Why Did Hertz Go Bankrupt Understanding How The Rental Car Giant Went Belly Up
When Hertz filed for Chapter 11 Bankruptcy, part of the world wasn’t shocked and the rest weren’t. The size of Hertz alone meant that the consequences would ripple at a global scale. So, a lot of people wonder why did Hertz go bankrupt? The reasons are varied and, contrary to what people believe, it’s not only about 2020. Let’s find out in this article.
Hertz Files For Bankruptcy
Hertz has received a temporary lifeline from a group of its lenders, as it tries to find a way to survive near-zero travel during the Covid-19 pandemic.
The company has been renting cars since 1918, when it set up shop with a dozen Ford Model Ts, and has survived the Great Depression, the virtual halt of US auto production during World War II and numerous oil price shocks. By declaring bankruptcy, Hertz says it intends to stay in business while restructuring its debts and emerging a financially healthier company.
âThe impact of Covid-19 on travel demand was sudden and dramatic, causing an abrupt decline in the companyâs revenue and future bookings,â said the companyâs statement. It said while it too immediate action in response to the crisis, âuncertainty remains as to when revenue will return and when the used-car market will fully re-open for sales, which necessitated todayâs action.â
The company had missed an April 27 payment due to a group of lenders who lease vehicles used in Hertzâs day-to-day United States rental car fleet. The one-week grace period for the payment expired on Monday, but the lifeline was extended.
Hertz said the bankruptcy process will give it âa more robust financial structure that best positions the company for the future as it navigates what could be a prolonged travel and overall global economic recovery.â
Hertz Car Rental Pioneer Files For Bankruptcy Protection
The company, which had amassed a large debt, has been devastated by the sharp drop in travel during the pandemic.
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Hertz, which started with a fleet of a dozen Ford Model Ts a century ago and became one of the worlds largest car rental companies, filed for bankruptcy protection on Friday after falling victim to its mountain of debt.
The coronavirus pandemic has devastated Hertz by grounding business travelers and tourists, making it impossible for the company to continue paying its lenders. A sharp drop in used car prices has also decreased the value of its fleet.
They were doing quite well, but when you turn off the revenues and you own all these cars and all of a sudden the cars are worth less its a very tough business, said John Healy, an analyst and managing director with Northcoast Research in Cleveland.
Hertz said late Friday that it would use more than $1 billion in cash on hand to keep its business running while it proceeds with the bankruptcy process.
Todays action will protect the value of our business, allow us to continue our operations and serve our customers, 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, Paul E. Stone, its chief executive, said in a statement.
How Long Has Hertz Been In Business
We go back to 1918. Thatâs right, 102 years ago thatâs how old this company is. Originally known as a Rent-A-Car Inc., it was the brainchild of Walter L. Jacobs, who started his venture with a dozen Model T Fords. Within five years, his company had a fleet of 600 vehicles and turned in $1 million in revenue these were fantastic numbers for 1923.
And this caught the attention of John Hertz, who owned a truck and coach company. He purchased Rent-A-Car and named it Hertz Drive-Ur-Self System. But get this, he kept Jacobs as president. Jacobs even remained as president after General Motors became interested in the successful venture and purchased it in 1926.
GM went into an aggressive expansion plan, which included airports, such as Chicago Midway, as well as opening in Canada and, after World War II, their first European location, in France. But John Hertz wasnât done. In 1953, he repurchased the brand, through another of his successful companies, and created the Hertz corporation. Then he purchased a truck leasing company with 4000 trucks. So, by 1954, Hertz Corporation had 15500 trucks and 12900 cars.
It was under this new ownership that, in 2012, after two years of back and forth bidding, Hertz purchased Dollar-Thrifty, for $2.3 BN, and this gave Hertz 10400 locations and presence in 150 countries in total. And if you are a fan of the show, you know how some big acquisitions end up.
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The company actively engaged with many of its largest creditors to temporarily reduce the required payments under the company’s vehicle operating lease, Hertz said in the statement. Although Hertz negotiated short-term relief with such creditors, it was unable to secure longer-term agreements. Additionally, the company sought assistance from the U.S. government, but access to funding for the rental car industry did not become available, the statement said.
Hertz’s international operations in Europe, Australia and New Zealand were not included in the chapter 11 filing. Neither were Hertz’s franchised locations, which are not owned by the company.
Hertz operates the Hertz, Dollar, Thrifty and Firefly rental companies, as well as Hertz Car Sales, and the Donlen fleet management company.
White & Case LLP is serving as legal advisor, Moelis & Co. is serving as investment banker, and FTI Consulting is serving as financial advisor.
