U.S. CONRACs' Credit Quality Is Comparable With, Or Higher Than, Pre-Pandemic Levels

Nearly five years on from the start of the pandemic in early 2020, the airport rental car market has largely recovered by most industry measures and remains a key component of the U.S. travel ecosystem. A large majority of customers and revenue (about 70%) of the major rental car companies are associated with airport locations. And while the largest segment of the broader rental car market always is exposed to shifts in consumer behaviors and competitive pressures, the relative convenience, value, and absence of mobility alternatives to the airport rental car market the underpin the credit quality of consolidated rental car facilities (CONRACs) that we rate. In fact, very closely tracking the recovery in U.S. air travel, demand performance for some CONRACs has even exceeded pre-pandemic levels. As a result, since the pandemic, S&P Global Ratings raised all but one of its ratings on CONRAC entities to pre-pandemic levels.

We view any potential drag on rental car demand caused by inflation and economic weakness as relatively benign and short-lived. Median debt service coverage (S&P Global Ratings-calculated), at 1.36x, and liquidity, at 21.6% of debt outstanding in fiscal 2023, continued to improve from pandemic lows, and we expect these metrics will improve. Operators have demonstrated meaningful financial flexibility through their ability to adjust rates or charge rental car companies contingent costs, to meet their needs despite the potential of fluctuating travel trends, fuel prices, or regulatory changes.

Many of the facilities that we rate are relatively new and, therefore, have limited capital needs. Nevertheless, the potential for a shift away from rental cars and toward alternatives such as ride-sharing or mass transit, as well as reduced business travel over the long term, could lead to diminished rental car activity and customer facility charge (CFC) revenue.

CONRAC Revenue Pledges Have Unique Credit Qualities

CONRAC revenue pledges have unique credit support that underlies their credit stability. CONRACs have superior on-airport locations and competitive positions, giving them a captive market for renting cars at airports across the U.S., with most being walkable from the airport terminal or a short trip via bus or people mover system. Like other concessions, rental car companies pay airport owners fees for the privilege of operating their business at the airport, mostly in the form of a share of gross revenue. In addition, to support the financing and operations of related infrastructure, rental car companies that operate on airport property are required to collect and remit CFCs, which essentially capture all car rentals derived from airport passengers. Almost all the rated CONRACs include a contingent payment, deficiency payment, or performance guarantees from rental car companies as part of their concession agreement with the airport. These supplemental payments could require rental car companies operating at the airport to fund any deficiency in CFC accounts to pay debt service in the event CFC revenue is insufficient. Although these payments have yet to be materially tested, we view them as supportive of the relatively high credit quality of the sector.

CONRACs are generally supported by comparatively good CFC rate-setting flexibility, with rate increases typically requiring only the airport's board of directors, the airport's CEO, or a CFC study suggesting a higher rate is needed to meet debt service payments. This feature enhances the credit strength of the sector, as we believe relatively inelastic demand allows for higher CFCs without materially lower demand, resulting in higher revenue. Although from 2019 through 2023, the median CFC for rated CONRACs was $6, inflated overhead expenses or weaker demand has created pressure to raise CFCs in the near term.

Some CONRACs have an open flow of funds where transfers can occur between the CFC revenue stream and the general airport funds. But most CONRAC systems retain excess CFC revenue in a CFC surplus account to bolster liquidity over time or to keep CFCs low. Table 2 highlights the use of these available liquidity accounts. These significant CFC surplus accounts played a material role in restoring credit quality following the pandemic, as several CONRACs relied on previously accumulated liquidity to meet expenses and debt service payments during lockdown. We expect that in the next few years, CONRACs will again build up CFC reserves. Of note, nearly half of the CFC entities we rate exclude or have immaterial operations and maintenance expenses (O&M), which simplifies and reduces their risk profile.

Table 1 details the core financial metrics we consider in our "Global Not-For-Profit Transportation Infrastructure Enterprises" criteria, published Nov. 2, 2020, and the ranges for our assessments. Our metrics focus on operating performance, and thus, calculations of net revenue available for debt service include operating and nonoperating revenue and exclude income statement line items such as nonrecurring grants and cash-basis carryover fund balances and coverage accounts.

Also, while our coverage calculation typically represents a comparison of net revenue and total senior and subordinated debt service obligations, the calculation can sometimes include other recurring obligations or adjustments we consider O&M-like or debtlike. Many CONRACs have no O&M expenses or have only immaterial O&M expenses, so we generally view unrestricted reserves to debt as the more important of the two measures for this sector.

