Hertz, the rental car giant, filed for Chapter 11 Bankruptcy protection last week. I’m neither surprised nor sympathetic hearing the news.
If you are considering booking travel or signing up for a new credit card please click here. Both support LiveAndLetsFly.com.
If you haven’t followed us on Facebook or Instagram, add us today.
Hertz Filed Chapter 11 Bankruptcy Protection
On May 22nd, 2020 Hertz Rental Car Company filed for Chapter 11 Bankruptcy Protection in the US. Chapter 11 allows the company to reorganize and restructure debt. The company had $19bn in liabilities with just $1bn cash on hand. It’s not clear whether Hertz other businesses (equipment rentals) are included in the filing.
According to Forbes, rental car purchases accounted for 10% of all US auto production in the US. The article is unclear how much foreign auto production is affected by car rental slowdowns.
Not Surprised
While I didn’t love my experience with Hertz, that’s not the reason I am not surprised that Hertz has filed for Chapter 11 protection. Hertz is a publicly-traded company with lots of liabilities. Publicly-traded companies are incentivized to improve their stock price. Many believe this is solely to enrich the C-suite but in reality, this is what the stockholders (owners of the company) want as it increases the value of their holdings.
Hertz runs a business that relies on revenue to make debt payments. Without revenue, there is no way to maintain debt payments and without a return to travel, especially for businesses, there is no revenue to keep the wheel turning.
It’s entirely unrealistic and poor business practice to hold on to cash with the sole intent of avoiding a once-in-a-generation catastrophe. Even the effects of September 11th didn’t affect the travel business to this level. However, holding just 5% of their debt in cash was clearly not a winning strategy.
Not Sympathetic
Please don’t misinterpret my lack of sympathy for Hertz, the company, as a lack of sympathy for its employees. Since the coronavirus crisis, Hertz has cut 12,000 of its 38,000 employees and furloughed another 4,000. I feel terrible for them.
Hertz missed lease payments early into the crisis and that suggests that Hertz was already failing without the crisis. No travel company, given the economy prior to the crisis, should have been in a precarious financial situation. It’s inexcusable.
Markets generally ebb and flow with peaks (such as was in place prior to March 2020) and valleys (current situation) and it is in the good times that cash should be stored up or debt paid down to get companies through the lean times. Hertz was betting that the good times were here to stay for some time. No one in the travel business sufficiently prepared for a disaster as sharp and deep as this one, but Hertz hadn’t behaved responsibly. That’s a disservice to its customers, partners, shareholders, and employees.
Others to Follow?
The Forbes article suggests that Enterprise Rent-A-Car (National, Enterprise, Alamo) and Avis (Budget, Avis, Payless, ZipCar) may also be in trouble, but ERAC is privately held and traditionally better prepared financially. Avis’s stock recently received an upgrade from Morgan Stanley due to financial reorganization measures.
Outside of the car rental business, hotels seem to be largely able to withstand the storm so far, whereas Hertz showed instant signs of distress.
American Airlines is a carrier that many, including me, have suggested may be in jeopardy of bankruptcy. The company’s cash-to-debt ratio is worst in the industry despite their cash on hand landing them best in the industry. However, the company has satiated such concerns demonstrating that without including the Advantage loyalty program, the company is still viable. That also led some to conclude that the Advantage program may be up for financing if necessary.
Allegiant has reported higher than expected confidence and strong demand. Southwest has indicated that they are taking more bookings than cancellations now.
Conclusion
Not all publicly-traded travel businesses have been irresponsible with their cash during times of plenty. Hertz was particularly bad at reducing its debt load. Even American Airlines had more than 20% of their debt in cash compared with just 5.26% for Hertz. I don’t believe Avis nor ERAC will follow suit, but stress on the industry, in general, may bring shocking company collapses.
What do you think? Was Hertz serving their shareholders or operating with too much debt? Are you surprised or sympathetic to Hertz’s filing?
A familiar theme rings through with another failure in the cash rich travel business. One only has to look at the history of corporate raiders to realize that the end of Hertz was predictable. Take a cash intensive business with a storied name, mortgage the assets, wait for the shell to collapse with the next economic downtown to blame and nothing to fall back on.
In the meantime, all of the money and the profits are gone, having been used to prop up the stock price. All of the shareholders too slow to realize what was happening are hung out to dry. Been here before. Sadly, for the employees, the pain is only beginning.
Worked at Hertz for 16 years starting in 2003 as a everyday Vehicle Service Attendant at the Hartsfield Atlanta airport location until I was laid off in late March 2020. My time with Hertz was not good. They mismanaged at the very top giving themselves big bonuses, etc. and was always placing blame and cutting cost at the expense of wage based employees at the very bottom.
Hertz management lied daily to their customers to get a sale. Like renting out cars with bad tires because they overbooking and didn’t want to lose sales. Toward the latter, Hertz CEO was telling customers and news reporters that they had started implementing a 15 step sanitizing process for all vehicles so that customers can feel safe renting from them which was a lie. Me and my colleagues was laughing about the whole thing. We wasn’t given any sanitizing spray of any kind. This was just another example of Hertz lying to their customers. As far as am concerned Hertz started failing as a company 10-15 years ago once they was sold to shareholders
@ Kyle — How really cares? They will reorganize and emerge smaller, as will most of the US airlines.
