Hertz Hits Roadblock

Hertz may not only be number one any longer, it may not even be.

The clock is ticking for Hertz, the car rental giant. It has only days to negotiate a deal with creditors in a desperate attempt to avoid bankruptcy amid the coronavirus pandemic.

How that plays out has serious implications for the new and used car markets, and even for government policy, according to analysts and industry insiders.

Hertz started the year with positive momentum, but two months later the pandemic “created a major business disruption as global travel demand dropped to almost zero and the U.S. used car market effectively shut down,” said Kathryn V. Marinello, chief executive of Hertz, on the company’s first-quarter earnings call. 

Estero, Florida-based Hertz Global Holdings — parent of The Hertz Corp.— has until Friday to come up with $400 million after it entered into an agreement with some of its lenders and holders of its asset-backed securities following a default on its April lease payment. Hertz Global posted a net loss of $356 million, and its adjusted corporate earnings before interest, taxes, depreciation and amortization (EBITDA) was negative $243 million in the first quarter of 2020.

While the company has approximately $1 billion in cash on the balance sheet, it has a total outstanding debt load of around $17 billion.

Hertz is reviewing all available options to preserve liquidity and recently announced it has canceled 90% of its remaining model year 2020 fleet orders, Marinello said.

The rental car company has a fleet of more than 560,000 vehicles in North America, with an additional 200,000 internationally.

Marinello said Hertz’s revenue trend went into free fall in April after the U.S. government suspended international travel, states enacted lockdowns and resale auctions sent employees home. The company “immediately shifted our business priorities to focus on employee and customer safety, expense mitigation, and preserving liquidity,” she said.

In North America, Hertz furloughed 16,000 corporate and field employees, with 12,000 of those furloughs transitioning into “permanent separations” in late March.

Those steps should deliver around $2.5 billion in annualized savings and “help extend our cash runway,” Marinello said on the earnings call.

The Virtual Shut Down of Air Travel Has Been a Key Element in Loss of Revenue  

Hertz derived 66% of its revenue from airport rentals in 2019, according to its fourth-quarter and year-end filing. That is a sizable percent of it’s earnings and when costs remain static, and revenues are rapidly decreasing, the results are not surprising.

Majority shareholder Carl Icahn, who has a 39% stake in Hertz, could pump more money into the company to keep it afloat and attempt to protect his investment, according to Bloomberg. However, if Hertz files for bankruptcy, creditors have priority over equity holders’ claims, so it’s tricky.

At the end of trading on Friday, May22nd, Hertz’s share price was $2.54. Less than three months earlier, on Feb. 21, it had spiked to $20.25 per share.

Hertz is scarcely alone in its financial dilemma. Avis Budget Group posted revenue of $1.8 billion in its first quarter, down 9% from the same quarter a year ago. Also, the parent company of Avis Car Rental posted a net loss of $158 million in the first quarter of 2020, compared with a net loss of $91 million posted in the same quarter a year ago.

“We took early actions to accelerate the number of cars sold in March and were able to “dispose of 35,000 cars,” said Joe Ferraro, interim chief executive officer of Avis, on the first-quarter earnings call on May 5.

The car rental company said it expects revenue in April and May to drop 80% as a fallout of the coronavirus (COVID-19) pandemic, but expects business to recover gradually in June “as travel restrictions are lifted and leisure demand begins to recover,” Ferraro said.

Hertz executives are unsure if the already-undertaken $2.5 billion worth of cost-cutting measures in the form of canceled fleet orders and eliminated jobs will keep Hertz afloat.

Hertz’s primary short-term problem is high debt relative to earnings, Investor William Pickett said.

As states enforced shelter-in-place orders and employees worked remotely instead of commuting to work each day, personal vehicle travel dropped nearly 50% in April, according to Inrix, a traffic data provider.

Fewer cars on the road means fewer collisions, Pickett said, and up to 50% of the rental car company’s business relies on providing cars to customers whose vehicles are in the shop.

Joseph Alba
Mr. Alba was previously Editor of the Airport Press for 12 years covering both local as well as global aviation news. Prior to this, Mr. Alba had Executive positions in Systems Engineering and Marketing with IBM World Trade, and had foreign assignments in the Far East and Latin America earning three Outstanding Achievement Awards. Mr. Alba also directed a new function dealing with Alternate Fuels for Public Service Electric & Gas company in New Jersey and founded a Natural Gas Vehicle Consortium consisting of car company executives and fleet owners, and NGV suppliers in New Jersey. Mr. Alba was a founding partner of ATA, an IT Consulting company which is still active in Central and South America. After leaving the armed forces, Mr. Alba’s initial employee was the U.S. Defense Department as an analyst.

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