| CENDANT CORP 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 The risk factors have been separated into risks related to our Separation Plan and risks related to our businesses |
| 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 |
| The following risks related to our business will continue to apply following the completion of the Separation Plan to the businesses of the four independent, stand-alone companies resulting from the completion of the transactions contemplated by the Separation Plan |
| Risks Related to our Separation Plan We may be unable to complete our Separation Plan and completion of the Separation Plan is subject to various risks |
| On October 23, 2005, our Board of Directors approved a plan to separate our company into four independent, publicly traded companies, one each for our Real Estate Services, Travel Distribution, Hospitality (including Timeshare Resorts) and Vehicle Rental businesses |
| Certain changes to the original plan were announced on December 13, 2005 |
| Completion of the Separation Plan is subject to various risks, including, but not limited to, risks inherent in the Separation Plan and related transactions, including risks related to increased borrowings, and costs related to the proposed transactions; increased demands on our management team as a result of executing the Separation Plan in addition to their regular day-to-day management responsibilities; changes in business, political and economic 39 _________________________________________________________________ [114]Table of Contents conditions in the United States and in other countries in which we currently do business; changes in governmental regulations and policies and actions of regulatory bodies; changes in Cendant’s overall operating performance and changes in the operating performance of any of Cendant’s business segments; access to financing sources, required changes to existing financings, and changes in credit ratings, including those that may result from the transactions related to the Separation Plan; new costs, which may be greater than the general corporate overhead expenses currently allocated, due to each of the businesses being operated as stand-alone companies rather than as part of an integrated group; the terms of agreements among the separating companies, including the allocations of assets and liabilities and commercial arrangements; our ability to obtain the financing necessary to complete all or a portion of our Separation Plan; and our ability to satisfy certain conditions precedent, including final approval by our Board of Directors, receipt of a tax opinion of counsel, receipt of solvency opinions and the filing and effectiveness of registration statements with the Commission |
| Therefore, there can be no assurances that our Separation Plan will be completed in whole or in part, including the timing thereof, or that completion of all or a part of the Separation Plan will not adversely affect our business |
| Each of the independent companies resulting from the completion of the Plan of Separation may be unable to achieve some or all of the benefits that we expect will be achieved from the separation transactions |
| Each of the independent companies may not be able to achieve the full strategic and financial benefits we expect will result from the separation of Cendant’s businesses into four independent companies or such benefits may be delayed or may not occur at all |
| For example, there can be no assurance that analysts and investors will regard the corporate structures of each of the independent companies as more clear and simple than the current Cendant corporate structure or place a greater value on the sum of each of the independent companies as compared to Cendant |
| Additionally, the consolidated financial information, as well as the segment level financial information, included in this Annual Report on Form 10-K, does not reflect the financial condition, results of operations or cash flows that each of the independent companies would have achieved if the Separation Plan had been completed prior to, or during, the periods presented or those that the companies will achieve in the future |
| This is a result of several factors, including the following: l Generally, the working capital requirements and capital for general corporate purposes of each of our businesses, including acquisitions and capital expenditures, have historically been satisfied as part of Cendant’s corporate-wide cash management policies which include cash generated from the businesses we plan to separate |
| Subsequent to the completion of the Separation Plan, each of the independent companies will no longer have access to the businesses of the other separated companies in order to finance its working capital or other cash requirements |
| Without the opportunity to obtain financing from the other separated businesses, each of the independent companies is expected to need to obtain independent financing from banks, or through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements |
| l Subsequent to the completion of the Separation Plan, the cost of capital for most of the separated businesses will likely be higher than Cendant’s cost of capital prior to the distributions due to several factors, including lower expected credit ratings for each independent company than Cendant’s current credit ratings |
| l Prior to the completion of the Separation Plan, our businesses will have been operated by Cendant as part of our broader corporate organization, rather than as independent companies |
