Avis Rent A Car, Inc.

views updated

Avis Rent A Car, Inc.

900 Old Country Road
Garden City, New York 11530
U.S.A.
(516) 222-3000
Fax: (516) 222-6677
Web site: http://www.avis.com

Public Company
Incorporated: 1946 as Avis Airlines Rent-A-Car System
Employees: 16,000
Sales: $1.87 billion (1996)
Stock Exchanges: New York
SICs: 7514 Passenger Car Rental

Avis Rent A Car, Inc. is the largest Avis system franchisee in the world, with more than 600 rental locations in the United States, Canada, Puerto Rico, the U.S. Virgin Islands, Argentina, Australia, and New Zealand (the Avis system as a whole consists of about 4,200 rental locations in approximately 160 countries, and comprises the second-largest general use car-rental business in the world, trailing Hertz Corporation). Known throughout its history for quality service, Avis Rent A Car caters primarily to business travelers (who account for about 60 percent of the company’s domestic revenue), with a resulting concentration on airport rental locations (from which about 85 percent of domestic revenue is derived). Avis, Inc.—the predecessor company to Avis Rent A Car—was purchased by hotel and real estate franchiser HFS Inc. in 1996. The following year, HFS created Avis Rent A Car, Inc. and sold about 75 percent of the new company to the public. In the process, HFS retained the Avis brand name and the Wizard reservation system, so Avis Rent A Car now licenses the use of the Avis name from HFS and uses the Wizard System through a long-term service agreement.

Early History

Avis Airlines Rent-A-Car System was founded in 1946 by Warren E. Avis, a former Army Air Corps flyer. The owner of an automobile dealership in Detroit, Avis had the idea of providing car-rental services at airports, surmising that air travel would quickly become more popular than travel by rail. Using savings, dealership profits, and a $75,000 loan, he opened Avis Airlines Rent-A-Car System in two locations, at Willow Run Airport near Detroit and at Miami Airport in Florida. Avis’s idea proved successful and his business grew quickly. Airports in New York, Chicago, Dallas, Washington, Los Angeles, and Houston were soon serviced by car-rental franchises licensed to use the Avis name.

By 1948, Avis was nationally known. In that year, the company dropped the “airlines” designation from its name, expanding operations beyond airports to serve hotels and businesses in urban areas. During the next six years, Avis also expanded internationally. In addition to its 185 locations in the United States, Avis acquired 10 in Canada and one in Mexico, and established ties with car-rental agencies throughout Europe and the United Kingdom. Warren E. Avis sold the company in 1954 to Richard S. Robie, a car-rental system owner operating in New England. Robie encouraged continued expansion, introducing a one-way car-rental system and a company charge card. Although Avis had revenues of $4 million in 1956, Robie was plagued by problems of cash flow incurred during his expansion efforts, and was forced to sell the company. Avis’s new owners, the Amoskeag Company and other investors, continued to foster its growth, creating a new entity, Avis, Inc. Business operations were consolidated through the formation of a wholly owned subsidiary, Avis Rent A Car System, Inc.; electronic data processing was introduced to facilitate the company’s innovative corporate charge card billing system; car leasing was established; and the licensee system was extended to include markets in Austria, Belgium, Norway, and Spain.

By 1962, Avis owned a fleet of 7,500 vehicles generating annual revenue of $25 million. The company was purchased that year by Lazard Freres and Company, an investment banking firm in New York City, and its corporate headquarters was moved to Garden City, New York. Under the direction of newly appointed president Robert Townsend, Avis launched a highly successful advertising campaign emphasizing its status as number two contender for car-rental market share. The slogan “We’re only No. 2. We try harder” appealed to the public and contributed greatly to Avis’s subsequent growth. In 1965, having attained annual revenues exceeding $74 million, Avis was acquired by International Telephone and Telegraph Corporation (IT&T); Winston V. Morrow, Jr., was appointed chief executive officer. During this time, international expansion again assumed paramount importance, and Avis increased its operations throughout Europe and Africa, becoming the leading car-rental company in Europe within eight years.

Enjoyed Strong Growth in the 1970s

Keeping pace with technological advances, in 1972 Avis introduced the first and largest computerized information system to be used in a U.S. car-rental business. The Wizard System, renovated in 1979, 1984, and the early 1990s, made reservations and processed rentals, maintained preventive maintenance schedules for Avis’s vehicles, and generated for auto manufacturers lists of customers who purchased Avis’s used cars. The system also provided electronically transmitted billing reports for use with corporate accounts.

During the same year, Avis became a public company when IT&T was ordered to sell several of its businesses. Forty-eight percent of Avis’s shares were sold to the public; the balance was held in trust by a court official. During this time, Avis, along with other car-rental companies, began to sell their used cars directly to the consumer rather than to wholesalers. This became a lucrative source of income; by 1987, Avis was marketing approximately 50,000 used cars each year. In 1976 Colin M. Marshall became chief executive officer of Avis, and in the following year the company was purchased by Norton Simon, Incorporated for $174 million. James F. Calvano succeeded Marshall as chief executive officer in 1979; that same year, Avis concluded an advertising and marketing agreement with General Motors, agreeing to feature GM cars in its worldwide fleet. The 1970s was a decade of enormous growth for Avis both domestically and internationally. Several factors, including greater airline use, airline deregulation, and the increasing strength of Avis’s European, African, and Middle Eastern operations, contributed to its jump in revenues from $162 million in 1970 to $673 million in 1979.

