Fitch: technology could disrupt rental car demand at airports

Investors in CONRAC facilities should be thinking of how the market might look in 15 to 20 years when financing deals, rating agency warns.

Ride sharing, autonomous vehicles and other innovations in transport could dampen consumer demand for consolidated rental car (CONRAC) facilities at airports, according to a report by Fitch Ratings.

The report states that new technology-driven modes of transport could lead to a reduction in the revenues generated by CONRAC facilities, which provide air passengers with a centralised location to rent personal ground transportation. The loss of revenue may put CONRAC deals financed today in jeopardy in the future.

According to the report, demand for rental cars will be increasingly uncertain over the next 20 years as ride-sharing companies such as Uber and Lyft increase their market share. There is also the potential for autonomous vehicles, which would lead to a further reduction in CONRAC revenues.

Fitch states that air passengers contribute more than half of the rental car industry’s total revenue. It cites statistics from Auto Rental News which show consumer demand holding steady over the short term, with compound annual growth of 4.2 percent forecast over the next five years and 3.4 percent projected over the following 10 years.

However, the report says demand at airports will depend on location. Airports servicing large cities with strong business and tourism industries will fare better than medium-sized facilities, according to the report.

Seth Lehman, the report’s lead author and Fitch’s senior director for global infrastructure and project finance, told Infrastructure Investor that Bradley International Airport in Hartford, Connecticut, was an example of a medium-sized airport that could experience increasing competition in ground transportation. He said annual passenger growth at Bradley had increased 20 percent since 2012, but that rental car transactions had remained steady.

Fitch says investments in CONRAC facilities should be structured in ways that enable investors to “quickly reduce leverage to a nominal level in the intermediate term, before the broad adoption of new mobility options”. Lehman said investors should be thinking about how the market might look in 15 to 20 years’ time when financing deals.

“The bond structures that are currently done have solid structure features,” he said. “But what they do lack is the flexibility to manage event risks such as new transportation services that may pinch rental car demand. It’s very possible that, some time during the period when rental car bonds are outstanding, this technology will be introduced broadly and could be disruptive to demand.”

Lehman also noted a recent financing of a CONRAC project to show how the risks associated with such assets might increase.

In May, a consortium developing a rental car facility at Newark Liberty International Airport in New Jersey closed on a 35-year deal to design, build, finance and maintain a CONRAC facility. Investors in the $500 million project – Related Fund Management, Fengate Asset Management and Conrac Solutions – financed the investment with 20 percent equity and 80 percent debt. They also agreed to take on the project’s entire revenue risk through a customer facility charge.

According to Lehman, the consortium could face difficulty paying down the project’s leverage if rental car demand falls, especially since the facility charge is locked in at $7 and only a 2 percent annual increase is allowed over the length of the contract.

“Those structures have limitations because, if there is a disruptive event in rental car demand, there is not enough flexibility in the rate-setting approach to address that risk,” Lehman said.

Conrac Solutions said in a statement: “The investment merits of every CONRAC, whether financed privately or through public bonds, must be analyzed individually based on the cost of the project and underlying rental market. The finance structure used in Newark provides the flexibility to consider the use of fixed-rate customer facility charges and the removal of contingent rent provisions, amongst other provisions.”

Mac Bell, head of public-private partnership investments at Fengate, agreed that rental car demand was weakening at some airports. However, he was confident in the Newark project’s market position.

“We have a confident view of the future based on our data,” Bell told Infrastructure Investor. “Other airports, we wouldn’t be able to take that risk because of volatility. But at Newark, it was pretty clear.”