The last 6 months and 1 year time horizon show a wide range and dispersion across the group. For the YTD period, Avis still holds down the total return derby vs. all but CVNA, who gets an asterisk for a drop in the stock from $370 in 2012 to an $11 handle as of Friday.   For equity holders looking to be in this space, Avis has established itself as the safer way to play the next stage of evolution in car rental and the strategic offshoots into integrated mobility. Both Avis and Hertz will be one of the “showrooms” for the next generation of EV and AV technologies.

While there will be a lot of equity valuation exercises going on from here given a recent history that is such an outlier from “normal” industry conditions, the credit story for Avis remains very much intact. Avis showed prudent liability management actions taken across the period of industry turmoil into 2021 as Avis then rode soaring profits and cash flow into a $4.1 billion EBITDA line.  That EBITDA run rate was not too far off from its total corporate debt of $4.6 bn and on top of its net corporate debt. The EBITDA was overwhelmingly concentrated in the Americas segment (mainly the US) with $3.7 billion in segment EBITDA in 2022 vs. $2.4 bn in the Americas in 2021. International segment EBITDA was $560 million. The $87 in corporate elimination brings the consolidate corporate EBITDA for 2022 to $4.13 bn.

Below we highlight some of the relevant operating data that drives the numbers. We include these as a reminder of the main ingredients of the operating performance: fleet size, fleet costs and pricing (Rev per Day). The sensitivity to pricing in this business is exceptionally high on the flow-through effects, and the chart shows the $50 handle pricing of 2020 and early 2021 soaring to $80 and $70 handles.

Meanwhile, the strength of the used car market sent unit costs plunging to $10 by 3Q22.  That has helped build equity cushions in the ABS structures for the next round of fleet expansion. For a pre-COVID example, per unit fleet costs for Avis were $309 in 2017 and $308 in 2016 for the full year. That offers some sense of how distorted the used car market was in 2021-2022.

Avis is still very much focused on shareholder returns as evidenced by its $4.8 bn in stock buybacks during 2021-2022 including over $3.3 bn in 2022 alone. The operating statistics covered in the chart above really hammers home the stunningly positive influence of risk earnings variables during 2021-2022 as Avis bounced off some near fatal threats during 2020 that had sent Hertz into a liquidity crisis and bankruptcy.

There are still all the same moving parts to monitor as Avis enters a new period of shifting variables across supply-demand balances in the broader industry rental fleet and what that means for pricing and used car residual risks. There is also what the SAAR rates and production challenges might mean for pricing given changing relationships with the OEMs on new car prices.

There is also the travel flow and whether leisure vacation will stay so strong and to what extent the rebounding commercial business will continue a comeback as Avis cited on its call. The pre-COVID challenges around customer services and management fleet remarketing risks and bringing more technology solutions to all aspects of the business are all still there to be wrestled with.

The EV revolution is further along now than in the COVID crisis, and EVs as a factor blew past all the AV hype of 2017-2018. EVs are now a front burner planning item for activities in 2023-2024. Car rental will be an industry to watch closely for many reasons including how companies such as Avis team up with OEMs, charging infrastructure providers, local utilities, airports, and local officials. Avis discussed some of these issues on their earnings call.