In previous articles I have noted the changes happening in the airline industry that should help boost airline earnings and stability over the next few years. Many investors are still cautious of the airline sector, but do see an increase in air travel occurring over the next few years. These investors are looking for investments that benefit from an increase in air travel, but do not carry all the risks present at airlines. For this situation, I believe that rental car companies are well positioned to gain as air travel returns to health alongside an improving economy.
Rental car kings
Like the airline industry, the rental car industry has undergone numerous mergers that have left far fewer competitors than ever before. While most travelers will see an abundance of rental car names as they leave the airport, in reality many of these names are owned by the same parent company. The table below demonstrates the extent to which the number of rental car companies is not what it seems.
| Enterprise Holdings | Hertz Global Holdings, Inc. (NYSE:HTZ) | Avis Budget Group Inc. (NASDAQ:CAR) |
| Enterprise Rent A Car Alamo Rent A Car National Car Rental | Hertz Corporation Thrifty Car Rental Dollar Rent A CAr | Avis Rent A Car Budget Rent A Car Zipcar |
Unlike airlines, which have retired brand names after mergers, rental car companies have chosen to keep acquired brand names alive. This is largely due to the brands rental companies like to create. Most find it beneficial to have separate premium and leisure brands to cater to different segments of the travel market. Acquired rental car companies also come with their own following of loyal customers, many of which are used to the existing brand, and the acquiring company finds it more profitable to let these customers rent from their own brand rather than try to incorporate them into the parent company’s brand.
Earnings ramp-up
Rental car companies are major beneficiaries of air travel since it brings large numbers of generally higher spending, car-less customers to their locations. The rental car stands are almost universal at or around airports for this exact reason. With an improving economy, air travel is expected to rise boosting airline profits while at the same time increasing the rate at which cars can be rented.
I have chosen Delta Air Lines, Inc. (NYSE:DAL) as a fitting comparison for Hertz Global Holdings, Inc. (NYSE:HTZ) and Avis Budget Group Inc. (NASDAQ:CAR) since Delta Air Lines, Inc. (NYSE:DAL) is, for the most part, finished with its merger and is not expecting to begin a new large scale merger any time in the foreseeable future. Additionally, the worldwide presence of Delta Air Lines, Inc. (NYSE:DAL) is more closely matched to the rental car giants than any regional airline could be.
| Company | EPS 2011 | EPS 2012 | est. EPS 2013 | est. EPS 2014 |
| Delta Air Lines | $1.01 | $1.19 | $2.57 | $2.72 |
| Hertz Global Holdings | $0.40 | $0.54 | $1.91 | $2.64 |
| Avis Budget Group | ($0.28) | $2.42 | $1.83 | $3.00 |
Source: 4-traders.com
A strong increase in earnings is expected from analysts based around the increase in consumer demand feeding the sales of both airlines and rental car companies. The merger comparison is also fitting since the reduction in competition and increase in economies of scale can be felt in both industries. In 2008, Delta Air Lines, Inc. (NYSE:DAL) became the world’s largest airline after acquiring recently reorganized Northwest Airlines in the wave of airline mergers that followed that of the rental car industry.
Air travel gains
The rental car industry is not a pure play on air travel since so many rentals are done independently of airline passengers, but it is one of the closest tied industries to the airline business. I am bullish on a rebound in air travel and hold Delta Air Lines, Inc. (NYSE:DAL) as my position in this play, but with the airline I also realize that many of the risks associated with the turbulent airline business still exist including fuel, labor, and economic problems. Investors bullish on air travel but wanting to assume less of these risks may be interested in Hertz or Avis Budget Group Inc. (NASDAQ:CAR).
The article How to Invest in Air Travel Without Buying Airlines originally appeared on Fool.com and is written by Alexander MacLennan.
Alexander MacLennan owns shares of Delta Air Lines. The Motley Fool owns shares of Hertz Global Holdings. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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