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Hertz filed for bankruptcy on Friday evening, the latest victim of the sudden economic downturn caused by the Covid-19 pandemic.
The company has been renting cars since 1918, when it settled with a dozen Ford Model Ts, and survived the Great Depression, the virtual shutdown of American auto production during World War II and the numerous oil shocks. By declaring bankruptcy, Hertz says it intends to stay in business while restructuring its debts and emerging a financially sounder company.
“The impact of Covid-19 on travel demand was sudden and dramatic, causing a sharp decline in business revenue and future bookings,” the company statement read. Although this is too immediate an action in response to the crisis, “uncertainty remains as to whether revenues will return and the used car market will fully reopen to sales, which has necessitated the action today”.
The filing is arguably the most high-profile bankruptcy of the Covid-19 crisis, which has prompted bankruptcies for national retailers like JCPenney, Neiman Marcus and J-Crewas well as some energy companies such as Whiting Oil and Offshore diamond drilling. But none of the companies to file so far have had such a large share of their industry as Hertz, which along with rivals Avis Budget and Enterprise dominates the car rental industry.
The entire car rental industry has been devastated by the drop in travel since the pandemic hit earlier this year. Nearly two-thirds of its income comes from airport rentals, and air travel has fallen sharply. Since early April, the number of people passing through TSA checkpoints at US airports has dropped 94% from a year ago.
A bankruptcy filing does not mean that a business will be forced to close. Many companies have gone through the process and posted record profits, including automaker General Motors and many of the country’s airlines. But many companies that filed for bankruptcy with the intention of staying in business did not survive the process.
Hertz said the bankruptcy process will give it “a stronger financial structure that will best position the company for the future as it navigates what could be an extended journey 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. He informed 12,000 employees in North America that they were losing their jobs and another 4,000 are on furlough. Its US workforce stood at 38,000 at the start of the year, about a quarter of whom were represented by unions.
Hertz shares closed down 7.5% on Friday and have fallen 82% so far this year. The shares fell sharply in after-hours trading on Friday evening. Shares are likely to lose all value as part of the bankruptcy process.
Hertz missed an April 27 payment due to a group of lenders that lease vehicles in Hertz’s daily rental fleet in the United States. Lenders extended a grace period for payment until May 22 “to engage in discussions…with the aim of developing a financing strategy and structure that better reflects the economic impact of the global Covid-19 pandemic and operating and financing needs continuums of Hertz”.
The company had a total of 568,000 vehicles and 12,400 branches and franchises worldwide at the start of this year. About a third of these locations are at airports.
A significant portion of Hertz’s non-airport business involves renting cars to people who are having their vehicle repaired after an accident. But with so many people out of work or working from home, the miles traveled and the number of car accidents have dropped dramatically. Car insurers voluntarily reimburse more than $7 billion, or between 15% and 25% of premiums, to their clients.
Losses and growing debts
Hertz posted annual revenue of $9.8 billion last year, a record for the company, and its car rental revenue is comparable to rival Avis Budget Group. But Hertz has issues that predate the Covid-19 pandemic. It recorded a net loss of $58 million in 2019, compared to a loss of $225 million in 2018. But in the first three of this year, it lost $356 million.
Hertz had $18.8 billion in 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 secured by its vehicles. That includes the debt he missed in April, which caused this latest crisis. It had just $1 billion in cash on its balance sheet at the end of March,
A rich history
Hertz was founded in Chicago just over 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. It launched the nation’s first nationwide rental network in 1925 and opened its first location at Chicago Midway Airport in 1932.
Hertz has had a number of high profile company owners including RCA, United Airlines and most recently Ford selling it to a group of private equity firms in 2005 for $5.6 billion. . It was made public a year later.
Its largest shareholder today is activist investor Carl Icahn, who owns about 38% of its outstanding shares. He continued to increase his stake in the company until 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 last purchases.
The problems at Hertz and the car rental business as a whole are particularly damaging to global automakers. Car rental companies have traditionally been the main buyers of new cars. Last year, they bought 1.7 million American cars, according to Cox Automotive. This was equivalent to 10% of new car purchases in the United States.
Hertz had already announced that it would no longer buy new cars for the rest of the year and that it was starting to sell its vehicles as used cars. By early March, it had sold 41,000 cars from its US fleet and another 13,000 from its European fleet. But the halt in used car auctions and the closure of many used and new car dealerships have all but halted sales.
But it’s clear that as used car sales channels return to normal, car rental companies will continue to downsize their fleets. Avis Budget said it expects its fleet in the Americas to be reduced by 20% by the end of June, compared to a year earlier.
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