The courts will shed much of the debt and they will emerge from BK a much more lean company. Stockholders, bondholders, creditors, employees get screwed but management will get bonuses.
SSDD
Hertz used to be the Ferrari of the rental car companies. Great cars, always clean and with low miles, amazing customer service, etc…: Then they became greedy and shot themselves on the foot. Don’t blame the pandemic. They were already in the ICU under artificial respirator for a long time. National, Silvercar, Sixt and even Avis left Hertz behind. Last time I rent from Hertz was 3 years ago in Sicily, Italy. My high status was not recognized, got a car that had more dents and dings than a Swiss cheese and they treated me like they were doing me a favor. Couldn’t care less about them disappearing.
Agreed companies holding so little cash is living on the edge with no margins for error. But to be Frank, Hertz business we doing well before COVID. Their revenue was up 6% in January, 8% in February.
I think another aspect of Hertz’s troubles that goes ignored is that the ideal mix of car types for a rental fleet is increasingly becoming problematic for car rental companies when they go to sell used cars to the American market. Essentially the compact/midsize sedans that are the backbone of a rental fleet are plummeting in resale value when its time for Hertz and its competitors to sell them as used cars due to the American car buying market’s decreasing interest in buying compact/midsize sedans.
While airlines and some others in the travel sector were certainly doing well pre-COVID, the rental car industry has been struggling as a lot of both business and leisure travelers switched from renting cars to relying on Uber, Lyft, etc. When I started in consulting, consultants rented cars every week. Now it’s only Uber for nearly every client.
Rental car companies have been getting crushed by ride sharing, but going forward they might have somewhat of a renaissance, as people will be weary of close contact in cars with strangers for a long time.
I never like their slogan/attitude “we’re #1. We try harder” sounds much better. Even better is National- choose you own car (the first to do so) and get going. Just get the job done.
The used car market is about to be flooded.
These large rental car companies can; reduce labor costs by shedding employees, and reduce assets by closing branches and selling cars.
A lot of cars.
I believe it will depress prices of used cars of the model years these agencies sell and possibly beyond since folks looking at older cars may jump on these ex-rental car deals.
As a former rental car executive with Enterprise Holdings, I can speak to the lack of strategic focus that Hertz has suffered for well over a dozen years. The company management (at all levels) has been in a state of perpetual decline and their decision to pursue the local market (HLE) was poorly executed with a twenty year-old execution thought process. The board of directors certainly must shoulder the blame for allowing The “#1 Hertz” legacy of shallow arrogance (perpetuated by former CEO Frank Olson) to remain alive despite its clear demise in the late 1990s. Hertz lost it’s leadership position and failed to develop a sound business strategy and play to it’s strengths, rather than squandering efforts to be “all things to all people.” In their attempts to regain the “crown”, Hertz leaders made mediocre acquisitions and lost sight of their core strengths. Maintaining a strong balance sheet in order to compete with Enterprise, AVIS et.al. during downturns was, perhaps, their most fatal downfall.
The US rental car industry has been an oligopoly for a number of years. At this stage, it would appear that Sixt Rent-a-Car (based in Germany) now has the opportunity to rapidly expand their footprint in the US through Hertz failure. Either of the two most likely scenarios (liquidation or a major restructuring resulting in a significantly smaller presence for Hertz) allows for a unique opportunity to the right player. Sixt Rent-a-Car has made it clear that they want to grow their North American presence and, as recently as 24 months ago, delineated a focused strategy. The current industry upheaval presents a less-than-perfect opportunity for Sixt, however, a massive barrier to entry has now been virtually eliminated. If they have (or can raise) the necessary capital, Sixt is poised to make a splash.
Sir,
I appreciate your value for the employees, I n my opinion, many modern corporations, like Hertz, are top heavy. The larger the company, by percentage, the more natural it becomes to “empire build” in the upper and mid-level sections of the company.
Yet, despite Hertz being in financial trouble, they didn’t fire their recent CEO Marinello, she “earned” over $9 million pay and benefits! The only righteous thing was that some of her compensation was in stock. Well that incentive didn’t work did it???
Perhaps, Hertz would consider a franchise agreement, but retain supervisory rights in different shapes/forms depending on location.
Hertz is too big too handle because it “creates” too much management, thus hamstringing itself.
Years ago I was in an accident with a Hertz rental car. The rental driver admitted fault and had purchased the Hertz insurance coverage. Hertz refused to pay the $2500 to repair my car I had to take them to court, which they delayed several times, to get paid. Good riddance.
Mr Comerford – Public organizations with highly compensated executives have well-defined “contract packages”. The more mature the industry, the more difficult it is to attract top talent. Hertz has been “bottom barrel” for well over ten years. Believe it or not, $9M is a modest pay plan. The writing has been on the “wall” for a number of years. Franchise / Licensing agreements may be an option. Maybe Carl I. Can throw one of his last “Hail Marys”. Question is, why did Trump snub the rental car industry?
Hertz equipment rental was spun off as a separate public company years ago. The car rental company really isn’t even that, it is a company that leases cars to a local subsidiary, AKA a bank. They’ll spend a few years in chapter 11 then emerge and go down the tubes again in 5 years.