Hertz files for bankruptcy in North America

Hertz Global, the holding company for car rental giant Hertz and fleet management company Donlen, has filed for bankruptcy under Chapter 11. Hertz is the second-biggest car rental company in North America, behind Enterprise. 

A long-established player, 102-year-old Hertz operates around 760,000 vehicles at more than 12,000 locations globally. The largest part of its fleet, around 560,000 vehicles, is in North America. It is precisely for its U.S. and Canadian subsidiaries that Hertz has now filed for bankruptcy. The company’s overseas operations, in Europe, Australia and New Zealand, are not affected. 

Financial restructuring
By filing for bankruptcy under Chapter 11, Hertz should be able to keep operating in the U.S. and Canada, while preparing an organisational and financial restructuring. Filing for 'Chapter 11' is not good news, but does not necessarily mean that it's the end of the road for Hertz. Many companies manage to survive the restructuring and go on to thrive - previous examples include General Motors and many major U.S. airlines. 

“All of Hertz’s businesses globally, including its Hertz, Dollar, Thrifty, Firefly, Hertz Car Sales and Donlen subsidiaries are open and serving customers. All reservations, promotional offers, vouchers and customer and loyalty programs, including rewards points, are expected to continue as usual,” Hertz said in a statement. 

Hertz is the first big player in the fleet and mobility industry to file for bankruptcy due to COVID-19. The pandemic and its travel restrictions have decimated demand for rental cars and driven down residual values on the used-car market. 

Buy-back model
Just before the COVID-19 outbreak, Hertz was still able to present growth figures. In January and February 2020, global revenue had increased by 6% and 8% year on year, respectively. Apparently, that was not enough to finance the massive drop in business due to the pandemic, the loss on the resale of end-of-contract vehicles, and the huge investments in fleet renewal made last year.

It is no secret that all travel-related business is heavily impacted. Other car rental giants like Enterprise, Sixt, Europcar and Avis admit they’re facing challenges. But contrary to competitors in Europe, Hertz in North America does not operate on a buy-back model, in which the car manufacturer agrees to take back the end-of-contract vehicles at a fixed price, a model that protects the car rental company from used-car price volatility.

“The impact of COVID-19 on travel demand was sudden and dramatic, causing an abrupt decline in revenue and bookings. Hertz took immediate actions to prioritise the health and safety of employees and customers, eliminate all non-essential spending and preserve liquidity. 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,” the company’s statement continued.

Hertz’s Chapter 11 comes after weeks of negotiation with its lenders for payment relief as well as with the U.S. government about a possible bailout. The company, which has around $19 billion in debt and already announced a reorganisation with 10,000 job cuts, missed important lease payments on its rental car fleet at the end of April.

New CEO
In an earlier sign of turbulence, Hertz appointed a new CEO just last week, promoting Paul Stone, the head of its North American car rental operations, to replace Kathryn Marinello, who resigned after just three years at the helm. The appointment caused Hertz stock to surge as much as 17% - after plunging more than 80% this year. 

Nevertheless, Stone could not avoid filing for Chapter 11 – an action he said would “protect the value of our business, allow us to continue our operations and serve our customes, 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. Our loyal customers have made us one of the world’s most iconic brands, and we look forward to serving them now and on their future journeys.”

The company still has more than $1 billion in cash to support is ongoing operations, which include Hertz, Dollar, Thrifty and Donlen, but it may seek access to additional cash, including through new borrowings, as the reorganisation continues.

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