Executive Summary / Key Takeaways

• Avis Budget Group is undergoing a significant strategic transformation centered on an accelerated fleet rotation, shedding higher-cost older vehicles for more affordable 2025 models to normalize fleet costs and enhance operational efficiency.
• Despite a Q1 2025 net loss of $505 million driven by increased fleet costs (including a $390 million charge related to accelerated disposals) and lower revenue, the company achieved Adjusted EBITDA loss of $93 million, better than prior guidance, reflecting cost control and improved utilization.
• Management expects substantial improvement in per-unit fleet costs throughout 2025, guiding from $351 in Q1 to approximately $325 in Q2 and targeting around $300 by Q4, positioning the company for significant profitability gains.
• The company maintains a strong liquidity position ($1.1 billion total liquidity as of March 31, 2025) and financial flexibility through its asset-backed financing structures, providing cushion against market volatility and supporting strategic investments.
• Avis Budget Group remains committed to its long-term target of generating no less than $1 billion in Adjusted EBITDA annually, driven by normalized fleet costs, ongoing operational efficiencies from technology investments, and anticipated solid travel demand, particularly in the leisure segment.

The Global Mobility Landscape and Avis Budget Group's Strategic Positioning

Avis Budget Group stands as a prominent global provider of mobility solutions, operating across approximately 180 countries under well-recognized brands including Avis, Budget, and Zipcar. With a history spanning over 75 years, the company has evolved through strategic shifts, including significant divestitures like the spin-offs of Realogy (HOUS) and Wyndham (WH), which shaped its focus and financial structure. Today, its operations are segmented into the Americas (North America, South America, Central America, and the Caribbean) and International (Europe, Middle East, Africa, Asia, and Australasia), serving both business and leisure customers through vehicle rental and car sharing services.

The mobility industry is characterized by a high level of competition, encompassing traditional rental car companies like Enterprise Holdings and Hertz Global Holdings (HTZ), as well as newer entrants leveraging technology and alternative models like ride-sharing services (Uber (UBER), Lyft (LYFT)). Avis Budget Group holds a significant, though not dominant, share of this market, estimated at 15-18% globally.

Against this competitive backdrop, Avis Budget Group positions itself as a customer-led, service-driven organization, emphasizing its extensive global network and diverse brand portfolio to cater to various customer segments. While direct quantitative comparisons across all competitors can be challenging, particularly with private entities like Enterprise, analysis suggests Avis Budget Group excels in customer service and global reach. Its digital platforms, for instance, offer faster booking times compared to some rivals, contributing to customer retention. However, it has faced challenges in cost efficiency relative to larger players like Enterprise and has lagged in the speed of electric vehicle (EV) adoption compared to peers like Hertz and Sixt (SIXTY), potentially impacting operational costs and market share in increasingly eco-conscious segments. The company's strategic response involves leveraging its brand equity, enhancing its service offerings, and crucially, driving operational efficiencies through technology to mitigate cost disadvantages and strengthen its competitive moat.

A cornerstone of Avis Budget Group's strategy and competitive differentiation lies in its investment in technology and data analytics. The company has developed and deployed a proprietary demand fleet pricing system, now fully operational across Europe and being implemented in the Pacific region. This system utilizes machine learning to forecast demand by segment and optimize pricing down to the location level, aiming to maximize utilization and overall contribution margin. Early results from Europe indicate benefits in price optimization and utilization.

Beyond pricing, technology is central to operational efficiency. The company is leveraging data analytics and on-the-ground systems to improve productivity, optimize labor mix, and enhance in-life vehicle cost management. Analytics around in-life vehicle costs led to a more than 10% decrease in related expenses in Q2 2024. Furthermore, the company is piloting digital tools for in-life fleet management, aiming to provide better visibility into vehicle disposition, enable more timely repairs, and improve vehicle movements. These tools are designed to create more available fleet, thereby increasing utilization without necessarily increasing fleet size. Management believes these initiatives, delivered through task-based analytics to operational teams, can generate significant improvements in utilization, a key driver of profitability. The strategic intent behind these technological advancements is clear: to create a more efficient, responsive, and profitable operation that can better navigate market dynamics and competitive pressures, ultimately contributing to margin expansion and the company's financial targets.

The Strategic Pivot: Accelerated Fleet Rotation

The post-COVID environment presented Avis Budget Group with significant challenges, particularly concerning its vehicle fleet. Supply constraints and market conditions forced the company to acquire model year 2023 and 2024 vehicles at elevated prices. Initially, the strategy was to hold these higher-cost vehicles for longer periods to spread depreciation over a flatter curve. However, the landscape shifted with the return of model year 2025 vehicle prices to more normalized, affordable levels.

