Car rental companies feel the symptoms of the coronavirus.
Late last night, Hertz (NYSE: HTZ) filed for bankruptcy. The restructuring has sent shockwaves through the US auto industry, according to CNN. What’s driving the decision? Reduced air travel. The TSA reports that domestic flights are down 94%. As a result of this massive shrinkage, car rental rivals Avis Budget Group (NASDAQ: CAR) and privately-owned Enterprise are also hurting. Last year, all US rental car companies bought nearly 2 million automobiles - or about 10% of the US auto industry production. Now, major auto manufacturers like Ford (NYSE:F), GM (NYSE: GM) and Fiat Chrysler (NYSE: FCAU) are seeing a vast aspect of their annual sales threatened. What are the implications for Detroit - and the US economy as a whole - as the coronavirus finds more corporate victims?
At the start of the year, Hertz had 568,000 vehicles parked at 12,400 locations across the globe. The company’s overall revenues in 2019? $9.8 Billion. But carrying cars on a balance sheet is a pricey proposition: in March of this year the company was servicing nearly $19 billion in debt- with only (only?) $1 billion in cash available, according to CNN reports. But the bankruptcy filing has broader implications than just Hertz’s balance sheet.
Turning Cars Into Cash: Difficult
In the US, Hertz employs 38,000 people. So far, 12,000 have lost their jobs and 4,000 have been furloughed, according to CNN reports. To gain some breathing room, the company renegotiated with lenders on debt due in April - extending the payment deadline to May 22.
That was the day the company filed for bankruptcy.
To be clear, bankruptcy is a restructuring - not a declaration that the company is going out of business. Hertz already abandoned part of its fleet, selling 54,000 cars in March - but the cancellation of auto auctions (and the closure of many new car dealerships) has blocked the company from continued relief. Rival Avis Budget Group is in a little better shape, but will cut its new car purchases this year by 80%. These rental car companies will hopefully be able to come out on the other side - but they will be reshaped into something quite different than the structure we see today.
A Somber Statement
Forbes reports that Hertz CEO, Paul Stone, issued this recent statement: "With the severity of the COVID-19 impact on our business, and the uncertainty of when travel and the economy will rebound, we need to take further steps to weather a potentially prolonged recovery.” So far, his company’s shares are down 82% for the year, and falling. “Today's action will protect the value of our business, allow us to continue our operations and serve our customers, and provide the time to put in place a new, stronger financial foundation to move successfully through this pandemic and to better position us for the future.”
As US automakers struggle to bring plants back online (halting production in some locations due to COVID-19 outbreaks), the news from Hertz and others points to a perilous future. US automakers account for approximately 3.5% of the US GDP, employing over 1.7 million people. According to the Center for Automotive Research, almost 5% of all US jobs are supported by the auto industry, generating $500 billion in annual wages and $70 billion in tax revenues.
With over 1.5 million cases confirmed in the US, as of today, COVID-19 has claimed over 94,000 victims. Beyond those statistics from the CDC, Hertz and the US auto industry are feeling some very troubling symptoms. As rental car companies jettison an estimated 1.5 million cars from their fleets, there’s a good chance consumers will be able to get a great deal on a used car. But will that sweet deal be tasty enough to bring these companies through an economic crunch? How will unemployed consumers make that down payment, when they need the money for rent and groceries? And what do those nearly-new deals mean for new car sales, when the market is flooded with alternatives? Only time will tell.
