Aug. 4–New York hedge fund is in line to gain control of Alamo Rent A Car and National Car Rental System in a Delaware bankruptcy courtroom Wednesday, a move that would continue the trend ofcar-rental companies ending up in some very deep pockets.

If approved by the bankruptcy judge, Cerberus Capital Management’s purchase of ANC Rental Corp. — parent company of Alamo and National — is slated to close by the end of this month. The deal by Cerberus, which has $9 billion under management, would mark the second time in less than 10 months that a top-five car-rental company has been sold. Budget Group was acquired out of bankruptcy by hotel and real estate conglomerate Cendant Corp., the parent company of Avis Rent A Car System, in November.

The sale of ANC’s assets would leave Enterprise Rent A Car as the only remaining stand-alone company among the five largest car-rental brands. Hertz Corp. is a subsidiary of Ford Motor Co.

The deals are expected to bring some stability to an $18 billion industry that has been wracked by a slowdown in travel. That was exacerbated by the Sept. 11, 2001, terrorist attacks, and prolonged by a frail economy, the Iraqi war and the outbreak of severe acute respiratory syndrome, or SARS.

With the national terrorism index periodically ratcheted up and down a notch, many remain skittish about traveling.

All of this has the travel industry wondering when travelers — particularly those on business — will return to the highways and skies as they did just a few years ago amid robust economic growth.

Still, some observers say the car-rental industry may be heading for a rebound after more than two years of upheaval.

“I would say the worst is probably over,” says Betsy Snyder, an analyst with Standard & Poor’s in New York.

Car-rental companies have coped with fewer travelers in the latest slump by reducing their fleet size. And the industry — not known for its pricing discipline — lately has been raising rates, albeit slowly.

The car-rental industry has always been a difficult business, and not just because it’s at the mercy of the traveling public, says Michael S. Egan, ANC’s chairman, who doesn’t have a hand in day-to-day operating responsibilities. Egan built Alamo from a small, regional player into a national brand. He sold his 93 percent stake in Alamo to what is now AutoNation for $580 million in 1996.

“First of all, it’s a low-margin business,” Egan says. “Secondly, it’s a business that oftentimes has oversupply problems, due to car manufacturers putting deals out that seem too good to pass up.” That means too many cars relative to demand.

“When you have oversupply in the market, you can no longer manage yield effectively,” Egan adds. “You’re faced with pricing to the lowest-common denominator to be competitive.” Car-rental companies may be wising up. After peaking at 1.83 million vehicles in 2000, U.S. car-rental fleets fell to 1.64 million vehicles last year, Auto Rental News reports.

“They have a lot more flexibility than the airlines because they can reduce their fleet purchases and turn vehicles back to the manufacturers,” Snyder says. Airlines also are struggling to adjust to fewer travelers.

When customer demand slackens, so do prices. Industry revenues were $17.9 billion last year versus $19.4 billion in 2000, according to Auto Rental News.

The industry may have reason to be hopeful, though. Average rates for vehicles rented at airports have steadily climbed since April, according to figures from Abrams Travel Data Services, a Long Beach, Calif., market-research firm that tracks the car-rental industry. At one point last month, rates topped an average of $56 a day.

Rates for rentals at locations other than airports, known as the “local” market, also are rising. They still trail last year’s pace, however. The latest figures from Abrams put the average at just under $41 a day, or about $3 less than the same period a year ago.

Historically, summer is the busiest season for car-rental companies.

But a critical question hanging over the industry is whether commercial travel will return to previous levels.

Business people aren’t flying like they used to, which adversely affects car-rental companies. The number of people boarding planes was down 3.6 percent in the first half of the year compared with a year ago, figures from the Air Transport Association of America show.

Fifty-eight percent of 204 travel managers surveyed by the National Business Travel Association last month said their companies are spending less on travel compared with 2002.

“The industry may have to learn to live with a smaller base of revenue from the business travel sector,” says Jon LeSage, Abrams research director.

Hertz Chief Executive Craig Koch doesn’t buy into the idea that commercial travel won’t return to previous highs.

“It will definitely get back to 2000 levels, but it won’t be this year or next year,” Koch says. “Most likely it will be 2005 or 2006, barring some catastrophic event.” With the drop-off, car-rental companies have focused on cutting costs.

Hertz, of Park Ridge, N.J., has “managed costs with an electron microscope,” Koch jests. “It’s a situation where you’re only going to squeeze so much blood out of the revenue rock.” Besides their fleets, companies have cut their workforces.

Hertz also continues to expand its local-market presence, also known as the insurance-replacement market because it targets customers whose primary vehicle is in the shop for body work or repair. Hertz jumped into the business in 1999 and has opened 900 locations. It expects to have 1,100 by early next year.

