Avis steers into crowded field for managing ride services fleets

DETROIT (Reuters) - When Avis Budget Group Inc (CAR.O) reports its results on Wednesday, executives under pressure from restive shareholders will likely point to the potential for profits from managing fleets of vehicles for ride services and robo-taxi companies.

Avis, however, won’t be alone in chasing revenue from the same ride service companies that are undermining the rental car business.

Fleet management is a catch-all term for a complex suite of services ranging from financing car purchases to maintaining, cleaning, fuelling, repairing and selling used vehicles.

Fleet managers use real-time data to track vehicles for customers like Uber Technologies Inc [UBER.UL], Lyft and General Motors Co’s (GM.N) Maven to maximum vehicle usage and cut down on the downtime that leads to lost revenue on expensive assets.

“Saying ‘I want to go into fleet management’ is easy,” said Hans-Werner Kaas, a senior partner at McKinsey & Company’s Detroit office. “But fleet management is very capital-intensive and is different from what many of those companies do today.”

Even Element Fleet Management Corp (EFN.TO), an established fleet manager, has stumbled recently with an expensive, complex big-data platform deployed to manage large vehicle fleets.

Element manages more than 1 million vehicles for corporate customers and spent $70 million on a big-data driven platform for customers using artificial intelligence and predictive analytics.

But the system’s glitches cost Element’s former chief executive his job and helped send the company’s shares down more than 50 percent this year. Element said it is fixing the problems and will spend $35 million more in 2018 on product enhancements.

“The bumps we’ve had in rolling out a new platform is indicative of the complexity of pivoting to new transportation models that are still being invented,” said Michele Cunningham, Element’s senior vice president for products and services.

CONFRONTING THREATS

Years of heavy U.S. automobile sales have depressed used car values, hurting Avis and others that depend on selling vehicles into the secondary market. Avis is trying to beef up prices but said last month that “unexpected pricing and fleet cost challenges” have cost it $300 million over the last two years.

It expects to post 2017 adjusted pre-tax income nearly 13 percent lower than in 2016.

The company’s largest shareholder, SRS Investment Management LLC, has proposed three new nominees for Avis’ board and said it must formulate “top strategic priorities” to confront a present threat from Uber and Lyft, and a future threat from robo-taxi operators such as Alphabet Inc’s (GOOGL.O) Waymo or GM’s Cruise.

Avis owns ride-sharing service Zipcar, which rents cars to Uber drivers, and last June announced a service agreement for Waymo’s self-driving car fleet starting in Phoenix, sending its shares soaring.

Avis is testing a fleet of connected cars in Kansas City to build fleet management expertise and “to see how we can do this for others as well,” Chief Executive Officer Larry De Shon said.

Stanford economist Tony Seba and tech investor James Arbib estimate that self-driving cars in "transportation-as-a-service" will grow from zero U.S. passenger miles in 2020 versus traditionally-owned vehicles to 95 percent of the 6.1 trillion passenger miles in 2030. (For a graphic, see: tmsnrt.rs/2Ffgxu6)

The fleets required for those services mean “a lot of money on the table” for fleet managers, said Doug Mehl, a partner in A.T. Kearney’s automotive practice.

That potential is drawing a crowd.

Avis rivals Hertz Global Holdings Inc (HTZ.N) and Enterprise Holdings Inc ERACR.UL are staking out positions in fleet management, as are car auction giants Manheim and KAR Auction Services Inc (KAR.N), which already have facilities to handle millions of used vehicles annually.

KAR said this month it was buying fleet management software company STRATIM to enter the business.

Manheim is talking to partners about larger fleets and expects to invest in new facilities in the next three years as demand grows, said Grace Huang, president of inventory solutions at Cox Automotive, Manheim’s parent company.

Car dealers want in as well. AutoNation Inc (AN.N) last November signed a service agreement with Waymo, a deal that boosted its shares.

“Dealers are a natural fit,” National Automobile Dealers Association spokesman Jonathan Collegio said. “Because they’re everywhere, they’ve already made the investments and have the expertise.”