| We have performed various corporate functions for each of the businesses, including, but not limited to, tax administration, certain governance functions (including compliance with the Sarbanes-Oxley Act of 2002 and internal audit) and external reporting |
| 40 _________________________________________________________________ [115]Table of Contents l Other significant changes may occur in the cost structure, management, financing and business operations of each independent company as a result of each such business operating separate from each other |
| Each of the independent companies may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as a company independent from the other Cendant businesses and the agreements among the separated businesses may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated parties |
| Following the completion of the Separation Plan, the separated businesses will be contractually obligated to provide to each other only those services specified in a transition services agreement and other agreements the companies enter into in connection with the Separation Plan |
| The independent companies may be unable to replace the other services that one or more of the applicable separated businesses previously provided to it in a timely manner or on comparable terms |
| In addition, if any of the separated businesses do not continue to perform the transition services that are called for under any such transition services agreement effectively, the other businesses may not be able to operate their business effectively and their profitability may decline |
| In addition, the agreements related to the Separation Plan that we expect the separated businesses to enter into with each other may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated parties |
| Such terms would include, among other things, those related to allocation of assets, liabilities, rights, indemnifications and other obligations among the separated businesses |
| As part of the Separation Plan, we anticipate that each of the independent companies will incur substantial debt with external lenders, which could subject them to various restrictions and decrease their profitability |
| As part of the Separation Plan, we anticipate that each of the independent companies will incur substantial borrowings to repay Cendant debt and/or to finance such company’s working capital requirements and/or for general corporate purposes |
| We expect that such financing arrangements will contain customary terms, restrictions and covenants |
| The terms of these financing arrangements and any future indebtedness may impose various restrictions and covenants on the relevant company (such as maintenance of various financial ratios) that could limit that company’s ability to respond to market conditions, provide for capital investment needs or take advantage of business opportunities |
| In addition, such financing costs may be higher than they were if such businesses remained part of an integrated Cendant |
| Risks Related to our Businesses The risks described below under the heading “General” apply to our business as a whole and/or businesses included in more than one of our segments |
| In addition, with respect to the businesses that comprise our Real Estate Services, Travel Distribution and Vehicle Rental segments, we have included additional risk factors specific to those businesses under the relevant headings |
| General Adverse developments in general business, economic and political conditions could have a material adverse effect on our financial condition and our results of operations |
| All of our businesses and operations are sensitive to general business and economic conditions in the United States and worldwide |
| These conditions include short-term and long-term interest rates, inflation, fluctuations in the debt and equity capital markets and the general condition of the US and world economy |
| A host of factors beyond our control could cause fluctuations in these conditions, including the political environment, acts or threats of war or terrorism and pandemics |
| Adverse developments in these general business, economic and political conditions, including through recession, economic downturn or otherwise, could have a material adverse effect on our results of operations and financial condition |
| The businesses that comprise our Real Estate Services segment are affected significantly by the monetary policies of the federal government and its agencies |
| These businesses are affected particularly by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States |
| The 41 _________________________________________________________________ [116]Table of Contents Federal Reserve Board’s policies affect the real estate market through its effect on interest rates |
| Changes in these policies are beyond our control, are difficult to predict and could have a material adverse effect on the businesses and results of operations of our Real Estate Services segment and our financial condition |
| Revenues in our Travel Related Businesses are highly dependent on the travel and transportation industries, and particularly on airlines, and a prolonged substantial decrease in travel volume could adversely affect us |
| Most of the revenue from the businesses that comprise our Hospitality, Timeshare Resorts, Travel Distribution and Vehicle Rental segments (our “Travel Related Businesses”) is derived from the travel and transportation industries |
| Our revenue increases and decreases with the level of travel and transportation activity and is therefore highly subject to declines in or disruptions to travel and transportation due to factors entirely out of our control |
