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Goodbye, Hertz. Don’t Come Back.

"...when you turn off the revenues, it’s a very tough business".

There’s something tragically ironic about Hertz filing for bankruptcy late on the Friday evening headed into Memorial Day weekend.

I don’t know whether this particular holiday is usually a boon for car rental companies, but what I do know is that Americans have been living under unprecedented mobility restrictions, and Memorial Day generally marks the beginning of the summer vacation season.

State and local officials have spent the last several weeks lifting restrictions on businesses, including restaurants and bars, and many beaches are reopening, just in time for the holiday.

“Passenger car travel in US beach counties has more than doubled since Easter”, Reuters notes, citing data from StreetLight. “At Maryland’s Ocean City beach resort, car activity was four times higher, compared to only a 5% increase during the same period in 2019”.

The same data shows that although traffic is still down by about half countrywide, it’s tripled from the nadir around Easter, when lockdown protocols were the most pervasive. StreetLight uses anonymized, aggregated data from mobile apps and in-car systems, as does INRIX, another data provider.

Although INRIX says traffic in major cities is still “significantly” depressed, Reuters cites the company in noting that “road use in some less populated areas has… surpassed February levels and non-coastal cities like Atlanta, Chicago, Detroit and Houston have seen large increases in activity since early May”.

I’ve generally cited Apple’s mobility data, which tracks requests for directions in Apple Maps by country and by type of transportation. The visual shows trends in driving by city. It does indeed suggest Americans are back on the road.

It’s thus somewhat amusing that Hertz was forced into Chapter 11 just as things started to return to normal ahead of the summer driving season.

For all the press this received on Friday evening and into Saturday morning, there is regrettably little to say. John Healy, from Cleveland-based Northcoast Research, summed it up. “They were doing quite well, but when you turn off the revenues and you own all these cars and all of a sudden the cars are worth less it’s a very tough business”, Healy said.

Try to appreciate how inherently hilarious it is that people are explaining this situation with sentences that begin with: “They were doing quite well, but when you turn off the revenues…”

A big part of this is obviously the collapse in air traffic. When nobody is flying, there’s nobody to rent cars on offer at airports, where Hertz generates most of its sales. Here again, there’s an element of tragic irony. TSA data continues to show a gradual uptick in passengers.

Although I’ve never had anything other than a passing interest in this saga, I’ve been wholly baffled at the notion that anyone was buying into Hertz’s turnaround story. Maybe you can ask Carl Icahn.

The fact that the company has had five CEOs in six years tells you everything you need to know, but really, the whole business model is a disaster. They own nearly all of the cars in their US fleet. That means they are effectively hostage to the used car market during periods of lackluster rental demand.

It stands to reason that in some cases, subdued demand for rentals will coincide with a drop in prices for used cars, which means a business that depends on selling used cars to mitigate lower demand for renting those same cars, is precarious. In short: That model sets you up to be a seller into a falling market. That is exactly what’s happened in recent months, apparently.

Click here to view voluntary petition(s)

Click here to view Hertz’s Chapter 11 Filing Press Release

Frankly, this is a maddening story. At every possible turn there were red flags, including the well-documented mishandling of the Dollar Thrifty acquisition. Each and every article about this debacle is replete with silly quotes. For example, consider the following from Robert Rostan, the CFO of Training the Street, which offers technical training to Wall Street firms, business schools, startups and private equity firms (this is from a Bloomberg piece):

It is incredible to me how their fortunes changed so quickly. Even though they just finished a record year and things were looking fine, they were still operating on a razor-thin cushion of liquidity.

It may be “incredible” to Robert, but intuitively, it is never advisable to be overloaded with debt against a “razor-thin” liquidity cushion. Consider this: Hertz has a little over $1 billion in cash and equivalents, around $25 billion in debt and some 400,000 cars which aren’t under repurchase agreements with manufacturers. I’m sorry, but that’s laughable.

Looking back over the past several years, there’s scant evidence to suggest anyone ever cared about reducing leverage – a spinoff of an equipment-rental business notwithstanding. And, like any “good” corporate mess, this book has a chapter dedicated to an accounting scandal.

