“We’ll pick you up!” Or not…: Hertz files for bankruptcy

June 16, 2020

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2 min read

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What's going on here?

102-year-old car rental company Hertz has filed for Chapter 11 bankruptcy in the USA and Canada, due to a sharp reduction in global travel following the coronavirus outbreak.

What does this mean?

Chapter 11 bankruptcy requires Hertz to reorganise its business in order to keep it going, meaning that a restructure of debts will allow the company creditors to be paid back.  The Florida-based company, which operates Hertz alongside Dollar and Thrifty car rentals, has approximately $19bn (£15.6bn) in debt resulting from restructuring attempts before the coronavirus outbreak.  This stems from losses due to competition from other car rental businesses such as Uber and Avis.  Attempts to reduce this debt has led to Hertz selling 54,000 cars and laying off 12,000 of its 38,000 employees. 

Hertz had previously suggested that it could avoid bankruptcy if it was given financial aid from creditors or the US government to keep afloat at home.  Fortunately, however, the company’s international operations in Europe, Australia and New Zealand as well as its franchises in the US have not been affected by the bankruptcy measures despite the ongoing decline in world travel.

What's the big picture effect?

Hertz’s insolvency is representative of the huge reduction in revenue and future bookings being made within the transport sector amid the coronavirus outbreak.  With governments imposing lockdowns across the globe, it is clear that car rental companies are not alone in the struggle.  Since Hertz’s business relies on airport rentals for profit which accounts for two-thirds of its revenue, its decline will be felt greatly alongside that of the aviation industry which is facing a revenue reduction crisis and predicted global job losses of around 25m.  This raises questions as to whether the correlation between car rentals and aviation will result in a mutually inclusive recovery process.

Importantly, Hertz CEO Paul Stone noted the severe impact that coronavirus has had on the company, emphasising that “we need to take further steps to weather a potentially prolonged recovery” if they are to survive the virus economically.  Other businesses in the sector are facing similar challenges, with competitor Avis suffering an 80% fall in sales in April and a $158m loss in the first quarter of 2020.  Share values in Hertz have fallen by 82% and Avis have noted a 10% decline during the first week of May, which will reduce investor confidence and deprive Hertz of a way to obtain vital funds to secure their future beyond Covid-19.  

What can be inferred from Hertz’s move?  Filing for bankruptcy could be considered a strategy to defend the company from unwanted takeovers in a bid to appear in control of the reorganisation procedures.  Such procedures will include seeking legal advice from restructuring and insolvency teams, consulting shareholders and renegotiating contracts.  On the other hand, with company cash being around $1bn, perhaps the decision is a plea for investment, amplified by the $2.3tn relief package distributed by the US Treasury to carry companies through the virus.  Ultimately, it is paramount that the decision taken is effective in causing growth opportunities in the long-term, to increase revenue once the demand for global travel is reignited.

Report written by Evangeline Taylor

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