Is Hertz Back on Track?

Hertz Global Holdings declared bankruptcy in late May 2020, but it feels like an eternity. By June, Hertz was shedding cars at bargain basement prices about as fast as it was shedding staff. At that time, with society firmly in the grip of the pandemic, no one knew what the future held for Hertz, or for car rental in general.

What a difference a few quarters make, as Hertz reported record adjusted earnings for the full year 2021 and record profit margins. Hertz’s public competitors in the U.S., Avis Budget Group and Sixt, also reported blockbuster years. (Enterprise Holdings is privately held.)

The pandemic tested many business models and felled some iconic retail brands. However, we learned that the world will always need personal transportation.

In 2021, Hertz and the rest of the car rental industry rode favorable — though uneven — demand, meteoric pricing, and historic returns on used cars, brought on by unfavorably severe supply constrictions. It was a roller coaster of a year with mostly positive uphill climbs.

Shed from debt post-bankruptcy, Hertz is back on a more level playing field with its competitors. “Our leaner cost structure also contributed meaningfully to our results,” said Mark Fields, Hertz’s interim CEO, on the company's fourth quarter and full year conference call.

Headwinds and Tailwinds

On the call, Hertz reported localized Omicron impact, echoing Avis’s view on its call. Industry pricing was disciplined during Omicron, which was mostly a function of low vehicle supply, but also because of the threat of another variant. Luckily Omicron has largely passed, but no one in the travel or transportation industries is ready yet to sing “Happy Days Are Here Again.”

Looking at overall 2021 results, the car rental recovery was driven by U.S. leisure travel. The return of international leisure inbound, one of the most lucrative segments, and business travel have yet to be fully realized.

This is where Hertz’s bankruptcy restructuring has material impact: Like its competitors, many of Hertz’s corporate contracts were negotiated before the pandemic with locked-in low rates that didn’t reflect the supply-constricted market. But in Hertz’s case, bankruptcy allowed Hertz to exit or renegotiate almost all those contracts. “As corporate and business travel returns, that’s going to be a favorable tailwind for us,” Fields said.

With Omicron waning and travel restrictions reduced, pricing for the remainder of Q1 is trending upwards. However, getting fleet is still an issue for everyone, as vehicle inventory was down 20% in December compared to 2019. The vehicle shortage will linger for several quarters, and recent geopolitical events can only exacerbate the situation.

When it comes to fleet, Hertz is retrenching with a much smaller footprint after bankruptcy, unlike Avis, which was able to expand its fleet to levels greater than pre-pandemic. In Q4 2021, Hertz fleeted an average of 470,900 units compared to pre-b/k Q4 2019, when it held an average of 686,697 units.

According to Hertz, half of that lower fleet size was tied into that corporate business it was able to walk away from.

The silver lining for a smaller fleet size isn’t overall revenues, it’s higher revenue per unit (RPU) and revenue per day (RPD) — which drive stronger profit margins. “Maybe in the past our approach has been to have the biggest fleet,” Fields said. “Our approach now is to have the most profitable fleet and match capacity to demand.”

Hertz reported monthly depreciation per unit of $57 for Q4, an unmistakable manifestation of just how hot the used car market is and a clear earnings booster. Even more incredibly, Hertz expects Q1 depreciation to be a gain — a negative expense — of $40 to $50 per vehicle per month.

Towards the end of 2022, Hertz’s depreciation should rise to historic norms of about $300 per month. However, Hertz CFO Kenny Cheung made the point that normalized residuals won’t put deflationary pressure on rental pricing.

“Pricing is fundamentally reflective of supply and demand for rental cars,” he said. “And as Mark mentioned, we are keeping the fleet supply slightly below expected demand.”

EV Rentals Are Happening

When Hertz announced the biggest electric vehicle fleet deal ever — and laid down a marker of fleeting 100,000 Teslas by the end of 2022 — I doubted the timeline. But the initiative is underway. Hertz is renting Teslas in Atlanta, Fort Lauderdale, Los Angeles, Orlando, San Francisco, and Washington, D.C., as well as three other unnamed U.S. markets.