Recognizing this opportunity and aiming to position the company for sustainable growth and improved cost structure, Avis Budget Group made a decisive strategic pivot in the fourth quarter of 2024. The company opted to significantly accelerate its fleet rotation strategy, particularly in the Americas segment. This involved aggressively disposing of the higher-cost older model year vehicles to make room for the new, more economically favorable 2025 models.

This accelerated disposition strategy had immediate financial consequences. In the fourth quarter of 2024, the company recorded a substantial $2.5 billion non-cash asset impairment and other related charges, reflecting the reassessment of the carrying value of the fleet based on the shortened holding periods. This was followed by an additional non-cash charge of $390 million in the first quarter of 2025 related to these accelerated dispositions, which was excluded from Adjusted EBITDA. Management has stated that no further fleet-related charges from this strategy are expected beyond the first quarter of 2025.

Despite these near-term costs, the strategic rationale is centered on long-term benefits. The aggressive disposal effort in Q1 2025 resulted in a company record for risk vehicle sales in any quarter. By accepting deliveries of approximately 70% of the anticipated model year 2025 vehicles by the end of Q1 2025, the company is rapidly refreshing its fleet. This is expected to decrease the average age (currently less than 12 months in the Americas) and mileage of the fleet, which management anticipates will positively affect in-life costs (maintenance, repairs) and improve vehicle utilization due to less downtime. The goal is to have the average age and miles of the Americas fleet back to pre-pandemic levels by year-end 2025. This accelerated rotation is seen as creating greater certainty around future fleet costs, positioning the company for increased utilization, reduced operational expenses, enhanced customer experience, and ultimately, sustainably growing Adjusted EBITDA.

Recent Financial Performance: A Look at Q1 2025

Avis Budget Group's first quarter 2025 results reflect the ongoing fleet transition and the broader market environment. Total revenues for the quarter were $2.43 billion, a decrease of $121 million, or 5%, compared to $2.55 billion in the first quarter of 2024. This decline was primarily attributed to a 2% decrease in revenue per day (excluding exchange rate effects), a $23 million negative impact from currency movements, and a 1% decrease in volume.

The company reported a net loss attributable to Avis Budget Group, Inc. of $505 million, a significant increase from the $114 million net loss in the prior-year period. This wider loss was primarily driven by increased total expenses, which rose 15% year-over-year to $3.11 billion.

A key factor in the expense increase was vehicle depreciation and lease charges, net, which surged 66% to $1.06 billion, representing 43.4% of revenue, compared to 24.9% in Q1 2024. This increase was primarily due to the $390 million in other fleet charges related to the accelerated disposal strategy in the Americas, as well as increased per unit fleet costs driven by decreased fleet levels and higher depreciation rates on the remaining older fleet, partially offset by an increase in the gain on sale of vehicles. Operating expenses also increased, rising 1% to $1.35 billion, representing 55.7% of revenue, up from 52.7% in Q1 2024. This was primarily due to the decrease in revenue per day and sustained costs. Selling, general and administrative costs were relatively flat year-over-year at $308 million, maintaining consistency as a percentage of revenue at 12.7%. Vehicle interest costs decreased 12% to $210 million, or 8.6% of revenue, down from 9.4% in Q1 2024, primarily due to decreased fleet levels and lower interest rates.

The company reported an Adjusted EBITDA loss of $93 million for the first quarter of 2025, compared to a loss of $12 million in Q1 2024. While a wider loss year-over-year, this result was better than the approximately $100 million loss the company had previously guided to, reflecting better-than-expected per-unit fleet costs ($351 vs. ~$400 guided) and cost management.

Segment performance in Q1 2025 showed varied results. The Americas segment saw revenues decrease 4% to $1.91 billion, primarily due to lower revenue per day and volume, impacted by calendar shifts (leap year, Easter moving to April). Despite this, Americas Adjusted EBITDA increased to a loss of $67 million from a loss of $44 million in Q1 2024, primarily due to higher per-unit fleet costs. The International segment's revenues decreased 6% to $523 million, driven by lower volume and negative currency impacts, partially offset by a slight increase in revenue per day. International Adjusted EBITDA loss decreased to $3 million from $15 million in Q1 2024, primarily due to lower per-unit fleet costs.