| Factors that may adversely affect travel and transportation activity, which are beyond our control, include: l global security issues, political instability, acts or threats of terrorism, hostilities or war, l increased airport security that could reduce the convenience of air travel, l natural disasters, such as the hurricanes that occurred in the Gulf Coast in 2005, l travelers’ perception of the occurrence of travel-related accidents, l travelers’ concerns about exposure to contagious diseases and pandemics, such as SARS or bird flu, l increases in fuel prices, l general economic conditions in the United States and worldwide, l political issues in the Middle East, Asia, Latin America and elsewhere, and l the financial condition of travel suppliers |
| The possibility of further terrorist attacks, hostilities and war, the resulting heightened security measures at airports, and the financial instability of many of the air carriers may continue to adversely affect the travel industry |
| With respect to our travel distribution and vehicle rental businesses, airlines may reduce the number of flights they offer, making fewer offerings available to our travel distribution businesses and resulting in a decline in the volume of car rental transactions at our vehicle rental business |
| Our travel distribution businesses depend on a relatively small number of airlines for a significant portion of their revenues |
| Several major airlines have experienced liquidity problems, some (including US Airways, Inc, ATA Holdings Corporation, Delta Air Lines, Inc |
| and Northwest Airlines Corporation) have sought bankruptcy protection and still others may consider bankruptcy relief |
| Travelers’ perceptions of passenger security or airlines’ financial stability that are negative may have an adverse effect on demand |
| The financial instability of airlines or a prolonged substantial decrease in travel volumes could have an adverse impact on our financial performance, operations, liquidity, or capital resources and could impair our ability to recover the carrying value of certain of our assets, including capitalized software, other intangible assets and goodwill |
| Declines in or disruptions to the travel industry due to the factors listed above also could result in a decrease in travel to locations in which property owners of our franchised lodging properties and managed properties, timeshare resorts and resorts with units that participate in our vacation exchange business have a presence |
| We cannot assure you that we will be able to successfully integrate recent and any future acquisitions or that such acquisitions will have the anticipated impact on our earnings and results of operations |
| In 2005, several of our businesses completed acquisitions, such as the acquisitions of Gullivers Travel Associates and ebookers by our Travel Distribution segment and Wyndham by our Hospitality segment, and are currently integrating those acquisitions into our operations |
| The business strategies of some of our 42 _________________________________________________________________ [117]Table of Contents businesses, such as NRT, include the selective acquisition of additional complementary businesses |
| Acquisitions involve risks, including those associated with integrating with our businesses the operations, financial reporting, technologies and personnel of acquired companies |
| Acquisitions may not be accretive to our earnings, as expected or at all, and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, non-cash write-offs of goodwill or intangibles and increased amortization expenses in connection with intangible assets |
| Acquisition integration activities can also put further demands on management, which could result in negative operating results |
| We may not be able to achieve our objectives for growth |
| There can be no assurance that we will be successful in achieving the growth objectives described for each of our operating segments in the “Business” section |
| The reasons that we may not achieve our growth objectives include, but are not limited to: l With respect to our real estate businesses, adverse developments in the home sale industry and our ability to control costs, particularly broker commission rates and storefront costs |
| l With respect to our hospitality and timeshare resorts businesses, our ability to retain our hotel franchisees; our ability to generate tours and close timeshare sales; the availability of economically viable real estate in the areas of demand by consumers of our hospitality franchisees and timeshare resorts business; and RCI’s ability to compete with timeshare developers who have internal exchange programs as well as within the vacation rental industry |
| l With respect to our travel distribution businesses, our ability to grow our online direct to consumer brands; our ability to sell complex travel, such as dynamic packaging; our failure to attract and retain customers in a cost effective manner; the cost of renewing contracts in our Preferred Fares Select program; our ability to address technology issues at ebookers; and management turnover and distraction from acquisition integration efforts |
| l With respect to our vehicle rental business, our ability to properly react to changes in market conditions and successfully market to replacement renters and the insurance companies and our ability to increase our prices in order to offset increased fleet costs |
| A failure to maintain our investment-grade debt ratings could impact our ability to obtain financing on favorable terms and could negatively impact our business |
