Avis 2006 Annual Report Download - page 21

Table of Contents
ITEM 1A. RISK FACTORS
You should carefully consider each of the following risks and all of the other information set forth in this Annual Report on Form 10-K. Based
on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our
company in each of these categories of risk. However, the risks and uncertainties our company faces are not limited to those described below.
Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our
business. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to
anticipate results or trends in future periods.
Risks related to our business
The high level of competition in the vehicle rental industry may lead to reduced rental volumes, downward pricing or an inability to
increase our prices, which could have a material adverse impact on our results of operations.
The vehicle rental industry in which we operate is highly competitive. We believe that price is one of the primary competitive factors in the
vehicle rental industry. Our competitors, some of whom may have access to substantial capital, may seek to compete aggressively on the basis
of pricing. To the extent that we match competitors’
downward pricing, it could have a material adverse impact on our results of operations. To
the extent that we do not match or remain within a reasonable competitive margin of our competitors’ pricing, it could also have a material
adverse impact on our results of operations, as we may lose rental volume. The Internet has increased pricing transparency among vehicle
rental companies by enabling cost-conscious customers to more easily obtain and compare the rates available from various vehicle rental
companies for any given rental. This transparency may increase the prevalence and intensity of price competition in the future.
We face risks of increased fleet costs, both generally and due to the possibility that automobile manufacturers could change or cease their
repurchase or guaranteed depreciation programs.
Fleet costs represented approximately 27% of our aggregate expenses for 2006 and can vary from year to year based on the prices at which we
are able to purchase and dispose of rental vehicles. For 2006 and 2005, approximately 88% and 95%, respectively, of the rental cars purchased
for our domestic car fleet were the subject of agreements requiring automobile manufacturers to repurchase them or guarantee the depreciation
rate for a specified period of time. We refer to cars subject to such agreements as “program cars.” Under these repurchase and guaranteed
depreciation programs, automobile manufacturers agree to repurchase cars at a specified price during a specified time period or guarantee the
rate of depreciation for a specified period of time, typically subject to certain car condition and mileage requirements. Repurchase and
guaranteed depreciation programs, therefore, enable us to determine, in advance, our depreciation expense, which is a significant cost factor in
our car rental operations. Repurchase and guaranteed depreciation programs also limit the risk to us that the market value of a car, at the time of
its disposition, will be less than its estimated residual (or depreciated) value.
Automobile manufacturers may not continue to sell cars to us subject to repurchase or guaranteed depreciation programs at all or on terms
consistent with past practice. In addition, we intend to reduce the number of program cars we purchase to mitigate anticipated increases in fleet
costs. Should any such decrease in the percentage of our car rental fleet subject to repurchase or guaranteed depreciation programs occur, we
would expect to bear increased risk relating to the residual market value of our car rental fleet and the depreciation of rental vehicles, each of
which could have a material adverse effect on our results of operations and financial condition. The overall cost of cars subject to repurchase or
guaranteed depreciation programs could also increase if the manufacturers were to make changes to these programs, particularly if such
changes were to result in a decrease in the repurchase price or guaranteed depreciation without a corresponding decrease to the original
purchase price. Repurchase or guaranteed depreciation programs also generally provide us with flexibility to reduce the
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