Difficult 1980s Led to Several Ownership Changes

The strong growth of the 1970s slowed in the early 1980s as high oil prices, soaring interest rates, and inflation plagued the global economy, reducing the volume of air travel and weakening the closely connected car-rental market. Price competition among the leading car-rental companies contributed to a $50 million loss for Avis in 1982; 2,400 jobs were cut as a result. J. Patrick Barrett, who became chief executive officer of the company in 1981, along with Joseph V. Vittoria, who became president and chief operating officer in 1983, and Alun Cathcart, who became group managing director and chief executive of the Europe/Africa/Middle East Division in the same year, provided new direction for the company. They reorganized management, reemphasized the company’s “We try Harder” image, and introduced new technology, such as Avis Express service. Designed to facilitate fast passage through airline terminals, Avis Express processed rental agreements before customers deplaned, allowing the consumer a speedy departure from the airport. Earlier, Avis had introduced a computerized checkout system to its operations in Europe; by 1983, after further enhancements, only a few seconds were required for this system to produce a completed rental agreement. In 1984, Avis introduced Rapid Return, an automated self-service check-in device, to its U.S. franchises. A similar innovation called Rapid Rental, a credit-card prompted, computer-assisted transaction, followed shortly thereafter at testing locations in the United Kingdom and France. By 1987, all Avis’s domestic and international operations were connected to its main computer in Garden City, New York.

Avis also changed owners a number of times in the 1980s. After being acquired by Esmark, Inc. in 1983, Avis was purchased along with Esmark by Beatrice Companies in 1984. Kohlberg, Kravis, Roberts & Company, a New York investment firm, acquired Beatrice Companies and Avis the following year in a leveraged buyout. In another leveraged buyout in 1986, Kohlberg sold Avis to Wesray Corporation, a New Jersey-based investment company, and its partner Avis management for $265 million and the assumption of $1.34 billion in debt. Avis’s revenues for that year were $1 billion, a 26.2 percent share of the car-rental market. Wesray next sold Avis’s domestic car leasing fleet to PHH Group, Incorporated of Hunt Valley, Maryland, the industry leader in corporate car leasing, for approximately $134 million. During 1986, Avis sold 65 percent of its European operations, known as Avis Europe PLC, to the public for approximately $290 million. Alun Cathcart remained as group managing director and chief executive of what was now a public company, becoming chairman in 1988. Under his direction, Avis Europe grew tremendously, diversifying and updating its services by purchasing such related companies as car leasing businesses and distributorships. In the United States, Avis introduced another technological advance in 1987 with Roving Rapid Return, a portable computer with a printer that allowed Avis employees to move around a rental lot and assist customers at their cars in easy, one-step checkout procedures. Also at this time, Avis’s Wizard computer system developed the capacity to allow travel agents direct access to Avis rental vehicles for their customers through computerized communications with airline reservation centers.

Began Operating Under an ESOP in 1987

Avis was sold once again in 1987, this time to an employee stock ownership plan (ESOP) for $750 million and the assumption of $1 billion in debt. Under the plan, both buyers and lenders received tax breaks, and employees of the company became its owners, with Wesray retaining a 29 percent stake. Financing for the ESOP was provided by General Motors Acceptance Corporation, Chrysler Credit Corporation, and Pittsburgh National Bank, who loaned a combined $395 million; Irving Trust Company and a group of banks, who loaned $1 billion; Drexel, Burnham, Lambert, Incorporated, and Klein-wort, Benson Limited, who advanced a $255 million bridge loan; and stockholders, who purchased preferred stock for $135 million. A trustee, Citizens & Southern Trust Company of Atlanta, now known as NationsBank, held employees’ shares.

The ESOP proved highly successful, boosting employee morale and prompting better service to consumers. When the plan went into effect, Avis’s management introduced employee participation groups whose members included workers from all levels of the company. These groups met periodically, generating ideas that were frequently implemented to improve Avis’s operations. For example, Avis employees suggested that the company provide managers with Avis charge cards for their expenses, which would save the cost of fees normally paid to charge card creditors. They also suggested such innovations as rental cars to be used specifically for nonsmokers and compilations of traffic law tips for each rental area. Joseph V. Vittoria, who became chairman and chief executive officer of Avis in 1987, commented enthusiastically about the ESOP in Fortune: “Believe me, the ESOP works, and it works very well.” In another Fortune article Charles Finnic, an analyst at the Baltimore brokerage firm of Alex, Brown & Sons and an expert on the car-rental business, concurred: “Right now Avis is on a roll. The ESOP has really improved their morale and productivity and service.” Robert W. Anderson, a director of corporate travel for Unisys, said in the same publication: “Employee ownership has got to be a winner. Avis is absolutely superior in customer service, though they were pretty good to begin with.” Official figures underscored the success of the ESOP. Profits for the first half of 1988 were 35 percent higher than those of the same period a year earlier, market share increased to 27 percent, and customer complaints were down 35 percent from 1,918 in 1987 to 1,238 in 1988.

