Hertz, the rental car giant, filed for Chapter 11 Bankruptcy protection last week. I’m neither surprised nor sympathetic hearing the news.
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.
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.
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.
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?