Fields declined to give the number of Teslas fleeted to date. Yet Hertz claims to be ahead of plan to build out its charging infrastructure and is “front-loading” charge points to be prepared for new locations coming online. Globally, Fields said the company has installed more than 700 Level 2 chargers in 65 markets in airport, neighborhood, and shared mobility (Uber) rental locations. Its top markets will get Level 3 DC fast chargers later this year.

I’ll still take the under on the 100k units by the end of this year. On this point, there are plenty of external factors not in Hertz’s or Tesla’s control.  

Hertz also struck a deal to rent Teslas to Uber drivers. The initiative is up and running in more than 30 markets, including Los Angeles, San Francisco, Chicago, and Atlanta. Hertz wouldn’t say exactly how many Teslas are dedicated to this b2b business either. (The official line is “up to 50,000” Teslas could be rented to Uber drivers.)

Uber drivers can rent a Model 3 from Hertz for $334 per week, which includes unlimited miles, maintenance, and insurance. Drivers pay for charging. Uber drivers can also rent an ICE car through Hertz’s Rideshare Program for less, even with fuel included. The Tesla rental starts to make more sense for rideshare drivers running high miles.

However, that $334 will only get a consumer a Model 3 for about two rental days. Fields said consumers are willing to pay a premium for a Tesla and demand is high — so one has to wonder how the Tesla rentals make sense to a lower-rate/higher-mileage Uber driver base.

Right now, the profit math doesn’t need to add up — historically low depreciation eases many concerns. We’ll see what happens in a more normal depreciation environment.

And no need to quibble on the actual number of Teslas fleeted, because when Fields said the process “will give us a huge competitive advantage in the industry,” he’s right. Setting up EV infrastructure is never easy, nor is educating customers (“This credit card is the car key?”) or adjusting contracts, websites, and rental processes.

Hertz is also gaining an advantage through its investment in UFODrive, the European EV rental startup with a fully digital rental experience. Hertz will combine its tech with UFODrive’s to deploy and manage EV rentals and help it scale globally.

One bit of news picked up from the call is that Hertz’s deal with Tesla isn’t exclusive for EVs. Hertz is in “active ongoing discussions with our OEM partners and evaluating all available models for inclusion into our fleet,” said Fields.

Connecting all Cars

Fleet electrification and the connected car go hand in hand, as EVs are computers on wheels and extracting data from them will be essential for more efficient management.

Cars are connected traditionally via aftermarket hardware and increasingly today through OEMs’ factory modems. Fields said Hertz has partnered with a “leading telematics supplier” and with OEM partners on this connectivity, with a majority of the fleet connected before the end of the summer.

From location, fuel tank monitoring, and EV battery charge level to facilitating touchless rentals and understanding customer preferences, we’re only beginning to realize the operational efficiencies of a connected rental fleet. Once we’re there, we’re never looking back.

Remarketing Firepower

Back in October 2021, Hertz announced a partnership with Carvana for a new direct-to-consumer sales channel for de-fleeted Hertz rental cars. Hertz is now running several thousand cars through Carvana, the digital remarketing portal on everyone’s lips after it bought KAR Global’s physical auction unit ADESA for $2.2 billion.

The major car rental companies have been on a perennial hunt to de-fleet quicker and gain higher returns than they would through physical auctions. For Hertz, which constricted its Hertz Car Sales locations from 80 to in 2018 to 68 post bankruptcy, the Carvana partnership increases their remarketing firepower in an asset-light manner without a downside.

An Enlightened Workforce

This pandemic era has also fostered a new “mindfulness” in corporations, particularly when it comes to employee care and projecting a company’s values through environmental, social, and governance (ESG) criteria.

“Hertz is prioritizing being environmentally conscious on our path to lead the future of mobility,” Fields said. “We’re actively working towards establishing short- and long-term science-based greenhouse gas emission reduction targets. Ongoing investments in growing our global EV fleet and robust charging infrastructure will be critical to achieving future targets and improving customers’ access to zero emissions transportation options.”

As transportation accounted for the largest share (29%) of greenhouse gas emissions of any sector, we’ll be interested to see if Hertz establishes and shares baseline targets for fleet emissions reductions, achieves those reductions, and is able to use it as an advantage over competitors with the next generation of car renters who are increasingly concerned with the shape of the planet.