“It’s a big market for long-term growth, and it’s profitable,” Koch says. Plus, he says it doesn’t have the costs associated with being at the airport, such as concession fees.

Hertz last month entered into a deal to provide car-rental services to FixUSA, a chain of independent auto-body repair centers. FixUSA doesn’t have any South Florida locations.

Enterprise Rent-A-Car, which generates 95 percent of its business from local-market transactions, is doing just the opposite by expanding to more airport locations. Since debuting its first airport location in Denver in 1995, Enterprise has added more airport locations each year and now has 142.

Enterprise and Dollar Thrifty Automotive Group, the Tulsa, Okla., parent of Dollar Rent A Car and Thrifty Car Rental, believe they’re capitalizing on a trend prevalent in the airline industry.

“What you see is a shift in market share to some of the lower-cost providers,” says Rob Hibbard, vice president of rental development for St. Louis-based Enterprise. “Enterprise, over the last four years, has continued to see strong double-digit growth, even at airports,” where travel is down. “People are looking for value.” “I’m not suggesting we’re there yet” in copying the success of low-cost airlines like Southwest Airlines and JetBlue, adds Donald Himelfarb, president of Dollar Thrifty in Tulsa, Okla. But “the world has changed. The days of the business travelers having to be pampered, whether by an airline or car-rental company . . . are over.” Both Dollar and Thrifty target leisure travelers.

Cendant hopes its acquisition of Budget will help it capture more cost-conscious customers. Cendant considers its other brand, Avis, more of a full-service brand. Cendant paid $109 million and assumed $2.4 billion in debt from Budget in November.

“We think it’s a great brand to marry with Avis,” says F. Robert Salerno, chief executive and president of Cendant Car Rental Group of Parsippany, N.J.

Meanwhile, Alamo and National parent ANC Rental has been losing market share. ANC’s revenues dropped 26 percent over the past two years. It had $2.39 billion in revenue last year, down from $3.25 billion in 2000.

ANC’s performance, along with pricing and fleet problems, led it to file for bankruptcy about two months after the 2001 terrorist attacks. Since then, it has focused on slashing costs.

It has reduced staff and closed Alamo’s local-market division. A cornerstone of its reorganization has been the consolidation of Alamo and National at airports across the country. Instead of operating a concession counter for each brand at an airport, the two companies now share one at nearly 176 airports.

“I know our business has stabilized,” says ANC Chief Executive William N. Plamondon III. “Our financial performance is ahead of our forecast.” Nevertheless, ANC still loses money. It lost $120 million in the first half of this year, bringing total losses since its November 2001 bankruptcy filing to $811 million.

But Plamondon notes that besides operating results, the figures includes writedowns and restructuring costs. (ANC’s international operations are not in bankruptcy and, therefore, are not counted in results reported to the court.)

Before resolving its objections on the proposed sale to Cerberus, the unsecured creditors’ committee in the bankruptcy was critical of ANC’s reorganization strategy. The creditors described a host of problems, including poorly run operations, an inability to close unprofitable business lines, and a failure to quickly reduce the workforce. And ANC’s plan to combine Alamo and National operations, called Fast Forward, “has never produced the kind of costs savings they anticipated,” the committee has stated in a bankruptcy court filing.

Plamondon has dismissed the creditors’ criticism.

Perhaps the second-most-asked question in the car-rental industry — behind the one on commercial travel — is what Cerberus Capital Management has in store for ANC. Cerberus, known for buying distressed companies, isn’t giving any hints. Cerberus spokesman Dick Auletta declined to comment. William Lobeck, who formerly ran Alamo and National when they were owned by AutoNation and has been consulting for Cerberus, wasn’t available for comment.

Cerberus has agreed to buy ANC’s assets for $230 million and the assumption of more than $60 million in nonvehicle debt and $2 billion in vehicle debt. Cerberus also agreed to provide $150 million line of working capital. By comparison, the predecessor to AutoNation spent about $1.5 billion — not including debt — amassing a car-rental empire that was spun off into a separate company, ANC, in 2000.

Companies like Cerberus aren’t known for holding on to acquisitions for any great length of time.

“I wouldn’t want to speak to their motivations, but having been in this business for a long time, as an investor, if you can buy at the low end of the cycle, you may be able to find somebody willing to buy at the high end of the cycle,” Plamondon says.

Any thought Cerberus might have of eventually selling Alamo or National individually may be difficult given the brand consolidation.

Adds Hertz’s Koch: “There is no magic or secrets in this industry.

They are not going to come out of Chapter 11 with any unusual cost advantages.” While industry observers say the purchases of Alamo, National and Budget provide some balance for the car-rental business, they know all it takes for the industry to spin out of whack is a price war or steep discounts by manufacturers on vehicle sales.

“Stability is a relative term in the car-rental industry,” says Abrams’ LeSage.

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