Hertz, along with most players in the rental car industry, is learning to live with a smaller fleet footprint out of necessity, with higher profits to follow. Will this discipline remain as supply normalizes?
Photo via Enjosmith/Flickr
Hertz Global Holdings declared bankruptcy at the end of May 2020, but it seems like an eternity. In June, Hertz was shedding bargain-priced cars about as quickly 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 car rental in general.
What a difference a few quarters make, as Hertz reported record full-year 2021 adjusted earnings and record profit margins. Hertz’s public competitors in the United States, Avis Budget Group and Sixt, also reported record years. (Enterprise Holdings is privately held.)
The pandemic has tested many business models and brought down some iconic retail brands. However, we have learned that the world will always need personal transportation.
In 2021, Hertz and the rest of the car rental industry experienced favorable – albeit uneven – demand, skyrocketing prices and historic returns on used cars, driven by unfavorable supply restrictions. . It was a rollercoaster year with some pretty positive climbs.
Cleared of its debts after its bankruptcy, Hertz is back on an equal footing with its competitors. “Our lean cost structure also contributed significantly to our results,” said Mark Fields, interim CEO of Hertz, during the company’s fourth quarter and full year conference call.
Headwinds and Tailwinds
On the call, Hertz reported a localized impact from Omicron, echoing Avis’ view of his call. Industry pricing was disciplined during Omicron, which was primarily a function of low vehicle supply, but also due to the threat of another variant. Fortunately, Omicron has largely passed, but no one in the travel or transportation industries is ready to sing “Happy Days Are Here Again” yet.
Turning to 2021 overall results, the car rental recovery was driven by US leisure travel. The return of international leisure travel, one of the most lucrative segments, and business travel has yet to fully materialize.
This is where Hertz’s bankruptcy restructuring has a big impact: Like its competitors, many of Hertz’s corporate contracts were negotiated before the pandemic with locked-in low rates that did not reflect the tight market for offer. But in the case of Hertz, the bankruptcy allowed Hertz to terminate or renegotiate nearly all of those contracts. “As business and corporate travel returns, this is going to be a tailwind for us,” Fields said.
With the decline of Omicron and the reduction in travel restrictions, prices for the remainder of the first quarter are trending higher. However, obtaining a fleet remains a problem for everyone, as vehicle inventory decreased by 20% in December compared to 2019. The shortage of vehicles will persist for several quarters, and recent geopolitical events will not can only make the situation worse.
As for the fleet, Hertz is folding back with a much smaller footprint after the bankruptcy, unlike Avis, which was able to expand its fleet to higher levels than before the pandemic. In Q4 2021, Hertz averaged 470,900 units compared to Q4 2019 pre-b/k, when it averaged 686,697 units.
According to Hertz, half of this smaller fleet size was related to this company from which it was able to move away.
The silver lining for a smaller fleet isn’t overall revenue, 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 cost-effective fleet and match capacity to demand.”
Hertz announced a monthly depreciation per unit of $57 for the fourth quarter, an unmistakable manifestation of the heat of the used-car market and a clear boost to profits. Even more incredible, Hertz expects the first quarter depreciation to be a Gain — a negative expense — of $40 to $50 per vehicle per month.
Towards the end of 2022, Hertz’s depreciation is expected to reach historical norms of around $300 per month. However, Hertz chief financial officer Kenny Cheung argued that normalized residuals would not put deflationary pressure on rental prices.
“Prices fundamentally reflect rental car supply and demand,” he said. “And as Mark mentioned, we’re keeping fleet supply slightly below forecast demand.”
Electric vehicle rentals are on the rise
When Hertz announced the biggest EV fleet deal ever — and set a milestone of 100,000 short-lived Teslas by the end of 2022 — I doubted the timeline. But the initiative is on the way. Hertz leases Teslas in Atlanta, Fort Lauderdale, Los Angeles, Orlando, San Francisco and Washington, DC, as well as three other unnamed US markets.
Fields declined to give the number of Teslas in the fleet to date. Still, Hertz claims to be ahead of the plan to build its charging infrastructure and is in the process of “pre-charging” charging stations to prepare them for the new locations that will come online. Globally, Fields said the company has installed more than 700 Level 2 chargers in 65 markets at airports, neighborhoods and shared mobility (Uber) rental locations. Its major markets will receive Level 3 DC fast chargers later this year.
I will still take the underside on 100k units by the end of this year. On this point, there are many external factors that are not under the control of Hertz or Tesla.
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 would also not say exactly how many Teslas are dedicated to this b2b activity. (The official line is that “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 ride-sharing program for less, even with fuel included. Renting Tesla is starting to make more sense for carpool drivers who put in a lot of miles.
However, that $334 will only get the consumer a Model 3 for about two days of rental. Fields said consumers are willing to pay a premium for a Tesla and demand is high.
Right now, the earnings calculation doesn’t need to add up – a historically low depreciation allays many concerns. We’ll see what happens in a more normal damping environment.
And no need to quibble about the actual number of Teslas in the fleet, because when Fields said the process “will give us a huge competitive advantage in the industry,” he’s right. Setting up an EV infrastructure is never easy, nor is educating customers (“Is this credit card the key to the car?”) or adjusting contracts, websites and rental processes.
Hertz is also gaining an edge through its investment in UFODrive, the European electric vehicle rental startup with an all-digital rental experience. Hertz will combine its technology with that of UFODrive to deploy and manage electric vehicle rentals and help it grow globally.
One of the news gleaned from the call is that Hertz’s deal with Tesla is not exclusive to electric vehicles. Hertz is in “active ongoing discussions with our OEM partners and is evaluating all available models to include in our fleet,” Fields said.
Connect all cars
Fleet electrification and the connected car go hand in hand, as electric vehicles are computers on wheels and extracting data from them will be essential for more efficient management.
Cars are traditionally connected via aftermarket hardware and increasingly today via factory modems from OEMs. Fields said Hertz had partnered with a “leading telematics provider” and OEM partners on this connectivity, with the majority of the fleet online before the end of the summer.
From tracking, monitoring fuel tank and EV battery charge level to facilitating contactless rentals and understanding customer preferences, we are only beginning to realize the operational efficiency of a rental fleet. connected. Once we are there, we never look back.
Remarketing Firepower
In October 2021, Hertz announced a partnership with Carvana for a new direct-to-consumer sales channel for disused Hertz rental cars. Hertz now operates several thousand cars through Carvana, the digital remarketing portal on everyone’s lips after buying ADESA, KAR Global’s physical auction unit, for $2.2 billion.
Major car rental companies have always sought to retire their fleet faster and earn higher returns than they would through physical auctions. For Hertz, which reduced its Hertz car outlets from 80 in 2018 to 68 after bankruptcy, the Carvana partnership increases its remarketing firepower in a way that lightens assets without downside.
An enlightened workforce
This pandemic era has also fostered a new “mindfulness” in business, particularly around caring for employees and projecting a company’s values through environmental, social and governance (ESG) criteria.
“Hertz is prioritizing environmental awareness on our path to leading the future of mobility,” Fields said. “We are actively working to establish short-term and long-term science-based targets for reducing greenhouse gas emissions. Continued investments in growing our global electric vehicle fleet and robust charging infrastructure will be key to meeting future goals and improving customer access to emission-free 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 sets and shares baseline targets for fleet emissions reductions, achieved these reductions and is able to use it as an advantage over its competitors with the next generation of car rental companies increasingly concerned about the shape of the planet.