| Our current debt ratings from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings are Baa1, BBB+ and BBB+, respectively |
| Following our announcement of our Separation Plan in October 2005, Fitch has placed us on “Evolving Outlook” and Moody’s has placed us on “Developing Outlook” |
| Should we fail to maintain our investment-grade ratings as a result of our Separation Plan or future events or circumstances: l Our ability to obtain additional financing on favorable terms could be negatively impacted; l Our ability to maintain our asset-backed funding arrangements may be limited; and l The interest rate and facility fees charged in connection with our borrowing facilities would increase |
| We are reliant upon information technology to operate all of our businesses, and, in particular, the success of our travel distribution businesses depends on maintaining the integrity of, and upgrading the quality of, its systems and infrastructure |
| We cannot assure you that we will be able to continue to effectively operate and maintain our information technologies and systems |
| These technologies and systems are vulnerable to damage or interruption from various causes, including: (1) natural disasters, (2) power losses, computer systems failures and Internet, telecommunications or data network failures, (3) computer viruses and other physical or electronic breaches of security and (4) our inability to attract or retain the services of appropriate personnel to maintain the systems |
| Any extended interruption in our technologies or systems could significantly curtail our ability to conduct our business and generate revenue |
| 43 _________________________________________________________________ [118]Table of Contents In our hospitality and timeshare resorts businesses, we depend upon the use of sophisticated information technologies and systems, including those utilized for reservation systems, vacation exchange systems, communications, property management, procurement, member record databases, call centers and operation of our customer loyalty programs |
| In our vehicle rental business, we depend upon such technologies and systems for reservation systems and customer service, and in our real estate businesses, we depend upon the use of such sophisticated technologies and systems for LeadRouter and SearchRouter |
| In order to be successful in our travel distribution businesses, we must provide reliable, real-time access to our systems for our customers and suppliers while also pursuing a low-cost model |
| As our travel distribution operations grow in both size and scope, we will need to continuously improve and upgrade our systems and infrastructure to offer an increasing number of customers and travel suppliers enhanced products, services, features and functionality—all while maintaining the reliability and integrity of our systems and infrastructure and pursuing the lowest cost per transaction |
| The expansion of our travel distribution systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of business increases, with no assurance that the volume of business will increase |
| Consumers and travel suppliers can be deterred by slow delivery times, unreliable service levels, prolonged or frequent service outages, or insufficient capacity, any of which could have a material adverse effect on our Travel Distribution segment or its results of operations |
| In our international B2C business, the competitiveness of the online travel distribution markets is intensifying |
| com, operates on systems that require a significant amount of manual processing, which have resulted in substantial reporting and maintenance costs |
| Furthermore, ebookers |
| com, OctopusTravel |
| com and GTA operate on systems that face stability and other attendant risks |
| These issues are being addressed by upgrading and remediating the current systems, transitioning our management team and achieving greater automation of our business |
| Any failure to address these issues could have an adverse effect on our travel distribution businesses |
| Several of our businesses are highly regulated and any failure to comply with such regulations or any changes in such regulations could adversely affect our business |
| Several of our businesses are highly regulated |
| The sale of franchises is regulated by various state laws as well as by the Federal Trade Commission (“FTC”) |
| The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration |
| A number of states require registration or disclosure in connection with franchise offers and sales |
| In addition, several states have “franchise relationship laws” or “business opportunity laws” that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the referral or transfer of these agreements |
| While we believe that our franchising operations are in compliance with such existing regulations, we cannot predict the effect any existing or future legislation or regulation may have on our business operation or financial condition |
| Our real estate brokerage business, our relocation business, our title and settlement service business, our timeshare resorts business and the businesses of our real estate franchisees must comply with the Real Estate Settlement Procedures Act (“RESPA”) |
| RESPA and comparable state statutes, among other things, restrict payments which real estate brokers, agents and other settlement service providers may receive in connection with the referral of business to other settlement services providers in connection with closing of real estate transactions |
