Hertz files for bankruptcy

Hertz filed for bankruptcy Friday night, the latest victim of the sudden economic downturn sparked by the Covid-19 pandemic.

The company has been renting cars since 1918, when it set up shop with a dozen Ford Model Ts, and has survived the Great Depression, the virtual halt of US auto production during World War II and numerous oil price shocks. By declaring bankruptcy, Hertz says it intends to stay in business while restructuring its debts and emerging a financially healthier company.

“The impact of Covid-19 on travel demand was sudden and dramatic, causing an abrupt decline in the company’s revenue and future bookings,” said the company’s statement. It said while it too immediate action in response to the crisis, “uncertainty remains as to when revenue will return and when the used-car market will fully re-open for sales, which necessitated today’s action.”

The filing is arguably the highest-profile bankruptcy of the Covid-19 crisis, which has prompted bankruptcies by national retailers like JCPenney, Neiman Marcus and J.Crew, along with some energy companies such as Whiting Petroleum and Diamond Offshore Drilling. But none of the companies to file so far have had such as large a share of their industry as does Hertz, which along with rivals Avis Budget and privately held Enterprise dominate the rental car industry

The entire rental car industry has been devastated by the plunge in travel since the pandemic hit earlier this year. Nearly two-thirds of its revenue comes from rentals at airport locations, and air travel has fallen sharply. Since the start of April, the number of people passing through TSA checkpoints at US airports has plummeted 94% compared with a year ago.

A bankruptcy filing does not mean a company will be forced out of business. Many companies have gone through the process and gone on to post record profits, including automaker General Motors and many of the nation’s airlines. But many companies that have filed for bankruptcy with the intention of staying in business have not survived the process.

Hertz said the bankruptcy process will give it “a more robust financial structure that best positions the company for the future as it navigates what could be a prolonged travel and overall global economic recovery.”

Deep cuts already in place

The company rents cars under the brands Hertz, Dollar, Thrifty and Firefly, a discount brand outside the United States.

The company has already made deep cuts to stem its losses. It has notified 12,000 employees in North America that that they were losing their jobs, and another 4,000 are on furloughs. Its US workforce stood at 38,000 employees at the start of the year, with about a quarter of them represented by unions.

Hertz shares closed down 7.5% on Friday and have fallen 82% so far this year. Shares moved sharply lower in after-hours trading Friday evening. Shares are likely to become worthless as part of the bankruptcy process.

Hertz missed an April 27 payment that was owed to a group of lenders that lease vehicles in Hertz’s day-to-day US rental fleet. The lenders extended a grace period for the payment until May 22 “to engage in discussions … with the goal to develop a financing strategy and structure that better reflects the economic impact of the Covid-19 global pandemic and Hertz’ ongoing operating and financing requirements.”

The company had a total of 568,000 vehicles and 12,400 corporate and franchise locations worldwide at the start of this year. About a third of those locations are at airports.

A significant portion of Hertz’s nonairport business is renting cars to people who are having their vehicles repaired after accidents. But with so many people out of work or working from home, the miles being driven and the number of car accidents are down significantly. Car insurers are voluntarily returning more than $7 billion, or between 15% to 25% of premiums, to their customers.

Mounting losses and debt

Hertz posted annual revenue of $9.8 billion last year, a company record, and its rental car revenue is comparable to that of rival Avis Budget Group. But Hertz has problems that predate the Covid-19 pandemic. It posted a $58 million net loss in 2019, down from a $225 million loss in 2018. But in the first three of this year it lost $356 million.

Hertz had $18.8 billion of debt on its books as of March 31, up $1.7 billion from the end of last year. Most of that debt, $14.4 billion, is backed by its vehicles. That includes the debt for which it missed the payment in April the prompted this latest crisis. It had only $1 billion in cash on its balance sheet as of the end of March,

A storied history

Hertz was founded in Chicago just more than a century ago by Walter Jacobs, who sold the company in 1923 to John Hertz, who renamed it and expanded the fleet to 600 cars. He began the nation’s first national rental network in 1925 and opened its first airport location at Chicago Midway Airport in 1932.

Hertz has had a number of high-profile corporate owners, including RCA, United Airlines, and most recently Ford, which sold it to a group of private equity firms in 2005 for $5.6 billion. It was taken public a year later.

Its primary shareholder today is activist investor Carl Icahn, who owns about 38% of its shares outstanding. He continued to increase his stake in the company all the way through mid-March. Those shares, which increased the size of his stake by 26%, have lost more than 60% of their value in the two months since his most recent purchases.

The problems at Hertz and the rental car business overall are particularly bad news for the world’s automakers. Rental car companies are traditionally a major purchaser of new cars. Last year they purchased 1.7 million US cars, according to Cox Automotive. That equaled to 10% of US new car purchases.

Hertz had already announced it would not purchase any new cars for the rest of this year, and that it is starting to sell its vehicles as used cars. As of early March, it had sold 41,000 cars out of its US fleet and another 13,000 out of its European fleet. But a halt of used car auctions and the closure of many used and new car dealerships has brought sales to a virtual halt.

But it is clear that as used car sales channels return to normal, rental car companies will continue to slash the size of their fleets. Avis Budget said it expects its fleet in the Americas will be reduced by 20% by the end of June, compared to a year earlier.