As alluded to above, the market for used cars has collapsed in the wake of the COVID crisis and now, it’s at least possible that Hertz’s situation will make things worse. Consider the following two quotes, the first from Benchmark analyst Michael Ward, the second from Joseph Acosta, a partner in the bankruptcy practice at the law firm Dorsey & Whitney, both of whom spoke to Bloomberg for one of at least a half-dozen articles published over the past two months documenting this train wreck:

The risk for the auto sector occurs if the creditors of the debt that is secured by the vehicles decides to liquidate the fleet to repay the bonds.

Hertz may have little choice but to scale down its operations and sell assets to pay down its significant secured debt. Hopefully, the restructuring expenses will not bury the company in the process.

Yes, “hopefully”.

Or maybe Hertz is a company that just needs burying, despite readily apparent nostalgia for the century-old brand, which every account published over the past 24 hours reminds you began “with a fleet of Model Ts” – as though that somehow mitigates this situation.

S&P’s Betsy Snyder thinks the company will eventually rise from the smoldering wreckage. “I don’t think Hertz is going away”, she told The New York Times. “When you think about car rental, you think about Hertz. It’s an iconic brand”.

I’m going to let you in on a little secret: “When you think about car rental”, what comes to mind are usually bad experiences, no matter how “iconic” the brand.

At the end of the day, nobody likes renting cars. Nobody.


 

14 comments on “Goodbye, Hertz. Don’t Come Back.

  1. It may be “incredible” to Robert, but intuitively, it is never advisable to be overloaded with debt against a “razor-thin” liquidity cushion.

    Chalk another one up for Team LBO.

  2. Having observed (and been impacted) by Icahn over the years I can guarantee you he has a plan. Now you might not be part of the plan or be able to profit along side him but rest assured….. he has a plan to come out on top. Remember, he loves distressed companies, he will either buy into them or distress them himself if need be. A bankruptcy is merely an opportunity for Carl.

    • Yeah, but remember: Everybody gets old. Everybody loses a step. When I heard him discuss this on Bloomberg TV last month, he came across as hapless. I’m not saying he doesn’t have a plan, but he damn sure didn’t see a pandemic coming.

  3. The funny thing is that this is precisely the landscape I would expect to say “so they can’t make money, have terrible margins and nobody in particular likes or cares about the business? Well let’s make sure they get a huge bailout and lots of cheap debt to keep them afloat for a couple decades. I mean why shouldn’t companies be successful even if they do nothing right and contribute nothing to society? It isn’t like they are some poor wage earning citizen who deserves their fate.

  4. If Hertz changed its model to something closer to Zipcar, that might decrease the inefficiency in the current rental model- which has a lot of underutilized capacity.

    • Zipcar is owned by Avis… and I am not sure how profitable it is as a business, but I agree in that shared mobility is a huge competitor and Hertz have not been able to innovate the business or venture into them.

  5. Hertz Gold just went to Copper. The buybacks were a lifeline ‘til the auto companies wised up on these loss leader deals.

  6. We do it to ourselves. We used to accept that the Sear’s price for a new shirt was fair. Now we drive across town to save a few cents on gasoline and order through Amazon and hope it fits. The real price of renting cars has gone down over the decades (a lot). The rental company can only survive by posting a low rate and gouging us for insurance, child car seats, unfilled gas tanks, etc. while being gouged themselves by airports and governments. We’ve created an environment where only the most conniving survive.

    • I think a lot of businesses do it to themselves. Using Sears as an example, I used to buy a dozen new Lands’ end dress shirts each year. Sears bought the company and my they completely destroyed the shirts. They changed the fit, the tails were shortened, the locker loop was gone, and they hemmed the lower button hole with a contrasting color thread so that the new shorter shirt body pulled out of my trousers and the button hole looked like a belly button. I called to return the shirts and was told I had to return them to a Sears location. The closest Sears with a clothing department was an hour and a half away. Sorry, no other way to return it. I was so pissed off I never returned to a Sears again. I also don’t have warm fuzzy feelings about my dealings with Hertz.

  7. Regular readers are aware that I’ve been extremely sympathetic to businesses that have fallen on hard times due to the virus. But there is nothing – nothing at all – that I like about this story.

  8. Does seem they are trolling for federal bailout dollars. We will see one day who got federal loan gaurantees during bankruptcy.

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