| Such laws may to some extent restrict preferred vendor arrangements involving our franchisees and our company owned brokerage business |
| Additionally, as noted above, our title and settlement services and relocation businesses must comply with RESPA and similar state insurance and other laws |
| RESPA and similar state laws require timely disclosure of certain relationships or financial interests that a broker has with providers of real estate settlement services |
| There is a risk that interpretations will be adopted in the future that could make compliance more difficult or expensive |
| There is also a risk that a change in current laws could permit the entrance of new competitors, some of which may have greater resources than we do |
| In September 2005, the Justice Department filed a lawsuit against the National Association of Realtors, of which our company owned brokerages and franchisees are members, asserting that certain adopted rules regarding the sharing of online property listings between real estate brokers in the marketplace are anti-competitive |
| The Justice Department contends that the rules give an unfair advantage to traditional brokers at the expense of 44 _________________________________________________________________ [119]Table of Contents non-conventional brokers such as Internet-based discount brokers |
| If the National Association of Realtors is forced to change its rules regarding the sharing and display of online property listings, various changes in the marketplace could occur, including an increase in referral fees, a decrease in average commission rates, and/or other changes |
| Our timeshare resorts business is subject to extensive regulation by the states and countries in which our resorts are located and in which our timeshare properties are marketed and sold |
| In addition, our timeshare resorts business is subject to federal regulation, including the federal Telemarketing Sales Rule with its “do not call” and “do not fax” regulations |
| Many states have laws and regulations regarding the sale of timeshare properties, such as real estate licensing laws, travel sales licensing laws, anti-fraud laws, telemarketing laws, telephone solicitation laws, including “do not call” and “do not fax” regulations and restrictions on the use of predictive dialers, prize, gift and sweepstakes laws and labor laws |
| Violations of certain provisions of these laws may limit the ability of our timeshare resorts business to market, sell and finance our timeshare properties or to collect all, or a part of, the principal of, or interest on, loans made to finance the purchase of our timeshare properties by consumers |
| Our GDS business is also subject to risks with respect to the deregulation in the European Union, where currently rules are in place which prevent airlines from discriminating against other GDS systems in terms of services, commissions, and fees |
| Any change in these rules which could permit airlines to discriminate among GDSs could negatively impact our travel distribution business |
| Our B2C businesses must comply with laws and regulations applicable to online commerce and the sale of air transportation |
| Increased regulation of the Internet or air transportation or different applications of existing laws might slow the growth in the use of the Internet and commercial online services, or could encumber the sale of air transportation, which could decrease demand for our products, increase the cost of doing business or otherwise reduce our sales and revenues |
| New laws, regulations or judicial decisions may impose on us additional risks and costs of operations |
| In addition, our domestic B2C businesses may be affected by the position being taken by several state and local tax authorities that taxes they impose on hotel occupancies apply to the compensation we receive for hotel reservations booked under our merchant model and not just to the amounts ultimately paid to the hotel |
| While we do not believe that our fees are subject to these taxes, if any or all of the jurisdictions rule that our domestic B2C businesses are subject to these taxes (either retroactively, prospectively or both), it could increase our costs or decrease demand for our products |
| In addition, regulatory authorities have relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations |
| Accordingly, such regulatory authorities could prevent or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us if our practices were found not to comply with the then current regulatory or licensing requirements or any interpretation of such requirements by the regulatory authority |
| Our failure to comply with any of these requirements or interpretations could have a material adverse effect on our operations |
| We are also subject to various other rules and regulations such as: l the Gramm-Leach Bliley Act which governs the disclosure and safeguarding of consumer financial information; l various state and federal privacy laws; l the USA PATRIOT Act; l restrictions on transactions with persons on the Specialty Designated Nationals and Blocked Persons list promulgated by the Office of Foreign Assets Control of the Department of the Treasury; l the US Foreign Corrupt Practices Act; l “controlled business” statutes, which impose limits on the number of businesses that may be controlled by any one entity in a particular jurisdiction; l regulation by insurance and other regulatory authorities; 45 _________________________________________________________________ [120]Table of Contents l requirements governing the licensing and conduct of real estate brokerage and brokerage-related businesses; l environmental regulations with respect to our vehicle rental operations; l the Fair Housing Act; and l laws and regulations in jurisdictions outside the United States in which we do business |
