Hertz bankruptcy and distressed rental car market plague American automakers

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Hertz Global Holdings Inc. signage is at a rental location in Berkeley, California, United States, Tuesday, May 5, 2020.

David Paul Morris | Bloomberg | Getty Images

Continued distress in the rental car market due to the coronavirus pandemic, highlighted by Chapter 11 bankruptcy declarations by Hertz and parent company Advantage Rent A Car last week, will put further pressure on the already struggling US auto industry.

Last year, new vehicle sales to car rental companies represented about 10%, or 1.7 million vehicles. This request was stopped due to the coronavirus crisis when the Americans fled to their homes to stop the spread of the disease, some expect 250,000 or fewer sales to these agencies in 2020.

“This is where the majority of the risks lie for the year,” said Jeff Schuster, president of the Americas for LMC Automotive and global vehicle forecasting. Sales of car rental companies are expected to have little or no impact for the rest of the year.

Sales to car rental companies are not as profitable for car manufacturers as those to dealers for individual customers, but they are a major leverage for car manufacturers to use to unload large quantities of vehicles. Companies such as Nissan Motor and the Detroit automakers rely particularly on daily rental companies to sell hundreds of thousands of vehicles per year.

The car rental industry has always been used to “dump” cars to reach sales records or lower high inventory levels. But its importance to the US auto industry is far more important than that, officials say.

“Although the margins are very low on rental sales, they increase the volume and generate liquidity. Cash flow is the name of the game right now, so it will have an impact, “said Schuster. “It puts more pressure on factories to operate and build truck stocks for the retail market. “

Widespread impact

The rental car industry also affects the prices, profitability and residual values ​​of individual vehicles for automakers. Such a rapid drop in sales could prompt automakers to raise vehicle prices or abandon highly rental-dependent vehicles, which could lead to fewer jobs in US factories.

“It is quite amazing how many facets of the industry could be affected by, not necessarily bankruptcies, but the decline in business travel, less rental and most car rental companies not needing to participate to the company’s fleet, “said Tyson Jominy. , JD Power vice president of data and analytics.

Ford began resuming vehicle production in the United States on May 18, 2020 with new coronavirus security protocols such as health assessments, personal protective equipment and modifications to facilities to increase social distance.

Ford

Rental car bankruptcies could also lead to an influx of used cars flooding the already crowded used car market, affecting the residual values ​​of vehicles as supply exceeds demand. This could mean a lot for a used car for consumers, but a significantly lower value for commercial vehicles for consumers and non-rental vehicles for finance companies. Lower values ​​can damage car brands and affect the prices of new models.

Manheim, a major auto auction firm in the United States, has reported a “historic drop” in used vehicle prices as cars and trucks went out of the market and were not sold. The company says prices rebound in May but remain lower than a year ago.

“Once the market you use isn’t working properly, the new market can be really tough,” said Jominy. “It’s a very interesting dynamic in the way that one feeds the other. “

Most affected auto manufacturers in Detroit, Nissan

Rental car sales are particularly important for automakers Big Detroit and Nissan, according to a recent investor note from Dan Levy of Credit Suisse, citing industry data from WardsAuto InfoBank, J.D. Power, and others.

Last year, General Motors, Ford Motor and Fiat Chrysler collectively represented approximately 56%, or 975,000 vehicles, of car rental companies. Fiat Chrysler dominated its competitors in Crosstown with 21%, followed by Nissan (20%), GM (18%) and Ford (17%). South Korean automaker Hyundai Motor, including Kia Motors, and Toyota Motor each accounted for about 11% of sales to car rental companies.

Sales to car rental agencies have historically accounted for the majority of fleet sales to automakers, which accounted for about 17%, or 2.9 million, of the 17 million vehicles sold in the United States last year, according to the research firm IHS Automotive. Fleet sales are from car rental companies, government agencies and other commercial enterprises.

Fleet sales by Detroit automakers have declined significantly over the past decade. For example, nearly 30% of GM’s sales in the late 2000s were to fleet companies, according to annual documents. In 2019, they represented only 16.1%.

Cox Automotive reports that some of the vehicles sold to rental agencies last year included large vans and pickup trucks from Ford and Fiat Chrysler, Nissan Altima and Sentra sedans, Nissan Rogue crossover and mid-size and compact cars from Toyota, Ford, Chevrolet and Hyundai.

Hertz bankruptcy “manageable”

Levy described the impact of the Chapter 11 filing for Hertz, which also includes the Dollar and Thrifty brands, as “manageable” for the automotive industry.

A bigger blow would be if additional large rental companies such as Enterprise – the largest car rental company in the country – were to significantly reduce purchases for an extended period or go bankrupt. The private company owns more than 2 million cars and trucks worldwide under its Enterprise Rent-A-Car, National Car Rental and Alamo Rent A Car brands.

“Although Hertz has a comparable share to Enterprise in the US airport rental market, it is comparatively small in the non-airport market, where Enterprise holds ~ 75% of the market,” writes Levy.

The coronavirus and measures to prevent it from spreading have devastated demand for air travel in the United States, which has had a significant impact on car rental companies that rely on airport operations. Covid-19 has cut air travel to the lowest levels since the 1950s, before the aircraft era, according to Airlines for America, an industry group that represents America’s largest carriers.

Alicante airport arrival hall with passengers, luggage on trolleys and Hertz and Europcar car rental station.

EyesWideOpen | Getty Images

Demand is starting to recover but is still far from normal levels for this time of the year. During Memorial Day weekend, the traditional kickoff of the peak season for spring and summer travel, 1.2 million people passed through security checkpoints at US airports, more than triple the level of a month before but down 87% compared to the same dates in 2019.

Hertz filed for bankruptcy last Friday, followed by Advantage Holdco – the parent company of Advantage Rent A Car, E-Z Rent A Car and several affiliates – filing for Chapter 11 on Tuesday evening. The two companies cited the decline in travel devastating their businesses as reasons for their deposits.

As a result of the drop in travel, automotive research company IHS Markit does not expect a “solid recovery” in fleet vehicle sales, including rental, until 2022.

“Our base scenario does not anticipate business trips to return until the last quarter of the year and leisure travel sometime in 2021,” said Guido Vildozo, senior director of vehicle sales forecasting light for the Americas for IHS Markit. . “The fleet has serious implications for the next year and a half. “

– CNBC’s Leslie Josephs contributed to this report.

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