COVID-19 may claim the venerable Hertz brand as its latest victim. But the car rental giant – like most who succumb to the new coronavirus – suffered from some serious underlying conditions.
The simultaneous collapse of business and leisure demand that accompanied this spring’s pandemic-induced lockdown has clobbered virtually every company in the travel industry. But Hertz, saddled with $17 billion in debt, was already in the midst of a financial turnaround effort when the lockdown began. The company was more vulnerable than almost any other big-name player in the industry.
Hotels could try to ride out the storm by cutting staff. Airlines could cut flights to save on fuel expenses. Their aircraft also have functional lives that span decades, so less was lost by parking them. But Hertz turns over every car in its 560,000-vehicle North American fleet in an average of 18 months. The loans that finance those recurring car payments keep coming due, virus or no virus, although the company has been seeking forbearance and restructuring from its lenders.
In what appeared to be a last-ditch effort, Hertz abruptly replaced CEO Kathryn Marinello on Monday with Paul Stone. Stone had been the company’s chief of North American retail operations. Hertz’s board may see Stone as the executive most capable of trying to revive customer demand as states begin to open up and the summer vacation season – what there is of it this year – gets underway with the upcoming Memorial Day holiday weekend.
Renting cars was a tough business well before the pandemic set in, because so many players try to piggyback off the industry’s revenue stream. Airports charge high concession fees for rental counters near baggage claim, for garage facilities, and even for the franchise to operate courtesy shuttles to reach off-airport locations. In most cases, rental companies pass these fees along to customers, sometimes even at locations far from the airport. States and municipalities also add hefty taxes aimed at travelers who do not vote in their jurisdictions. Such charges can add as much as 15% or 20% on top of the cost of the rental. Many hotels add daily parking rates that range from substantial to outlandish. Some hotels (I try to avoid these) have only valet parking; there, you pay for the privilege of waiting an often inordinate amount of time just to get into your vehicle.
As these financial demands on customers have grown, ride-hailing services like Uber and Lyft have offered travelers an attractive alternative. They provide not only a car but a driver on demand, along with curbside pickup (or some facsimile, at airports that make travelers go to a central pickup location). They don’t charge for parking or for collision damage waivers. In some places, you can hail an Uber faster than a hotel valet can deliver your rented vehicle.
I rent cars often when I travel for business – but less often than I used to, and not just because I am not traveling for business right now. I still rent a car when I fly to Salt Lake City. My business activities in the area may have me travel in a 75-mile radius and my preferred hotel there offers complimentary parking. But I no longer rent cars in Nashville, where all my activities occur within a few miles, if not a few blocks, of the venerable Ryman Auditorium and the Country Music Hall of Fame and Museum (both of which I highly recommend visiting).
This is not to say that life is any picnic for the ride-hailing companies these days, either. Just as Stone was taking the reins at Hertz, Uber announced a second round of staff cutbacks and the closure of 45 offices. In less than a month, Uber has cut about a quarter of its workforce, The Wall Street Journal reported. Revenue-starved state and local governments have increasingly cast a longing eye at Uber and its gig-economy rivals. California leads the pack, with its legislation aimed at forcing these companies to treat drivers as employees, even when drivers set their own hours and working conditions in ways more emblematic of independent owner-operators. While supporters pitched the legislation as a benefit to the drivers, it is not coincidentally a significant revenue raiser for Sacramento.
If Hertz must file for Chapter 11 bankruptcy protection, the brand stands a good chance of surviving in some scaled-down format. Yet even if Hertz makes it out of financial intensive care, its bout with the virus is apt to prove contagious. Automakers are likely to lose a significant amount of their annual fleet sales, while a sell-off of part of the Hertz fleet to satisfy creditors could decimate the used-car market.
That’s a lot of jobs on the line, both on and off the rental car lot. It would be nice if localities and hotel operators could join forces to reduce or drop nuisance taxes and fees, to help stimulate travel demand once it is safe for most of us to venture back into our socially distanced world. I doubt it will happen, though. Everyone in the travel sector is bleeding so heavily that I can’t see any likely volunteers to serve as the tourniquet.