| Our failure to comply with any of the forgoing laws and regulations may subject us to fines, penalties, injunctions, and/or potential criminal violations |
| Any changes to these laws or regulations or any new laws or regulations may make it more difficult for us to operate our business and may have a material adverse effect on our operations |
| Real Estate Services Segment The cyclical nature of the residential real estate market could adversely affect the results of operations of our Real Estate Services segment |
| In recent years, based on information published by the National Association of Realtors, existing home sales volumes have risen to their highest levels in history |
| The National Association of Realtors and Fannie Mae are forecasting, as of January 2006, a year-over-year decline in the number of existing home sales during 2006 |
| The residential real estate market tends to be cyclical and typically is affected by changes in general economic conditions which are beyond our control |
| Any of the following could cause a general decline in the number of home sales and/or prices which, in turn, could have a material adverse effect on the revenues and profitability of our Real Estate Services segment: l changes in government regulation l periods of economic slowdown or recession; l rising interest rates and general availability of mortgage financing; l adverse changes in local or regional economic conditions; l a decrease in the affordability of homes; l shifts in populations away from the markets that we, NRT or our franchisees serve; l tax law changes, including potential limits on, or elimination of, the deductibility of certain mortgage interest expense, real property taxes and employee relocation expenses; l decreasing home ownership rates; l declining demand for real estate; and/or l acts of God, such as hurricanes, earthquakes and other natural disasters |
| A sustained decline in existing home sales could adversely affect the results of operations of our Real Estate Services segment by reducing the royalties we receive from our franchisees, reducing the commissions our company owned brokerage operations earn and reducing the demand for our title and settlement services |
| Our brokerage operations are concentrated in metropolitan areas which could subject us to local and regional economic conditions that could differ materially from prevailing economic conditions in other parts of the country |
| Our subsidiary, NRT Incorporated, owns real estate brokerage offices located in and around large metropolitan areas in the United States |
| Local and regional economic conditions in these locations could differ materially from prevailing economic conditions in other parts of the country |
| While we believe that NRT’s offices are located in geographically diverse metropolitan areas of the United States, NRT has more offices and realizes more of its revenues in California, Florida and the New York metropolitan area than any other regions of the country |
| A downturn in residential real estate demand or economic conditions in these regions could result in a decline 46 _________________________________________________________________ [121]Table of Contents in NRT’s total gross commission income and have a material adverse effect on the results of operations of our Real Estate Services segment |
| In addition, given the significant geographic overlap of our title and settlement services businesses with our company owned brokerage offices, any local or regional declines that affect our company owned brokerage operations also could have an adverse effect on our title and settlement services business as well |
| Travel Distribution Segment Alternative models of travel distribution are emerging and some travel suppliers are seeking alternative distribution models, which may adversely affect the results of operations of our Travel Distribution segment |
| Some travel suppliers are seeking to decrease their reliance on travel distributors, including GDSs such as Galileo |
| Travel suppliers may give advantages to travel distributors in which they have an economic stake or may create or expand commercial relationships with online and traditional travel agencies that work with travel suppliers to directly book travel with those suppliers |
| Many airlines, hotels, car rental companies and cruise operators have established their own travel distribution web sites |
| Several suppliers have formed joint ventures that offer multi-supplier travel distribution web sites |
| From time to time, travel suppliers offer advantages, such as bonus miles, lower transaction fees, priority waitlist clearance, e-ticketing or discounted prices, when their products and services are purchased from these supplier-related web sites |
| Some of these offerings are not available to unrelated travel distributors, or those travel distributors must provide lower distribution pricing in exchange for access to the offerings |
| In addition, the airline industry has experienced a shift in segment share from full-service carriers to low-price carriers |
| Some low-cost carriers do not distribute their tickets through our GDS or through other third-party travel distributors |
| In addition, a new breed of competitors is entering the online travel marketplace |
