COVID-19s Latest Victim: Hertz Files For Bankruptcy

The coronavirus pandemic has claimed another victim as rental car giant Hertz filed for bankruptcy Friday night.

The company began renting cars in 1918 and has survived many hurdles including the Great Depression. However, this pandemic has pushed the rental car company onto its heels.

“The impact of Covid-19 on travel demand was sudden and dramatic, causing an abrupt decline in the company’s revenue and future bookings, however, 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” said the company’s statement.

My Hertz Rental “Swagger Wagon”

BUSINESS MODEL BUST

The rental car industry has been devastated by coronavirus because it is largely dependent on airport travelers.

Nearly two-thirds of rental car revenue comes from rentals at airport locations. Given the number of travelers passing through TSA checkpoints is down 90% from last year – which is the best it’s been in the past four weeks – it’s clear where this business model is failing.

In addition to the airport revenue, another large percentage of revenue is made by renting cars to individuals that are having their vehicles repaired after accidents. But with so many states under “lock down” orders, 30+ million unemployed, and many working from home, the number of car accidents have decreased significantly.

The third large revenue source is reselling the used cars but car auctions have been cancelled and sales at many used car dealerships have evaporated.

But the challenges at Hertz and other rental car chains are precipitous and this is particularly bad news for automakers globally.

With fleet sizes in the 6-7 figure range, historically, rental car companies are the largest purchasers of new cars in the United States and Hertz has already announced that it will not be purchasing any new cars for the rest of this year.

WHAT DOES BANKRUPTCY MEAN?

A bankruptcy is not the same as liquidation/going out of business. By declaring Chapter 11 bankruptcy, Hertz intends to stay in business but will be restructuring its debts with the hopes of emerging as a more financially healthy company.

A bankruptcy filing does not mean a company will be forced out of business. In fact, many companies have gone through the process and gone on to be profitable (e.g. General Motors).

FINAL STAMP

As I mentioned in a previous post, it’s rare that I rent cars but when I do I use THIS TRICK.

This filing is arguably the highest-profile bankruptcy due to the pandemic. Given the business model, I wouldn’t be surprised to hear rumblings from other rental car rivals like Avis, Budget, or the most dominating rental car agency, Enterprise.

If you frequently rent cars (or you’re in the market to rent a car), you’ll still be able to do so just like you’re still able to buy (overpriced) designer clothes from bankrupt Neiman Marcus or chinos from bankrupt J. Crew. It’s business as usual.

Are you surprised by this filing? Were you aware of the various revenue streams that rental car companies have implemented to make their money?

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