what-happened-to-hertz

Why Hertz Went Bankrupt? What Happened To Hertz In A Nutshell

Hertz is an American car rental company founded by Walter L. Jacobs in 1918 becoming one of the largest car rental organizations in the US, crippled by the coronavirus pandemic in the end as high levels of existing debt meant the company could not survive a downturn and competitors such as Uber and Lyft rose to prominence, Hertz had less revenue to service its debt-fronted business model.

Background

Hertz is an American car rental company headquartered in Estero, Florida. The company was founded in 1918 by Walter L. Jacobs, who began a small operation renting a dozen Model T Ford automobiles.

The company is one of the most recognizable car rental organizations in the world, with its distinctive black and yellow logo seen in more than 150 countries.

Hertz filed for bankruptcy on May 22, 2020, as it struggled to absorb the sharp decline in revenue resulting from the COVID-19 pandemic.

While Hertz was not the only car rental company to be impacted, it was the only such company to file for bankruptcy.

How did competitors such as Avis and Enterprise survive where Hertz could not?

Mismanagement

In 2005, Hertz was purchased by a private equity group for $5.6 billion in cash. Despite taking on $10 billion in company debt, the new owners paid out a further $1 billion in dividends.

Incoming CEO Mark Frissora then laid off employees and cut operating costs and was inexplicably awarded $19.2 million for his efforts.

Some years later, Hertz purchased the Dollar Thrifty Automotive Group for $2.3 billion in 2012. Ostensibly the deal expanded operations and removed the competition, but it added yet more debt to the bottom line. 

The merger itself was also problematic. Each company had a different computer system that could not be integrated.

Dollar and Thrifty also allowed the tires on their rental fleet to wear out more than Hertz did, meaning the latter had to spend $30 million upgrading tires.

Frissora then instructed that cars be kept in the fleet for longer than usual to soften the impact of depreciation in accounting.

The move attracted the ire of consumers who were rented sub-standard vehicles. The Securities and Exchange Commission (SEC) also noticed, and Frissora was eventually charged with fraud and fired. 

Competition

Hertz had been in some decline before the COVID-19 pandemic because of increased competition from other car rental companies.

It was also under pressure from ridesharing services like Uber and Lyft, who offered personal transport without the need for going through the convoluted vehicle rental process.

These competitors exposed the vulnerability in Hertz’s business model, which we will take a look at in the following section.

Vulnerable business model

Hertz relied on an asset-fronted debt model to make money from a very large fleet of leased vehicles. 

Under the model, debt owed to creditors is dependent upon the value of each leased vehicle.

When the value of a vehicle decreases, the creditor can adjust the terms of the loan in its favor. In other words, the creditor loans less money when car values are lower.

As competitors began to emerge, Hertz made less profit with which to fund its leased vehicle fleet.

What’s more, it still had to meet payments on the leases for airport and hotel rental locations and account for vehicle depreciation.

The company was aware of its vulnerable business model as early as 2014. In an SEC filing, Hertz noted its:

car rental business, which provides the majority of our revenues, is particularly sensitive to reductions in the levels of airline passenger travel, and reductions in air travel could materially adversely impact our financial condition, results of operations, liquidity, and cash flows.

At this point in the Hertz story, the company became saddled with around $19 billion in debt

Bankruptcy

With approximately 700,000 rental vehicles sitting idle, Hertz was forced to file for bankruptcy in May 2020 after it failed to meet its leasing repayments.

International operations in regions such as Australia, New Zealand, and Europe were not affected by the proceedings.

Re-emergence

In July 2021, the company emerged from bankruptcy as shares in the company once again became tradeable. 

Retail investor confidence in Hertz soared after the company was able to secure new investment funding and eliminate debt.

The re-emergence of the company was also well-timed to coincide with the U.S. summer holiday season and subsequent demand for rental vehicles.

Key takeaways:

  • Hertz is an American car rental company founded by Walter L. Jacobs in 1918. The company filed for bankruptcy in 2020 and then recommenced operations in July 2021.
  • Hertz was crippled by the coronavirus pandemic in the end. However, high levels of existing debt meant the company could not survive a downturn in the travel industry.
  • As competitors such as Uber and Lyft rose to prominence, Hertz had less revenue to service its debt-fronted business model. The company was also lead by management who spent lavishly and neglected to do proper due diligence on the acquisition of a competitor.

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