Prices May Zip Higher After Zipcar, Avis Deal
NEW YORK ( TheStreet) -- Whether it's Avis Budget (CAR) buying up struggling upstart Zipcar(ZIP) , Hertz(HTZ) acquiring Dollar Thrifty (DTG) or Priceline.com(PCLN) taking over Kayak Software (KYAK) , travelers should expect these deals to push up prices in the fast consolidating travel sector next holiday season.
Travel industry giants like Hertz, Priceline and Avis have used a depressed post-crisis economy to make the case for consolidation - taking out price-competitive discount competition. As the U.S. economy builds momentum, it won't be a surprise to see travel, plane and car rental deals evaporate as prices rise.
In the past 24 months, Hertz has been able to cut what's likely the last mega rental-car merger to cap a consolidation of the industry to three giant players , meanwhile online travel search specialists Kayak Software and ITA Software have fallen into to larger players like Priceline and Google (GOOG) .
While price increases are never outlined in the announcement of a deal, analysts covering rental car stocks like Hertz and Avis have long pointed to M&A as a way for the industry to drive flat pricing growth and revenue. In travel search, the merger of two industry heavyweights might have a similar impact.
The airline sector is also in the process of what could be a necessary consolidation to drive prices higher in an improving economy. In 2010, United (UAL) was able to buy Continental Airlines -- forming the largest U.S. airline. After American Airlines 2011 bankruptcy, signs indicate U.S. Airways (LCC) is slowly building the consensus needed to swoop in and buy its struggling, discount competitor from bankruptcy.
Still, in the wake of Avis's announced Wednesday acquisition of Zipcar for about $500 million -- or $12.25 a share -- antitrust officials are unlikely to take notice of how consolidation in the travel sector - be it land, air or web - impacts prices in a recovering economy.
Avis and Zipcar aren't direct competitors as the car rental giant may have been for Dollar Thrifty, a competitor it failed to acquire in a multi-year takeover dance that raised Department of Justice and Federal Trade Commission fire.
In acquiring Zipcar, Avis highlights significant operating and fleet synergies between the two companies, in a merger of complementary industry players. According to Avis, Zipcar will also remain an independent subsidiary of the company.
"We see car sharing as highly complementary to traditional car rental, with rapid growth potential and representing a scalable opportunity for us as a combined company," Ronald L. Nelson, Avis's chief executive, said in a statement.
With Avis's broad reach, an acquisition of Zipcar could be exactly what the hourly car rental specialist for urban centers needs to become solidly profitable.
Avis said in a statement, it could use its existing fleet to help serve Zipcar's loyal subscribers in peak demand such as weekends and that the deal will drive up to $70 million in overall yearly cost savings. As of the third quarter, Zipcar had roughly 760,000 subscribers - known as Zipsters, in some circles.