Internet Issue

Internet competition drives Avis Europe profits into reverse
By Saeed Shah
Published: 28 February 2007

Shares in the car hire group Avis Europe crashed 15 per cent yesterday after the company highlighted "structural changes" in its market and warned that it would not hit its target to improve profit margins.

The company reported that pre-tax profits had halved to €10.7m (£7.5m) in 2006, after taking exceptional charges of €28.9m, primarily as a result of restructuring costs.

Avis Europe, which is 60 per cent-owned by the Belgian car distributor D'Ieteren, said the internet had revolutionised its marketplace and put much greater pressure on pricing than expected when the company announced its margin target in 2005. At that time, Avis, under new chief executive Murray Hennessy, had pledged that it would improve margins, from 9 per cent, by between 3 and 5 percentage points over three to four years.

Instead, hit by slowing prices and restructuring costs, margins have fallen from 9 per cent in 2004 to 7.9 per cent last year.

Yesterday Mr Hennessy said: "A structural change has occurred in this marketplace ... the external environment has been, and is expected to continue to be, more difficult than we assumed two years ago and no longer supports the guidance we gave in 2005."

The internet made it easy to shop around for better deals and car manufacturers, in difficulty themselves, raised their supply prices. The result was that the hire sector was caught between falling prices and rising costs, the company said. "We're still aiming to move margins forward," Mr Hennessy said. "We're just not putting a target there."

Avis Europe, which also operates under the Budget brand, has struggled since 9/11, as the travel market fell. On an underlying basis, the company was able to report its first profits growth in five years yesterday. Underlying pre-tax profits increased by €1.1m to €38.9m.

Mr Hennessy said: "We are making good progress in implementing our strategy, which comprises: reducing cost; implementing revenue management to improve price, yield and utilisation; targeting our most profitable customer groups; and tight control of fleet."

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