| Both well-established search engine companies and start-ups are attempting to enter the online travel marketplace by leveraging search technology to aggregate travel search results across supplier, travel agent and other travel-related web sites |
| These search engines and alternative travel distribution channels have the potential to divert customers from our online sites and our GDS thereby putting pressure on our revenues, pricing and operating margins |
| Adverse changes in, or interruptions to, our relationships with travel suppliers could affect our access to travel offerings and reduce the revenues of our Travel Distribution segment |
| We rely on participating carrier agreements with our US and international airline suppliers, such as our Preferred Fares Select agreements in the United States and similar agreements abroad, and these agreements contain terms that provide discounted pricing |
| None of these arrangements is exclusive and airline suppliers could enter into, and in some cases may have entered into, similar agreements with our competitors |
| In addition, the agreements we have with our US and international airline suppliers will expire by their terms in 2006 and over the next three years, respectively, unless they are extended or replaced, which we cannot guarantee will occur |
| We cannot assure you that our arrangements with our travel suppliers will remain in effect on current or similar terms, that the net impact of future pricing options will not adversely impact revenue, or that any of these suppliers will continue to supply us with the same level of access to inventory of travel offerings in the future |
| Because our major airline relationships represent such a large part of our business, the loss of any of these relationships, including due to the bankruptcy of an airline, could have a material negative impact on our business |
| If our access to inventory or features is affected, or our ability to offer their inventory on comparatively favorable economic terms is diminished, it could have a material adverse effect on the business, financial condition or results of operations of our travel distribution businesses |
| 47 _________________________________________________________________ [122]Table of Contents Vehicle Rental Segment 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 the results of operations for our vehicle rental business |
| 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 the results of operations of our vehicle rental business, as we may lose rental volume |
| We face risks of increased fleet costs, both generally and due to the possibility that automobile manufacturers could change or cease their repurchase programs |
| Vehicle depreciation represents approximately 26prca of our aggregate expenses and can vary from year to year based on the prices at which we are able to purchase and dispose of rental vehicles |
| During 2005, 2004 and 2003, 98dtta0prca, 98dtta6prca and 99dtta6prca, respectively, of the cars purchased for our domestic car fleet were the subject of agreements requiring automobile manufacturers to repurchase them |
| We refer to cars subject to such agreements as “program cars” |
| Under these repurchase programs, automobile manufacturers agree to repurchase cars at a specified price during a specified time period, typically subject to certain car condition and mileage requirements |
| Repurchase programs, therefore, enable us to determine, in advance, our depreciation expense, which is a significant cost factor in our car rental operations |
| Repurchase programs, therefore, 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 at such time |
| There can be no assurance that the automobile manufacturers will continue to sell cars to us subject to repurchase programs at all or on terms consistent with past practice |
| Should the percentage of our car rental fleet subject to repurchase programs decrease, we would expect to bear increased risk relating to the residual market value of our car rental fleet and car depreciation, which could have a material adverse effect on our results of operations and financial condition |
| Under such a circumstance, we would have to find an alternate method of disposition of the additional non-program cars, which could significantly increase our overall fleet expenses and decrease our proceeds on sales |
| The overall cost of cars subject to repurchase 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 without a corresponding decrease to the original purchase price |
| Repurchase programs also generally provide us with flexibility to reduce the size of our fleet rapidly in response to an economic downturn or changes in demand by returning cars sooner that originally expected |
| This flexibility may be reduced in the future to the extent the percentage of program cars in our car rental fleet decreases or this feature of repurchase programs is altered |
| As of December 31, 2005, 63prca and 21prca of our program cars were manufactured by General Motors Corporation and Ford Motor Company, respectively |
| A default on any repurchase agreement, particularly with respect to GM or Ford, might also leave us with a substantial unpaid claim against the manufacturer with respect to program cars that were sold and returned to the car manufacturer but for which we were not paid, as well as potential additional expenses if the prices at which we were able to dispose of program cars were less than the specified prices under the repurchase program |
| Any increased risk with respect to the likelihood of these defaults could also impact our ability to finance the purchase of cars to maintain our car rental fleet |