Hertz To Improve Rental Prices To Boost Bottom Line

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May 19, 2015

As if the raise in airfares wasn’t giving tough times to consumers, the announcement by Hertz Global Holdings Inc. to increase car rental rates has come as a blow though its good news for the investors of the company. An important thing noted here is the clashing of the price hike by Hertz with the recent announcement of Carl Icahn (Trades, Portfolio)’s $100 million investment in the car sharing company Lyft Inc.

Florida based American car rental company Hertz Global Holdings Inc. (HTZ, Financial) shared its decision to raise car rental prices at U.S. airports by $5 a day and $20 a week. Outside the airport, the prices are set to go up by $3 a day and $10 a week. Hertz doesn’t seem to be affected by the recent announcement of investment by Carl Icahn (Trades, Portfolio) in car sharing company Lyft, which might prove as a tough competition for the company. Shares of the company rose 5.3% to close at $20.60.

Why the raise?

Founded in 1918, Hertz has a global presence in 145 countries and is the largest car rental company by sales. However, for some time, the company has been incurring losses and in the last year itself, company stock has fallen 20% and, year to date, a loss of 17% has been recorded. The company has been looking to get back the lost market share and John Tague, the company’s chief executive, has come out with a strategy to overcome the situation. He is known for his price raising formulas in his previous experiences as well wherein he made a remarkable contribution in United Airlines (UAL, Financial), which managed to raise prices under him by adding several kinds of fees and prices. He was appointed in November as a part of reshuffling of management at Hertz along with the departure of the company’s former CEO, Mark Frissora.

The raise in the prices of car-rental is a part of the strategy to gain back the lost profit margins by taking advantage of the seasonal demand and the company also plans to increase its fleet by 47% of vehicles with 30,000 miles or less. The company also plans to sell more of the existent cars and SUVs it has and buy fewer 2015 vehicles.

Another reason for losses incurred by the company is due to the accounting errors, which were revealed in 2011 taking the losses up to $183 million which led to missing the regulatory filing deadlines.

Competition in the market

Currently, any rental car company is charging $40-$50 a day for a small or midsize sedan vehicle. Hertz in particular is planning to raise rates for all its brands including Dollar and Thrifty. Although there is an increased competition from car-sharing companies like Uber Technologies Inc. and Lyft Inc., the company doesn’t look bothered by it. Another major competition for Hertz is Enterprise Holdings Inc., which has more than 50% of the U.S. market share in the rental car business. Morgan Stanley’s analyst has expressed that Enterprise will most likely try to kill competition and come up by playing with its prices, which will be a short term effort with long term customer gain.

Is Hertz strategy on the right track?

Analysts are doubting Mr. Tague’s experience in airlines to his current responsibility for the car-rental company, as they are two completely different industries.

Going forward, Hertz plans to shut down 200 stores, 5% of the off airport locations thereby saving $10 million per year. In the first quarter itself, the company has sold almost 43% more of its old vehicles as compared to the same quarter last year. Though Hertz’s planning may attract investors and make them hopeful after the loss in revenues by the company, how it affects the future is to watch out for.