Hertz - The Final Nail In The Coffin

Authored by Daniel Ruiz via Blinders Off blog,

As a disciplinarian in the automotive sector, my focal point is concentrated on the study of used vehicle values and how they affect the automotive industry as a whole.

Measure the Cause to Predict the Effect

There are several subcategories that help predict the trajectory of used vehicle values that I use as leading indicators. For example, there is a very strong correlation between the performance of Hertz stock and used vehicle values. In June, while the stock was trading at multi-year lows due to excessive pessimism, I witnessed used vehicle values begin to stabilize. I also noticed the amount of vehicles available from Hertz at auction fall drastically. These events made me believe that a strategy change was at hand. Was Hertz reducing the size of their fleet as they have in the past during difficult times? Would Hertz focus on better utilization rates and other cost saving measures? My suspicions proved to be correct. The benefits of stabilizing used vehicle values plus fleet management changes will likely be felt through the end of Q3.

The reduced volume of rental vehicles at auction has supported higher used vehicle values. Additionally, falling new vehicle retail sales increase the demand for used vehicles. Fewer new vehicle sales result in fewer used vehicle trades forcing dealers to acquire more used inventory at wholesale auctions.

However, I believe the factors currently supporting used vehicle values are transitory, and we should consider what comes next.

Poor Residual Performance Prompts A Change In Fleet Mix

Base trim levels and underperforming passenger vehicle values were identified by Hertz as part of the reason for the excessive per unit monthly depreciation levels experienced in Q1 and Q2 of 2017. The fix? Purchase vehicles with more options, reduce the amount of compact cars and add more SUVs.

This is where it all goes wrong. Higher trim levels are accompanied by higher cost. Assuming that the added cost will be recuperated when the vehicles are retired should not be expected. This is because added options do not depreciate at the same pace as the base value of a vehicle. To use a simple example, a navigation system with an added cost of $2,000 in a new vehicle will only add about $500 of additional wholesale value. The same applies for upgraded stereos, sunroofs, etc. However, the available wholesale and retail supply of a vehicle in a specific trim level is more important than the trim level itself. As the concentration of any vehicle in a specific trim level grows, it will experience pricing pressure. To date, the damage done by Hertz and other rental companies when vehicles are retired en masse has been limited entry level vehicles. When higher value assets experience pricing pressure, they put pricing pressure on all related lower value assets. When these higher trim level vehicles are retired, more pricing pressure will be felt in the used vehicle market because in essence, Hertz has taken one step up on the asset value ladder.

Higher trim levels were not the only change to the fleet. Hertz, like many others experiencing the accelerated depreciation in passenger vehicles, has chosen to seek the safety of the better performing SUV segment. The compact car portion of the fleet was reduced by 5% and replaced with more expensive SUVs. The timing of this decision could not be worse. I have been very vocal about the misconception that the truck and SUV market is healthy. Trucks and SUVs are in a different cycle than passenger cars, but the values have already peaked and will continue to fall for the next 2 to 3 years. SUVs are more expensive than passenger cars, so the losses will be greater.

We’ve Been Here Before

During the 2008 and 2009, Hertz faced a very depressed used vehicle market. In response to the difficult market conditions, they decided to reduce their fleet size and keep the vehicles longer as stated in this New York Times article. During this difficult time, the peak depreciation per unit reached $332 (2009).

In Q1 of 2017, Hertz reported a depreciation rate per unit of $348 and the most recently, a depreciation rate of $353 for Q2.

In response to the rising per unit cost due to weakening used vehicle values, Hertz has decided to reduce the size of its fleet once again.

More importantly, Hertz has committed to only half of the new vehicle purchases thought to be necessary in 2018 as they cautiously measure the demand and the strength of the used vehicle market going forward. If used vehicle values continue to fall (as I fully expect they will), a very similar scenario to 2009 is possible allowing new vehicle sales into rental to fall drastically.

This has very negative implications for manufacturing when you consider that new vehicle sales into rental represented a little more than 1.8 million units in 2016.