Hertz Files For Bankruptcy As Car Rentals Disappear Amid Coronavirus Pandemic
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Hertz filed for bankruptcy protection Friday, unable to withstand the coronavirus pandemic that has crippled global travel and with it, the heavily indebted 102-year-old car rental companys business.
The Estero, Florida-based companys lenders were unwilling to grant it another extension on its auto lease debt payments past a Friday deadline, triggering the filing in U.S. Bankruptcy Court in Delaware.
Hertz and its subsidiaries will continue to operate, according to a release from the company. Hertzs principal international operating regions and franchised locations are not included in the filing, the statement said.
Starting in mid-March, the company whose car-rental bands also include Dollar and Thrifty lost all revenue when travel shut down due to the coronavirus. The company made significant efforts but couldnt raise money on the capital markets, so it started missing payments to creditors in April, the filing said. Hertz has also been plagued by management upheaval, naming its fourth CEO in six years on May 18.
No business is built for zero revenue, former CEO Kathryn Marinello said on the companys first-quarter earnings conference call May 12. Theres only so long that companies reserves will carry them.
Krisher reported from Detroit.
What Happened To Hertz
To understand what happened to Hertz, it’s important to talk about what made Hertz special. They were good at what they did. They created membership programs, on-the-spot delivery and led the industry with innovations such as SiriusXM radio in 2000, carsharing in 2007, and photographic testing to ensure the state of rentals. Think of it as a before-and-after from when you rent the car and when you return it.
Why did they do all this? Hertz lost an average of $170 million a year in damages to its rentals. There was also a culture around Hertz. Since the sixties, it made alliances with different brands to provide specialty cars. And some of these were very special: Jaguar XK-Es, Corvettes, and modified Shelby Mustangs.
They relaunched this program in 2016. Then, they had a âgreenâ collection, with hybrids such as the Camry and Prius, making Hertz one of the first rentals to venture into this sector. This made Hertz stand out and grow. A lot. By 2014, Hertz had over half-a-million cars in the U.S. alone, including specialty cars, hybrids, and luxury vehicles, and thatâs what we want to talk about.
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Rates have risen throughout the rental-car industry, Mazari noted, partially because of surging demand and the difficulty of adding cars to company fleets. But Hertzs increases surpassed those of competitors Avis or Enterprise .
Some of the horrors that Hertz has visited upon its customers through filthy cars and unwarranted fees have been chronicled by my colleague David Lazarus.
The trophy for Hertz-borne mistreatment, as well as one for outstanding consumer pushback, probably belongs to Kate Klonick, a New York law professor who suffered the tortures of the damned when trying to collect a reserved car from Hertz in Brooklyn on the Sunday before Thanksgiving.
A woman told Hertz she found a used condom in a rental car. Then Hertz billed her for dog hair, even though she didnt have a dog in the vehicle.
As Klonick wrote in the short version of her :
Hertz refused to honor our contract, we had to call 20+ times, were hung up on 6 times, were 2 different locations that couldnt help us on our own dime, tried to make us pay $1800 for a new rental 4 times, and ended up making us pay $500+ over quoted price for a bad car.
What brought Hertz, which used to dominate the car-rental market to this wretched pass?
The Company’s Early Years
The Hertz Corporation, originally known as Rent-a-Car Inc., was founded by Chicago, Illinois native Walter L. Jacobs in 1918. This small car rental operation began with a dozen Model T Ford cars. Within five years, Jacobs’ fleet expanded to 600 vehiclesgenerating annual revenues of approximately US$1 million.John D. Hertz, owner of Yellow Truck and Coach Manufacturing Company, developed an interest in the brand, leading to him purchasing the company in 1923. It was then renamed to Hertz Drive-Ur-Self System. Jacobs continued to serve as president and chief operating officer of Hertz Drive-Ur-Self System until 1961.
After three years of ownership, John Hertz sold the rental car brand to General Motors Corporation in 1926. GM purchased the rest of Yellow Truck and Coach Manufacturing Company in 1943. Under the ownership of General Motors, the company released the first rental car charge card in 1926, opened its first rental car location at Chicago’s Midway Airport in 1932, and introduced the first one-way rental plan in 1933. Hertz Drive-Ur-Self System expanded services to Canada in 1938 and Europe in 1950.
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Hertz Poised To File For Bankruptcy Absent Deal With Creditors
Hertz Global Holdings could be forced to seek bankruptcy court protection if it is unable to come to terms on a deal with its creditors on Friday.