Posted by Larry M. Elkin, CPA, CFP®
photo by Michael Gray
COVID-19 may claim the venerable Hertz brand as its latest victim. But the car rental giant – like most who succumb to the new coronavirus – suffered from some serious underlying conditions.
The simultaneous collapse of business and leisure demand that accompanied this spring’s pandemic-induced lockdown has clobbered virtually every company in the travel industry. But Hertz, saddled with $17 billion in debt, was already in the midst of a financial turnaround effort when the lockdown began. The company was more vulnerable than almost any other big-name player in the industry.
Hotels could try to ride out the storm by cutting staff. Airlines could cut flights to save on fuel expenses. Their aircraft also have functional lives that span decades, so less was lost by parking them. But Hertz turns over every car in its 560,000-vehicle North American fleet in an average of 18 months. The loans that finance those recurring car payments keep coming due, virus or no virus, although the company has been seeking forbearance and restructuring from its lenders.
In what appeared to be a last-ditch effort, Hertz abruptly replaced CEO Kathryn Marinello on Monday with Paul Stone. Stone had been the company’s chief of North American retail operations. Hertz’s board may see Stone as the executive most capable of trying to revive customer demand as states begin to open up and the summer vacation season – what there is of it this year – gets underway with the upcoming Memorial Day holiday weekend.
Renting cars was a tough business well before the pandemic set in, because so many players try to piggyback off the industry’s revenue stream. Airports charge high concession fees for rental counters near baggage claim, for garage facilities, and even for the franchise to operate courtesy shuttles to reach off-airport locations. In most cases, rental companies pass these fees along to customers, sometimes even at locations far from the airport. States and municipalities also add hefty taxes aimed at travelers who do not vote in their jurisdictions. Such charges can add as much as 15% or 20% on top of the cost of the rental. Many hotels add daily parking rates that range from substantial to outlandish. Some hotels (I try to avoid these) have only valet parking; there, you pay for the privilege of waiting an often inordinate amount of time just to get into your vehicle.
As these financial demands on customers have grown, ride-hailing services like Uber and Lyft have offered travelers an attractive alternative. They provide not only a car but a driver on demand, along with curbside pickup (or some facsimile, at airports that make travelers go to a central pickup location). They don’t charge for parking or for collision damage waivers. In some places, you can hail an Uber faster than a hotel valet can deliver your rented vehicle.
I rent cars often when I travel for business – but less often than I used to, and not just because I am not traveling for business right now. I still rent a car when I fly to Salt Lake City. My business activities in the area may have me travel in a 75-mile radius and my preferred hotel there offers complimentary parking. But I no longer rent cars in Nashville, where all my activities occur within a few miles, if not a few blocks, of the venerable Ryman Auditorium and the Country Music Hall of Fame and Museum (both of which I highly recommend visiting).
This is not to say that life is any picnic for the ride-hailing companies these days, either. Just as Stone was taking the reins at Hertz, Uber announced a second round of staff cutbacks and the closure of 45 offices. In less than a month, Uber has cut about a quarter of its workforce, The Wall Street Journal reported. Revenue-starved state and local governments have increasingly cast a longing eye at Uber and its gig-economy rivals. California leads the pack, with its legislation aimed at forcing these companies to treat drivers as employees, even when drivers set their own hours and working conditions in ways more emblematic of independent owner-operators. While supporters pitched the legislation as a benefit to the drivers, it is not coincidentally a significant revenue raiser for Sacramento.
If Hertz must file for Chapter 11 bankruptcy protection, the brand stands a good chance of surviving in some scaled-down format. Yet even if Hertz makes it out of financial intensive care, its bout with the virus is apt to prove contagious. Automakers are likely to lose a significant amount of their annual fleet sales, while a sell-off of part of the Hertz fleet to satisfy creditors could decimate the used-car market.
That’s a lot of jobs on the line, both on and off the rental car lot. It would be nice if localities and hotel operators could join forces to reduce or drop nuisance taxes and fees, to help stimulate travel demand once it is safe for most of us to venture back into our socially distanced world. I doubt it will happen, though. Everyone in the travel sector is bleeding so heavily that I can’t see any likely volunteers to serve as the tourniquet.
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