Table 1

Table 2

Rental Car Activity Mirrors Air Travel Demand

Rental car special facilities located at U.S. airports have also seen a continued strong recovery in rental car transaction days. CONRAC activity levels are highly correlated with air travel demand and enplanements, and in general, rental car demand moves in lockstep with enplanements. However, this is not always the case, as historical performance at San Diego County Regional Airport Authority shows. Although enplanements recovered to 96% of 2019 levels as of fiscal 2023, rental car transaction days recovered to only 80% of 2019 levels. These numbers are a marked improvement from those seen during the depths of the pandemic, but we attribute the notable difference between air travel and rental car demand to the weaker comeback of inter-California business travel demand for rental cars and note this case is unique among rated CONRACs. Generally, rental car transaction days trail airport enplanement levels by 5%-10% for rated CONRAC entities, with a few outliers.

For more information, see "U.S. Transportation Infrastructure Airport Update: Air Travel Rides The Jetstream, For Now," published June 18, 2024, on RatingsDirect.

Electrifying Rental Car Fleets Has Yet To Spark

Rental car companies have initiated efforts to provide electric vehicles (EVs) to the market, in particular to meet regulatory targets on emissions reduction. However, costs and consumer hesitancy to rent EVs have dampened the widespread availability of EV rentals. In fact, many airports don't yet have adequate infrastructure to support rental car EVs, with rapid charging stations still being very costly to install. Nevertheless, we expect the trend toward more EV rentals will continue, and advances in charging infrastructure--including the expansion of fast-charging networks--are making it more convenient for renters in some markets.

However, many customers are still reluctant to rent an EV due to unfamiliarity and reliability concerns. Rental car companies report higher maintenance and repairs of EVs due to higher accident rates among new EV drivers. For example, in the last two years, Hertz added more than 60,000 EVs to its fleet, stating its intent to have 25% of its fleet be electric by the end of 2024. However, the operating results associated with this fleet were pressured by lower utilization (amid weaker-than-expected demand), higher maintenance expenses, and lower-than-expected residual values, leading the company to reduce its EV targets.

For more information on EV infrastructure in the U.S., see "U.S. States Jump Start Electric Vehicle Charging Infrastructure," published Sept. 21, 2023.

Consolidation And Concentration In Rental Car Companies Haven't Posed A Credit Risk

The airport rental car market is dominated by three major companies that combined account for approximately 95% of U.S. car rentals:

• Avis Budget Group (inclusive of Avis, Budget, and Zipcar brands),
• Enterprise Holdings (significantly the largest rental car company in the U.S. with Enterprise, Alamo, and National brands), and
• Hertz Global Holdings (inclusive of Hertz Dollar and Thrifty).

Rental car companies that operate at airports generally have strong pricing power and customer reach, given their captive market and varying price point offerings. Of note, even through a Chapter 11 bankruptcy during the pandemic, Hertz continued to operate at CONRACs and continued to pay rent, charge and collect CFCs, and remit that revenue to the CONRACs without material disruption. Because of the absence of competition and strong market positions associated with airport locations, we don't view the concentration in rental car companies as an inherent risk in our analysis.

Competition And New Legislation Persist, But We Expect Stability In Rental Car Transaction Days

We believe that many of the CFC pledged revenue streams and CONRACs we rate have strong market positions. The challenge for management teams will be navigating potential changes in consumer travel choices. We view transportation network companies (TNCs; such as Uber or Lyft) and other mobility solutions (such as mass transit systems or peer-to-peer car sharing) as posing moderate competition to this sector.

However, at this point, we believe that TNC usage at airports is stagnating, or has become sufficiently saturated that a further decrease in rental car transaction days at CONRACs is unlikely. Nonetheless, the peer-to-peer rental car market and other new mobility options, over time could affect the sector, and we'll continue to monitor this trend. In the past decade, many airports have also implemented ground transportation fees to charge TNCs that operate at the airport (drop-off fees, pick-up fees, or both) as a new revenue stream, which has slightly weakened the TNCs' competitive advantage. Other alternative forms of transportation that compete with on-airport rental cars are taxis, inter-city coaches, shuttle services, and public transportation.

We're monitoring new legislation that could affect CFC revenue streams across the U.S. and could further weaken the demand for rental cars. Hertz reports that more than 40 U.S. states charge either a rental car tax or fee. Many state legislatures have enacted laws imposing new rental car fees to help generate funds for transportation infrastructure or EV infrastructure. Should the costs of renting cars continue to rise, consumers could cut back their demand for car rentals and seek alternative transportation options.

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