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Car Rental Stocks On Collision Course With Safety Recall Regulations

Push to close 'loophole' may impact earnings


Car rental stocks are facing a dangerous road ahead.  Hertz (NYSE: HTZ), Avis Budget Group (NASDAQ: CAR), Dollar Thrifty Automotive Group (NYSE: DTG) and privately held car rental company Enterprise Holdings could face higher operating costs if federal regulators and a U.S. Senator change the way rental car firms manage auto safety recalls.

The proposed changes would close the so-called rental car “loophole” for car rental stocks Hertz, Avis Budget and Dollar Thrifty by banning the companies from renting any vehicle for which a safety recall has been issued until the problem has been fixed.

Federal law currently requires new and used car dealers to fix even seemingly minor recall problems (or to disclose those outstanding recalls) before selling vehicles to consumers, but it has never been applied to vehicle rental companies. As far as Sen. Charles Schumer (D-NY) and the National Highway Traffic Safety Administration are concerned, it’s time to start.

Here’s why: a recent NHTSA study alleged car rental companies like Avis Budget, Hertz and Dollar Thrifty could be putting their customers’ safety in jeopardy by not getting recall issues properly – and promptly – resolved.  The study found that within 90 days of a recall having been issued, Hertz on average had fixed 34% of its affected vehicles, Avis Budget had fixed 53%, and Enterprise Holdings had completed 65%. Yet, cars that had not yet been fixed were still on the road and available for rental.

sing those averages, NHTSA suggests tens of thousands of rental car drivers have unknowingly rented vehicles under recall and that this practice poses a serious threat to their customers and other drivers sharing the roadways.

NHTSA commissioned the study in the wake of publicity surrounding a 2004 accident in which two California sisters were killed when their Enterprise rental car, under a safety recall at the time, caught fire and crashed into another vehicle due to the safety defect.

But to rental car stocks HTZ, CAR and DTG just emerging from a recessionary winter of discontent, more regulation is bad news.  In a recent joint letter to NHTSA, Hertz, Avis and Enterprise said that the repair rates listed in the study were based on inaccurate information.

Once again, it’s the age-old question of safety risk vs. cost, and no industry welcomes costly new regulations like those car rental stocks are facing.  If the new safety recall procedures are approved, rental car companies like Hertz, Avis Budget and Dollar Thrifty will have to grapple with the increased cost of pulling vehicles out of their fleets to have manufacturing defects fixed fast.  That’s bound to result in lower earnings because rental companies (who are more prone to price wars than airlines, for example) will have greater difficulty passing on those higher operating costs to consumers.

A compromise plan from a car rental company trade group is likely to be a non-starter for auto manufacturers like Ford (NYSE: F), General Motors (NYSE: GM), and Toyota (NYSE: TM), who have no interest in revamping their entire recall management process to support a new “two-tiered system” for dealers and rental car companies.  While NHTSA likely will remain focused on the rental recall issue, lawmakers eager to alter safety regulations may find their attention pulled toward larger concerns in the coming months: like nuclear power plants.

As of this writing, Susan J. Aluise did not own a position in any of the stocks named here.

Article printed from InvestorPlace Media,

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