by Sean Slone, CSG senior policy analyst
The decision by Hertz to file for bankruptcy protection on May 22 will likely have implications not only for a pioneering 102-year-old car rental company but also for a long list of related companies and industries that were already struggling amidst the impacts of a global shutdown due to the coronavirus pandemic.
Hertz, which also operates under the brands Dollar, Thrifty and, outside the U.S., Firefly, blamed the decreased travel demand for bringing a decline in the company’s revenue and future bookings combined with uncertainty about when that revenue would return. The rental car industry, which relies on airport locations for nearly two-thirds of its rental revenue, has been devastated as air travel since the start of April has plummeted 94% compared with a year ago.
Hertz plans to remain in business through the bankruptcy but could face a challenging recovery even if travel and the global economy rebound quickly. The company laid off 12,000 employees in North America and furloughed another 4,000. Hertz already had significant debt on the books prior to the pandemic taking its toll.
There is also evidence that the airline industry doesn’t expect its business to return to normal anytime soon. American Airlines announced they have plans to cut 17,000 management jobs and 5,000 support staff. Delta announced they would extend early retirement and buyout offers in a bid to limit layoffs in the fall. About 40,000 of the company’s 91,000 employees have already agreed to take unpaid leave. The domino effect can also be seen in Boeing’s decision to lay off 6,770 U.S. employees due to falling demand for new planes.
In addition to the airport business rental car companies have come to rely on, another portion of their rentals come through insurance companies for people who have been in accidents and need to rent as they have their vehicles repaired. But the coronavirus has significantly limited miles driven as well with many Americans out of work or working from home, which has also reduced the number of car accidents.
The challenges faced by the rental car industry could also spell trouble for the nation’s auto industry since companies like Hertz are traditionally major purchasers of new cars. In 2019, rental car companies accounted for 10% of new U.S. car sales, CNN reported. Hertz had already canceled plans to purchase any new cars this year and the company announced it was starting to sell off some of its existing fleet as used cars. Rival company Avis-Budget group also announced plans to reduce its fleet this year. A market flooded with low-mileage, late-model used cars could be another blow for new car sales, industry analysts say.
That news comes following a period in which the United States produced fewer cars than at any time since World War II as production at most auto manufacturing plants ground to a halt. Analysts predicted new car sales would be off more than 50% for the second quarter. As CNN reported elsewhere, in getting production back up and running, automakers face the unique challenges of trying to ensure their suppliers have been able to weather the shutdowns, trying to figure out how to safely reconfigure auto assembly plants for reopening to accommodate public health concerns and how to kickstart consumer demand for their product during what could be a profound and prolonged recession.
While the auto industry appears to be in better shape now than it was heading into the Great Recession, some suggest an extended period of reduced demand could prompt a retrenchment on the part of the industry that could include rethinking R&D investments in new electric and self-driving vehicle models. Others however believe that while the industry could see more mergers and acquisitions in the years to come, electric vehicles could see a boost in sales even if gas prices remain low.
So add Hertz to the list of major companies that have announced bankruptcy filings as a result of the pandemic — a list that also includes retailers like J.C. Penney, J. Crew and Neiman Marcus. But it’s important to recognize that continuing struggles for the rental car industry could also have far-reaching effects for many others as well and cause headaches for states trying to revive their economies.
As the hospitality industry and other industries hope for a rebound in business and vacation travel as the nation reopens in the months to come, those struggles could make life more difficult for a traveling public that will already have to get used to long lines, unpredictable flight schedules and other inconveniences.