The second largest car rental agency in the world after Avis, Hertz has seen rentals plummet amidst the coronavirus pandemic. It missed some $400 million in lease payments on its fleet in late April and was able to persuade its lenders to give it until end of business Friday to come up with an acceptable payment plan.
Originally known as Rent-a-Car, Inc., the company was founded by Walter Jacobs in Chicago in 1918. It began operations with one dozen Ford Model Ts. In 1923, it was purchased and renamed by John D. Hertz, who owned the Yellow Truck and Coach Manufacturing Company. General Motors acquired Hertz in 1926 and John Hertz reacquired the company in 1953 and there were multiple changes in ownership in the course of the next half century that included United Airlines, Ford.
Hertz did start off the year on a positive note with a 6% increase in revenue in the first two months. The pandemic, however, dealt it a rapid, sudden, and dramatic blow, it said.
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Yet one wonders if the company is still a decent bet. In many ways its still a story stock one that appeals to investors more through conjecture about the future than a sober analysis of the past, especially the recent past.
Customer service problems are common enough to fill a Facebook page titled Hertz Rent-a-Car Sucks with stories about defective cars and miscellaneous unwarranted fees. Hertz experienced a wave of free positive publicity in October when it said it had placed an order for 100,000 electric cars with Tesla for delivery by the end of next year.
That made it sound as if the company had placed itself in the vanguard of transport innovation, except that the delivery schedule appears to be ambitious, to say the least. Tesla boss Elon Musk tweeted shortly after Hertzs announcement that no contract had been signed at that point, and Tesla has made clear that Hertz will have to stand in line like any other buyers to receive its cars, which makes it unlikely that it can place 100,000 Teslas on the road by the end of 2022. Nor will Hertz get a volume discount, as other carmakers have customarily awarded fleet buyers such as rental companies.
What The Hertz Bankruptcy Means For Your Next Car Rental
Last Updated on March 3, 2022 by Jonathan
Hertz Car Rental filed for bankruptcy in May, 2020, becoming arguably highest-profile victim of the economic downturn brought on by the COVID-19 pandemic. In July 2021, the company came out of Chapter 11 bankruptcy. Naturally, its short-lived bankruptcy sent shock waves through the industry. But what does the Hertz bankruptcy mean to you as a traveler?
The short answer: Not a thing. Hertz never went out of business and exited bankruptcy in summer 2021 in a far stronger position than anyone expected them to be. A major player in the car rental industry since 1923, Hertz has over 12,000 corporate and franchise locations internationally. By some measures, the company may be stronger now than they were pre-Covid having shed a tremendous amount of debt.
Hertz Bankruptcy And Reality
Will hertz go out of business
The debt was just too high, and Hertz failed to make payments on their leasing operations. But, before hertz going out of business, they asked for a government bailout, which was rejected. One big reason was Icahn himself, who was worth $18 BN.
So, they had to file under Chapter 11. Marinello jumped ship, and in came Paul Stone, just days before the company went under. And letâs talk about this Stone guy. Why would anyone want that job? Well, he made $700 000 in a single day as part of a retention program to keep executives from leaving. In total, Hertzâs executives received $16.2 million. Great.
Meanwhile, if you have seen our show, you know what Chapter 11 means: reorganizing and shedding, to make a profit again. In Hertzâs case, this meant cars and people. Lots of people. At the moment, 20,000 people and counting lost their jobs.
Then, there are the cars. In the U.S., Hertz had more than 500 000 cars and they will sell many of those for bottom dollar. Right now, the used car market is overstocked and with low demand. So other rental companies, dealerships, and even manufacturers are affected. You see, manufacturers like GM and Nissan Motors donât get much profit from selling to car rentals, but they sold in volume, which meant quick cash. Now, everything is paralyzed, and projections mention a possible recovery in 2022.
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On the final Monday of October, Hertz said it had placed a $4.2 billion order for 100,000 vehicles from Tesla to add to its rental fleet by the end of 2022. The public response was immediate. Hertz stock soared 10%. Shares of Tesla climbed nearly 13%. The deal was widely seen as a big win for both companies. CNBC described it as a tipping point that could usher the rental-car industry into a new climate change era.”
But was there really a deal after all? This week, Elon Musktweeted that Tesla hadnt signed a contract with Hertz. There were fears of chicanery, causing both companies share prices to waver.
When you order $4.2 billion worth of cars at once, you can skip the dealership.
Before long, though, those fears abated. A Hertz spokesperson publicly confirmed the order and said Tesla deliveries had already begun. The real question, it seems, is whether all 100,000 vehicles will actually arrive in the next 14 months: The Wall Street Journal reported that the two sides are still hammering out the details of a specific delivery timeline.