Cruise America Inc. Business Information, Profile, and History

Company Perspectives:

The Company is best served by maintaining and expanding our higher yield domestic rental business. We simply cannot rely on the European vacationer to brace our rental business. Plans have been developed to increase our Satellite rental centers. Also, we are exploring chassis maintenance agreements with truck rental firms to allow the Company to expand in areas not currently serviceable by our existing network of Company operated rental and service facilities. The prime area for expansion is the Northeast area of the United States.

History of Cruise America Inc.

Cruise America Inc. is the largest company in North America specializing in the rental and sale of recreational vehicles, with rental operations in 16 company-held locations and 70 satellite rental centers. It is the only publicly traded RV rental company and one of the fastest growing small companies in America. In addition to rental operations, Cruise America also sells new motor homes, motor homes retired from the rental fleet, used pick-up trucks, slide-in campers, motorized trade-ins, consignments, light duty commercial trucks, and cab and chassis. During fiscal 1996, Cruise America implemented rental programs for 4×4 Blazers and minibuses outfitted for camping holidays. At a limited number of locations the company offers rentals on touring, cruiser, and sport bikes. Cruise Canada, Inc., their wholly owned subsidiary, was incorporated in 1987 and utilized a peak fleet of 886 vehicles from four hub locations and one satellite location in the cities of Vancouver, Calgary, Toronto, and Montreal. The company owns American facilities in Mesa, Miami, Denver, Los Angeles, and Oakland.

Starting Up in the Early 1970s

Cruise America was founded in 1972 by Robert A. Smalley, a former president of RCA's Hertz car rental subsidiary, along with his two sons, Randall and Robert Jr., who both joined their father in starting the business after graduating from college. The senior Smalley had retired from Hertz in 1971, after establishing a major overseas presence for the company, and after failing to get authorization from Hertz to expand into a major international motor home rental operation. He recognized the huge demand for RV rentals, a business that he especially enjoyed and that Hertz had added temporarily to their vehicle rental repertoire in the late 1960s. He understood that many travelers, who realized the cost and comfort advantages of traveling with cooking and sleeping accommodations, would rather rent than carry the burden of purchasing a motor home (purchase prices start at about $45,000). According to Sharon Reier of Financial World, Smalley had "sold his family-founded firm to Hertz in 1957, after building it into the third-largest independent car rental company in the country."

Confident that he could succeed again in a family business, he moved to his hometown of Miami and started the American Land Cruiser Company. He purchased ten motor homes and flourished until the Arab oil embargo of 1973-1974, when filling the 100-gallon tanks became problematic. With rising interest rates, banks were less than enthusiastic about loaning the capital needed to add to his fleet of motor homes.

Raising Capital in the 1980s

Undaunted, Smalley managed to build his Winnebago dealership into the largest in the country and offered a service center for RVs. He made a small initial public offering, raising $3 million, which enabled him to build up his motor home fleet. The business grew rapidly throughout the 1970s and into the 1980s, but by 1984 U-Haul, a privately held truck rental company, added 4,000 motor homes to their rental business, which forced the smaller company to find a new market--Europe. Initially, their strategy had been to target large numbers of domestic and international travelers by locating rental centers in metropolitan gateway cities. At this point the company expanded operations into France, West Germany, and England via travel agency networks, and their European exposure complemented domestic rentals to foreigners who wanted to "cruise" America. With the dollar low in America, European travelers arrived in the United States at a rate of 17,000 a day, according to the U.S. Travel and Tourism Office. Europeans accounted for 40 percent of the company's Winnebago and Fleetwood bookings and 50 percent of revenues during the summer of 1988. Pleased with this segment of consumers, Smalley Sr. told Reier in Financial World, "Europeans tend to book six months to 30 days ahead of their vacations, and they tend to book for about three weeks. Americans call up June 30 for the July 4th weekend and rent for only one week." At a peak in the summer of 1989, 3,200 recreational vehicles were in the company's rental fleet.

By 1990, the company sold 1,227 recreational vehicles that had been retired from the fleet, and revenues jumped to $72 million from $19.6 million in 1985. Randall Smalley told Richard Franklin of the Wall Street Corporate Reporter: "Any rental operation, regardless of whether you rent cars, trucks or furniture, is ultimately dependent upon the rotation and resale of your revenue equipment. During that time [the 1970s and 1980s], resales of the used rental fleet were not a problem. Along came the early 1990s, specifically 1991. The combination of Iraq [the American invasion of] and the resulting recession, made fleet resales difficult." Within 12 months their resales had dropped from 1,600 rental units sold to 400 sold.

The 1990s: Modular Construction

Then in August of 1992, Hurricane Andrew devastated Miami--and saved Cruise America. Randall Smalley told Damon Darlin in Forbes that one of their rental units, a 1990 motor home, "tumbled down the road like a beach ball" and was destroyed by the storm. The company transported the motor home to their facility in Miami where it was determined that although the body of the vehicle was destroyed, the chassis was not. It soon became obvious that the vehicles were composed of two separate components: the body and the chassis. They made minor repairs to the chassis and converted it into a commercial delivery truck, making it more valuable than it had been in its original form. The company began purchasing all of their fleet motor homes with modular bodies, which could be separated and remounted in just a few hours at their Phoenix, Arizona manufacturing and refurbishing plant. Since the used truck market far exceeds the market for RVs, the company began replacing all of the unnecessary accouterments including the upholstery, flooring, and window treatments, and installing the body on a new chassis for rental or resale as a commercial vehicle. Then the company would restore the top camper portion, and, as explained to Darlin by Randall Smalley: "A customer may see a few dings on the table or on a cupboard, but if the odometer says only 2,000 miles, then it's a new vehicle as far as he is concerned." The depreciated value of the refurbished body combined with the value of the new chassis allowed the company to offer these vehicles at reduced prices, at a savings of between $5,000 and $10,000 per vehicle, depending upon the model. The recreational vehicle business competes most aggressively with other forms of travel rather than with other motor home rental companies, rendering their system of modular bodies competitive with airlines and railroads for vacation dollars.

