Rental-car crash worsens as Avis cuts annual profit forecast

[SOUTHFIELD] Avis Budget Group Inc plunged after slashing its annual profit forecast and missing earnings estimates, as rental-car companies struggle with bloated inventory and threats to their business model.

Avis now sees full-year adjusted earnings per share in the range of US$2.40 to US$2.85, according to a statement Monday. The company had previously said profit could be as much as US$3.50 a share. Avis also missed analysts' average second-quarter earnings estimate.

The cut forecast weighed on rival Hertz Global Holdings Inc, which is scheduled to report its results tomorrow. Rental-car companies have been under pressure from emergence of ride-hailing companies such as Uber Technologies Inc and Lyft Inc. At the same time, falling used-vehicle prices have added to their costs as the value of the autos in their crowded fleets have been depreciating more rapidly.

Avis fell 9.1 per cent as of 5:17 pm in late trading, while Hertz dropped 3.2 per cent. Avis had declined 9 per cent this year through the close Monday, while Hertz had plunged 29 per cent.

Investors have been more concerned about Hertz, which has been trying to overhaul its fleet that's loaded with too many compact cars and family sedans. As consumer demand shifts to sport utility vehicles, Hertz's cars have been quickly losing value.

Both companies have been struggling to support the rates they charge customers to rent, with Avis's falling about 4 percent in the quarter ended in June, according to Chief Executive Officer Larry De Shon. Analysts at Barclays had predicted that quarterly pricing would be down 1.5 per cent for Avis and down 1.75 per cent for Hertz.

If Hertz's pricing is deteriorating by an amount similar to Avis, it'll make the company's recovery bid even more difficult. Last month, Hertz canceled a plan to use proceeds from debt sold earlier this year to redeem 2019 bonds. Analysts have speculated that second-quarter results could be worse than expected and have said Hertz may have wanted to conserve cash rather than retire bonds early.

One bright spot in Avis's results is a hint that the worst may be over for rental-car rates. The companies have been selling off vehicles to shrink their fleets to a size more in line with demand. As a result, rental revenue per day at Avis rose more than 1 per cent in July.

"Looking forward, I am now more optimistic that the industry issues we've been contending with should be behind us," Mr De Shon said in the company's statement.

BLOOMBERG