To cut costs, Hertz announced April 20 that it would lay off 10,000 of the 29,000 employees in its North America operation. But with the effects of the COVID-19 pandemic on travel. the hits just keep on coming.
Last week, Bloomberg reported that the car rental companies “were left out in the cold,” failing to get government bailout money. On April 24, it was reported that Hertz would start working with debt restructuring advisors, as its $17 billion in debt (966% debt-to-equity ratio) was viewed as potentially unsustainable.
With the effect of the pandemic becoming clear, Morgan Stanley analyst Adam Jonas cut his price target for Hertz Global from $5.00 to $2.00. On Friday, Hertz stock (HTZ) dropped over 6% on an up day for the stock market, closing at 3.71, close to its 52-week low of 3.18.
Both Hertz and Avis lost more than half their stock value in a month. Hertz (HTZ) share price fell from $12.11 on March 4, 2020 to $5.99 on April 8, 2020. Avis (CAR) shares fell from $30.55 on March 4 to $14.38 on April 8.
Certainly, the pandemic has delivered a massive blow to the travel industry. The sufferings of the US airline industry, whose flights are down as much as 90%, are well-know. Not so widely publicized have been the troubles of the car rental giants. As early as the beginning of March, car rental bookings dropped by more than a third
Of course, coronavirus is only the latest plague to ravage the car rental industry. The major culprit has been the adoption of rideshare vehicles by leisure and particularly, business travelers.
How serious has the impact of new giants like Uber and Lyft been on the rental car market? In 2019, digital marketing firm Epsilon-Conversant analyzed $140 billion in travel transactions over the previous two years. The company found that 63% of previous car rental customers cut their spending on them, a nearly $3.2 billion decline. Even worse, 56% of customers stopped using car rental services altogether, with most switching to rideshare vehicles.
Still, both Hertz and Avis and their car rental rivals are important components of the travel industry. Hertz operates the Hertz, Dollar and Thrifty rental car brands. It has approximately 9,700 corporate and franchise rental locations in 150 c countries (including 2983 US locations) in Europe, Latin America, Africa, Asia, Australia, the Caribbean, the Middle East, and New Zealand,
Competitor Avis Budget Group (which added car-sharer Zipcar in 2013) operates in 5,500 locations in 165 countries. It may be somewhat better positioned to withstand the coronavirus crunch, especially if city dwellers use Zipcars to buy supplies during the pandemic. Still, a recent Forbes.com look at the stock notes “We estimate that a recession that persists through late Q2 will reduce Avis Budget Group’s revenues by 25% from $9.2 billion in 2019 to $6.9 billion in 2020.” Morgan Stanley analyst Jones dropped his price target for Avis from $11 to $7.
As for Hertz, it probably doesn’t help that in 2017 and again in 2018, it was named one of “The Worst Companies to Work For” by 24/7 Wall Street. The story noted Hertz “has some of the most dissatisfied employees of any large American company,” (2.6 out of 5 stars) with complaints about the company’s management, culture (“Long hours with little return”) and values.
Adding to the misery, both Hertz and Avis were affected by a Florida fire earlier this month that destroyed some 3,500 rental cars.
The precipitous decline in airline travel has obviously hurt both Avis and Hertz, as much of their business is airport-based. Still, both companies have been around for a long time; Hertz was founded in 1918, Avis in 1946. And both have been through major down turndowns previously. The largest shareholder in Hertz, billionaire Carl Icahn, has also achieved some success with his investments.
On a more practical level, there are ways for both Avis and Hertz to generate cash during the pandemic. First, for moderate distances (locally up to 250 miles) some people may choose to limit possible COVID-19 exposure on aircraft, in rideshare vehicles, or by taking a crowded train or bus, in favor of their own rental car.
Hertz and Avis can also step up sales of rental cars to the public, a tradional way the rental car companies raise cash while offering consumers a good deal. Last year I purchased a year-old Cadillac ATS that had been a rental for $20,000 less than its original list price. It had just 16,000 miles, with 32 months of warranty left.
Still, the coronavirus crisis may serve to depress used car prices even further, while the limited number of airline, train and cruise travelers may cause rental price cuts.
Is this the end for the car rental giants? Probably not: the car rental companies are simply too important to both the auto manufacturers and the travel industry. And perhaps reluctantly, the car rental giants are now partnering with their rideshare rivals to provide vehicles for drivers. But with increasing financial pressure, car rental companies may find it a challenge to provide the service travelers expect, when the economy does finally re-start.