Overall, the Q1 2025 results highlight the near-term financial impact of the accelerated fleet rotation strategy and the challenging revenue environment, but also demonstrate management's ability to manage costs and improve utilization (total company utilization up nearly 4 points YOY), setting the stage for expected improvements in the coming quarters.

Liquidity and Capital Management

Avis Budget Group maintains a focus on robust liquidity and flexible capital management to support its operations and strategic initiatives. The company's principal sources of liquidity include cash on hand, cash generated from operations and financing activities, and access to available funding arrangements and committed credit facilities.

As of March 31, 2025, the company held $516 million in cash and cash equivalents. It also had access to $559 million of available borrowing capacity under its senior revolving credit facility and approximately $57 million under uncommitted facilities, providing total available liquidity of approximately $1.1 billion. This level of liquidity is seen as providing a substantial cushion against potential market volatility or unforeseen events.

The company's financing structure is bifurcated between corporate debt and debt under vehicle programs, which is generally collateralized by the vehicle assets. As of March 31, 2025, total indebtedness stood at approximately $23.1 billion, comprising approximately $5.9 billion in corporate indebtedness and $17.2 billion in debt under vehicle programs. The agreements governing this indebtedness contain restrictive covenants, including financial requirements, with which the company was in compliance as of March 31, 2025. Corporate debt is well-laddered, with no meaningful maturities until 2027, providing stability.

Recent financing activities underscore the company's active management of its capital structure. In February 2025, the company borrowed $500 million under a floating rate term loan due December 2025, with proceeds primarily used to pay down fleet indebtedness, providing temporary flexibility. During 2025, the Avis Budget Rental Car Funding AESOP LLC subsidiary issued approximately $358 million of asset-backed notes to fund vehicle acquisitions and repay maturing debt. Furthermore, effective April 30, 2025, the company amended and extended its asset-backed variable-funding financing facilities, increasing borrowing capacity by $640 million. The ability to issue more than $1 billion of debt out of the AESOP financing structure represents additional liquidity cushion.

The company's capital allocation strategy is described as balanced, prioritizing debt repayment, strategic investments in the business to drive operational efficiencies and margin expansion, and opportunistic share repurchases. While no shares were repurchased under the Stock Repurchase Program in Q1 2025 or Q1 2024, approximately $757 million of authorization remained available as of March 31, 2025. The total net debt leverage ratio remains stable at around 5x, reflecting the use of corporate debt proceeds to reduce fleet debt. This balanced approach, supported by strong liquidity and financing flexibility, positions the company to execute its strategic plan and navigate the current environment.

Outlook and Path to $1 Billion Adjusted EBITDA

Avis Budget Group's outlook is heavily influenced by the expected benefits of its accelerated fleet rotation strategy and ongoing operational improvements, which management believes will drive significant profitability improvements throughout 2025 and beyond.

A key component of the outlook is the anticipated trajectory of per-unit fleet costs. After reporting an all-in fleet cost per unit per month of $351 in Q1 2025 (better than the ~$400 guided), management expects substantial sequential improvement. They guide for Q2 2025 per-unit fleet costs to be approximately $325 per month and anticipate further improvement, targeting around $300 per month by the start of Q4 2025. This expected decline reflects the rotation out of higher-cost older vehicles and the integration of more affordable 2025 model year vehicles, coupled with anticipated favorable conditions in the used car market, which performed well in Q1 2025 and continued to show strength.

Based on these expected cost improvements and anticipated demand trends, management has provided specific guidance for the second quarter of 2025, expecting Adjusted EBITDA to exceed $200 million.

Looking further ahead, Avis Budget Group remains committed to its long-term target of generating no less than $1 billion of Adjusted EBITDA annually. Management's confidence in achieving this target is grounded in several factors:

• Normalized Fleet Costs: The accelerated fleet rotation is expected to bring per-unit fleet costs closer to historical norms as the higher-cost older fleet is replaced by more affordable 2025 models.
• Operational Efficiencies: Ongoing investments in technology and process improvements (e.g., demand fleet pricing system, digital in-life fleet tools, labor productivity initiatives) are expected to continue mitigating inflationary pressures and drive margin expansion by improving utilization and reducing variable costs.
• Travel Demand: While acknowledging a pullback in commercial demand, management highlights continued solid leisure activity, strong holiday periods, and positive trends in forward bookings, particularly for the summer peak and international cross-border travel. They believe their flexible fleet strategy allows them to capitalize on this demand while maintaining fleet discipline.
• Pricing: Management expects pricing to show positive sequential trends consistent with seasonal patterns, with rates strengthening from Q1 into Q2 and current exit trends suggesting continued momentum into the peak summer season. Their strategy of keeping fleet inside demand is intended to support favorable pricing outcomes.

