Hertz Bankruptcy – The Winners and Losers
On May 22nd, 2020 Hertz car rental company filed for chapter 11 bankruptcy.
Chapter 11 bankruptcy means the company will continue operating while Hertz works to restructure its large debt load. Which as of this writing is $18.7 billion while the company only has $1 billion in cash.
Hertz began business in 1918 when it started renting Model T’s to clients.
The 2nd largest car rental company in the United States survived the Great Depression but it couldn’t survive the coronavirus and lockdowns. At least in its current structure.
Because most of Hertz’s business is done via airport travelers.
People traveling from one place to another and needing a rental car.
Due to the coronavirus and lockdowns nationwide air traffic was down 94% in April according to the Transportation Security Administration (TSA).
According to the Wall Street Journal this left the company’s almost 700,000 vehicles idle at airports since there are no customers to service.
When the crisis first hit the US in March, Hertz laid off or furloughed 16,000 of its employees or 25% of its workforce, eliminated 90% of future planned vehicle acquisitions, and stopped all “nonessential” spending in the hopes to save cash and survive.
Hertz even tried selling some of its large rental fleet at auction with massive discounts to get more cash.
But even these drastic actions didn’t work.
On May 12th during the company’s 1st quarter earnings call former Hertz CEO Kathryn Marinello said “companies aren’t built to work when revenue drops to zero. There’s only so long that companies’ reserves will carry them.”
Apparently, Hertz’s reserves only carried them another 10 days.
I say former CEO above, because Marinello resigned as CEO of Hertz on May 16th… Just 4 days after the 1st quarter conference call.
Hertz is likely to come to an agreement with its debt holders to continue operations for the long term under a more stable debt structure. But the effects of this are already wide ranging.
One example is major auto makers like Ford (F), Toyota (TM), Fiat Chrysler (FCAU), and General Motors (GM).
Last year Hertz bought 1.7 million vehicles in the US – or 10% of total vehicle production in the States.
Hertz is one of the largest vehicle buyers in the world and its already announced that its cutting vehicle buys by 90% due to lack of people travelling and needing car rentals.
If this continues car makers are going to be hammered.
How can these things affect you and your investment portfolio now?
Let’s briefly talk about some potential winners and losers of this news and how you may want to play these in the market.
Enterprise Rent A Car – Maybe
I put Enterprise as a potential winner because as the largest rental car company in the world it may take advantage of these problems at Hertz to take even more market share.
But this is a large maybe because Enterprise is getting hammered right now by the same factors – no travel and no one needing rental cars at airports or in their towns – because of the coronavirus.
Avis Budgets Group (CAR)– Maybe
Avis is another large car rental company that may – I caution like with Enterprise – may benefit from Hertz’s problems for the same reasons as Enterprise.
Hertz – For the reasons mentioned above.
Car Makers – For the reasons mentioned above.
Car part suppliers – with fewer cars being sold to individuals and now large buyers like Hertz, auto suppliers are going to get hammered too.
Airports – If Hertz can’t come to an agreement to lower its debt load it will go out of business. I don’t see this as likely but if it happens Airports will have fewer options for travelers to rent vehicles once things open again.
Travelers – Less options potentially available for consumers if Hertz goes out of business. Less competition could lead to higher prices for consumers.
If you own stock in any major companies in this arena and you’re not planning to hold for the long term, you should sell.
This goes for car rental companies, large automakers who have a lot of debt, and auto part supply companies.
Stay away from everything in this arena for the time being… I don’t think it will crash and see mass bankruptcies with companies closing for good.
But there’s far too much uncertainty and risk for me to get involved in any of these companies right now…