In 1993 Cruise America moved its corporate headquarters, including its domestic and international reservation systems, from Miami to Mesa, Arizona. Most of America's national parks are located in the western states, making that part of the country most desirable as a motor home destination, and accounting for a large portion of the rental business. Seasonal changes affect the motor home business but Cruise America adapted to fluctuations by concentrating on getting their equipment ready in the off-season, dismounting bodies, selling trucks and focusing advertised specials in the Sunbelt locations of Florida, Arizona, and southern California. The vehicles were allowed to travel to Mexico, where the temperate climate is desirable during winter months. Staffs were reduced during wintertime in the northern locations as a means of cutting overhead costs. The Alaskan and Canadian operations performed well from April through October, but reverted to caretaker status during the winter months.

The company earned the same rate per diem on motorcycles as on motor homes ($100 per day in 1996), and it could run up to five motorcycles for the same capital costs as a single motor home. The demand for motorcycles occurred year-round. Foreign customers especially appreciate touring America on a motorcycle, and many regard the "sport" of motorcycling a superior means of sight-seeing. Renting only to qualified motorcycle riders, Cruise America experienced a better accident history with its motorcycle rentals than with its RVs. The company rents the motorcycles for about six months before selling them for a profit. Accounting for less than three percent of revenues, the company expects the motorcycle rental business to continue as a growth sector, and they are expanding their fleet accordingly.

Approaching the Millennium: Reducing Foreign Dependency

In an effort to increase local business and reduce dependency on foreign travelers, the company also began renting and leasing shuttle buses, adding 38 vehicles purchased from a car rental company in 1996. The company extended the same modular technology to the buses as applied to motor homes, with coach and chassis sections separable. According to the Annual Report, "The coach portion is still fundamentally sound and is refurbished and repainted and remounted on a new chassis. The resulting product is a virtually brand new shuttle bus at a lesser cost than a new acquisition." The company typically rented these vehicles to a commercial client representing a hotel, car rental agency, or conference center. Recognizing the special requirements of a bus renting and leasing operation, the company established a Commercial Vehicle Division and hired a General Manager to implement the program. Revenues generated from this program were intended to offset lags in the cyclical motor home rental business.

In the 1990s Cruise America has focused more attention on the domestic, rather than the international, rental market because of the heavy travel agents' commission involved in attracting foreign customers, which sometimes costs the company as much as 20 percent of these revenues. The company began to target special events, such as the NASCAR stock car race in Phoenix, Arizona each October (renting almost 500 motor homes for that event), and the Daytona 500 and Indianapolis 500 races, among others. Many of the races occur during the off-season, expanding the duration of the company's rental profits.

Motor homes rented by Cruise America range in length from 18 to 31 feet. The three sizes they rent are deluxe, large, and intermediate, and they have two sizes of slide-in campers. Motor homes and slide-in campers (which are mounted on pick-up trucks) are fully self-contained with kitchen and bath facilities, heat and air conditioning, dining and sleeping arrangements. Some have microwave ovens and electric generators. Manufacturers of Cruise America's rental fleet have included Chevrolet, Ford, Fleetwood, Damon, Four Winds, and Coachmen. Most of their motorcycles are made by Honda and Triumph.

"Hubs" are company operated rental centers, consisting of 16 locations in 1996. Dealer locations (called "satellite rental centers") are usually secondary businesses operated by independent owners, who typically offer equipment rental, RV sales, and car or truck rental. By the mid-1990s there were 70 such locations in operation, with a combined fleet of 600 Cruise America motor homes for rent. Cruise America provided the insured vehicles, manuals and forms, marketing and promotional materials, advertising, and reservation services. The dealer provided the land and labor and was paid a commission on rental revenues. Dealers performed routine maintenance functions on vehicles and were aided by company-sponsored vendors for repairs--or they performed these services through their own facilities, all at the company's expense. The satellite locations were considered crucial to the company's ability to penetrate the rental market further, and expansion of these locations continued to be a priority in the mid-1990s. To track and organize business communications better a new rental and reservation system, automated through on-line terminals, simplified the functions of management and booking.

Overseas travel wholesalers have featured Cruise America and Cruise Canada in their North American advertising brochures, distributed to retail travel agencies. The agencies take reservations for the company and transmit them to company headquarters. Cruise America has been featured in nearly 500 brochures, including those from emerging parts of Eastern Europe, such as the Czech Republic, Hungary, Poland, Slovania, and Slovakia. Domestic advertising has been accomplished through traditional media placement, television, travel clubs, airlines, and direct mail; word-of-mouth and distribution centers have been crucial to product exposure.

For the fiscal year ended April 30, 1997, net earnings increased 170 percent over the previous year. Smalley Sr. stated in a company report: "Improved earnings from vehicle rental operations, which benefited from an expanded fleet size and higher utilization rates, more than offset a decrease in revenues and profitability related to sales of new and used recreational vehicles." He added, "Utilization rates during the early months of the current (1997) vacation season have been strong, and the majority of our Western U.S. and Canadian locations are already sold out for the summer." Responding to demand, the company added heavyweight Harley-Davidson and Honda motorcycles to their 275-unit fleet. The company also added a private label brand of new motor homes (the Flyer Motor homes) to the sales line. Since most RV buyers tend to be older Americans, Cruise America anticipates climbing sales as numbers of financially solvent baby boomers enter retirement.

Principal Subsidiaries: Cruise Canada.