Management acknowledges the uncertain macroeconomic environment, including potential impacts from automotive tariffs and unclear travel demand in the second half of the year. However, they believe the positive impacts of tariffs on used car prices could partially offset potential negative impacts on demand. The flexible fleet plan is designed to allow the company to scale up for peak demand or right-size quickly if conditions change.

Overall, the outlook is one of strategic execution driving financial recovery. The significant non-cash charges in late 2024 and early 2025 are viewed as the cost of positioning the company for a more favorable and predictable cost structure, enabling a path towards the $1 billion Adjusted EBITDA target through operational excellence and capitalizing on market opportunities.

Risks and Challenges

While Avis Budget Group's strategic direction and outlook appear promising, several risks and challenges could impact its ability to achieve its targets.

• Macroeconomic Uncertainty and Travel Demand Volatility: The company's performance is highly sensitive to economic conditions and travel demand. A deterioration in the global economy, recessionary pressures, or unforeseen events (pandemics, conflicts, natural disasters) could decrease discretionary spending on travel, impacting rental volume and pricing, particularly during peak seasons.
• Used Vehicle Market Performance: The success of the accelerated fleet rotation and future profitability heavily depend on the ability to dispose of used vehicles on attractive terms. A downturn in the used vehicle market could result in lower gains or higher losses on vehicle sales, negatively impacting fleet costs.
• Interest Rate Fluctuations: Recent and potential future increases in interest rates can increase financing costs for both corporate debt and vehicle programs, putting pressure on profitability.
• Automotive Tariffs and Supply Chain Disruptions: Evolving trade policies, including potential automotive tariffs, could impact the cost and availability of new vehicles, as well as the cost of vehicle parts, affecting fleet costs and operational expenses. Disruptions in the supply of new vehicles due to manufacturing issues or labor actions also pose a risk.
• Competition: The highly competitive nature of the mobility industry, including pricing pressure from rivals and the emergence of new business models, could constrain revenue growth and margins.
• Litigation and Regulatory Risks: The company faces risks related to litigation (including a recent securities class action lawsuit alleging misrepresentations about fleet strategy) and the ability to comply with evolving laws and regulations (privacy, labor, tax). Potential exposure from adverse legal outcomes could be material, although the company estimates potential aggregate exposure from reasonably possible losses in excess of accruals to be up to $40 million as of March 31, 2025.
• IT System Security: Risks related to protecting the integrity and security of IT systems and confidential information against cyberattacks or breaches are ongoing concerns.
• CEO Transition: While a planned succession, the transition of the CEO role in June 2025 introduces a period of leadership change, and the successful execution of the strategic plan will depend on the new leadership team.

Management employs various mitigation strategies, including maintaining fleet flexibility, focusing on cost control initiatives, leveraging technology for operational efficiencies, and maintaining a strong liquidity position to navigate these risks. However, the impact of external factors like macroeconomic shifts and market volatility remains a significant consideration for investors.

Conclusion

Avis Budget Group is at a pivotal juncture, having undertaken an aggressive and costly fleet rotation strategy to reset its cost structure and position itself for future growth. The significant non-cash charges incurred in late 2024 and early 2025 underscore the magnitude of this transition, aimed at shedding higher-cost older vehicles for more affordable new models.

While the first quarter of 2025 reflected the near-term financial impact of this strategy, resulting in a net loss, the underlying operational performance showed resilience, with improved utilization and cost control. Management's clear guidance for sequentially declining per-unit fleet costs throughout 2025, targeting a return to more normalized levels, forms the core of the investment thesis.

Supported by ongoing investments in technology to drive operational efficiencies and capitalize on demand, a solid liquidity position, and a commitment to strategic capital allocation, Avis Budget Group is focused on executing its plan. The reiterated long-term target of achieving no less than $1 billion in Adjusted EBITDA annually signals management's confidence in the earnings power of the business once the fleet transition is complete and operational improvements fully materialize.

For investors, the key factors to monitor will be the successful execution of the fleet rotation and the realization of expected cost savings, the performance of the used car market, the trajectory of travel demand (particularly leisure), and the company's ability to maintain pricing discipline in a competitive environment. While macroeconomic uncertainties and competitive pressures remain, the strategic actions taken position Avis Budget Group with a clearer path towards enhanced profitability and achieving its financial targets.