As the 1980s drew to a close, Avis, which had been exhibiting greater profit-sales ratios than Hertz Corporation since 1984, challenged Hertz’s position as the number one car-rental agency in the United States. Internationally, relations between Avis, Inc. and Avis Europe PLC remained strong, as the companies’ shared resources contributed to growth and prosperity for both. In addition, such programs as Avis Europe’s “Avis in Touch,” which provided travelers with travel planning guides, an answering service, and toll-free information numbers, and Avis, Inc.’s Preferred Express, which expedited rental procedures for frequent renters, enhanced customer service throughout the world. In 1987, Avis began to market its computer technology to the hotel industry through a newly formed subsidiary, WizCom International, Limited. The following year, Avis purchased its licensee in New Zealand, broadening the company’s influence in the Pacific. Avis Europe became private in 1989, when it was purchased by Cilva Holdings PLC, comprised of Avis, Inc., which owned 8.8 percent of the shares; General Motors, 26.5 percent; and Lease International SA, 64.7 percent. Also in 1989, General Motors bought out Wesray’s 29 percent stake in Avis, Inc.

1990s Brought Further Ownership Changes

Avis continued to emphasize innovation as it entered the 1990s. Company training programs in customer service, as well as comprehensive vehicle safety checks, were implemented. In 1992 the company tested a computer directional finder in several of its Orlando, Florida vehicles. This device, consisting of a dashboard monitor and computerized voice, helped drivers find their destinations by producing a series of beeps and dots to indicate direction. In 1992 Avis also introduced to its Sacramento, California, market 20 Chevrolet Luminas that would operate on either M85—a combination fuel made up of 85 percent methanol and 15 percent unleaded gasoline—unleaded gasoline, or a mixture of both. It was maintained that M85, an environmentally responsible product, would release 30 percent to 50 percent fewer pollutants into the atmosphere.

Meanwhile, the recession of the early 1990s initially provided benefits to the rental-car industry in North America as automakers, saddled with large inventories of cars they could not unload, sold the vehicles to Avis and other car renters at steep discounts. This in turn, however, brought numerous new competitors into the industry, which drove down rental prices. When the economy recovered in 1993 and 1994, the automakers were able to increase the prices they charged rental-car companies for the cars the companies needed. Rental-car companies in turn raised their rental rates, which dampened demand, leading to heavy losses by Avis and other companies and to an industry shakeout.

It was in this environment that after nine years under employee ownership Avis changed hands yet again. HFS Inc., the largest hotel franchiser in the United States and a franchiser of real-estate companies as well, paid $800 million for Avis in October 1996, purchasing both the ESOP interest and that of General Motors to gain full control. The buyout provoked controversy among some Avis employees who felt that their shares were being undervalued, but the deal went through nonetheless.

As a franchiser, HFS from the start planned to spin off the company-owned car-rental operations gained from the purchase of Avis, while retaining the rights to the Avis name and control of WizCom and the Wizard System. Along these lines, a new stripped-down company called Avis Rent A Car, Inc. (ARAC) was soon created, which comprised the company-owned car-rental operations. At the same time, HFS set up a subsidiary— HFS Car Rental, Inc.—to which it assigned the rights to the Avis name and which thus became the franchiser of the worldwide Avis rental system. Avis Rent A Car then entered into a 50-year franchise agreement with HFS Car Rental, thereby becoming an Avis system franchisee—the largest in the world. In return for the right to use the Avis name, ARAC agreed to pay HFS a royalty fee of between four and 4.5 percent of its revenues. WizCom International and Wizard Co., Inc. became subsidiaries of HFS; Avis Rent A Car thereby entered into a 50-year computer services agreement with WizCom for use of the Wizard System.

As HFS was laying plans for an initial public offering (IPO) of Avis Rent A Car stock, Vittoria retired as head of the company in February 1997. The following month R. Craig Hoenshell, a former American Express executive, was named chairman and chief executive of ARAC. In August 1997 ARAC acquired First Gray Line Corporation for about $195 million in cash. First Gray Line was the second-largest Avis franchisee in North America, having 70 locations in southern California, Arizona, and Nevada.

In September 1997 Avis Rent A Car went public through the long-planned IPO, with about 75 percent of the company sold to the public and the remaining 25 percent staying in HFS’s hands. The resulting $330 million proceeds were mainly to be used to pay down ARAC’s large long-term debt of nearly $3 billion.

Avis Rent A Car began its new era as a public company with public relations problems and investigations hanging over it. From November 1996 to October 1997, accusations that Avis franchisees racially discriminated against minorities who sought rental cars were raised in North Carolina, Florida, and Pennsylvania. In October 1997, the U.S. Justice Department launched an investigation into these allegations, as well as into Avis management knowledge of the accusations—the latter being an issue that had the potential to raise uncomfortable questions about the IPO. It thus seemed likely that Avis Rent A Car’s roller-coaster history would continue on course.