The last time this happened for Hertz the story had a happy ending. The peak of monthly depreciation per unit in 2009 also marked the bottom of the stock price declines.

This was largely due to used vehicle values rebounding strongly which provided them with a seller’s market when their aging fleet needed to be retired.

What’s Different This Time?

Unlike 2009 when the US government intervened with Cash for Clunkers and the lowest interest rates in history, I don’t foresee a catalyst that will boost or even stabilize used vehicle values for the next 2-3 years. Most important of all, in 2009, when the depreciation for rental vehicles was at its peak, new vehicle sales had been declining for three years: A used vehicle is little more than a new vehicle that is sold then driven just beyond the curb. Weak new vehicle sales for a prolonged period of time created a shortage of late model vehicles with low mileage.

Last year was a record setting year for new vehicle sales. We have not experienced a sufficient decline in new vehicle sales which will be necessary to balance the supply of used vehicles. Similar to the 2008 period, I expect that Hertz will have to keep their current fleet longer than expected due to further used vehicle value declines. However, a fleet can only be allowed to age for so long due to higher wear and tear costs like tire and brake replacement. In conclusion, Hertz has surpassed the previous peak in per unit depreciation and now has to weather a 2 plus year declining used vehicle value storm with a more expensive mix of vehicles.

The greatest challenge for Hertz is not behind, it lies ahead, and it’s one that they may not be able to survive this time.


NoWayJose Sun, 08/13/2017 - 14:36 Permalink

Where it all goes wrong is when the 'average Joe' - who has no special discount codes or groups - looks up a rental car for vacation and sees Hertz come in at $86 a day for a compact car.

The Cooler King (not verified) SethPoor Sun, 08/13/2017 - 15:06 Permalink

So basically, Arnie has already taken the ride in the 'Hertz' (gimme some slack here), & OJ, well, his ex wife & 'Goldman' did, but Goldman's 'folks' squeezed all the sheckels they could outta that, so I guess we're back at PAR. - Some whites got killed- Some niggers went to jail- some jews got richer

In reply to by SethPoor

DC Exile JRobby Sun, 08/13/2017 - 22:21 Permalink

I get your concern about buying a rental car. I had the same concern but after getting dicked around by dealers and private parties 4 years ago I took the suggestion of a friend and bought my 2012 Toyota Camry from Hertz Used Cars. I found the car on their website and drove out that day and bought it. Great price well-below blue book. Low miles. Transparent deal with Hertz - no haggling but I did get them to touch up some really minor dings etc. I've been very happy with the car - I've since put more than 50,000 miles on it driving all over the LA basin. I recommend people go to Hertz all the time. PS There are two ways to buy from Hertz I suggest going to the actual Hertz used car lots.  

In reply to by JRobby

junction NoWayJose Sun, 08/13/2017 - 14:43 Permalink

Instead of being crammed into high priced cattle car airline seats, travelers try to get there by car.  But if you have a car with you at your destination, you don't need to rent a car.  A rental car whose price is saddled with extra taxes and fees to pay for sports stadia and other local fees (taxes) that add up.

In reply to by NoWayJose

Utopia Planitia CheapBastard Sun, 08/13/2017 - 16:55 Permalink

Back in my destitute college days (I took out NO student loans - I worked part time to pay my bills) my decrepit Plymouth would leave me stranded from time to time. I lived in a poor area near the Univ and there were several occasions (late at night) when I "borrowed" a car to get home and retrieve tools to get my junker running again.  The system worked very well!  Yes, I was extraordinarily lucky to not have been either killed or jailed. Perhaps the lefists can enact laws so if you happen to need to "borrow" a vehicle the owner can't reject your request...  (I left my borrowed vehicles where I found them, with the gas tank filled.)

In reply to by CheapBastard

Village-idiot Sun, 08/13/2017 - 14:46 Permalink

No mention of lease returns in this article. From what I've been reading over the last year or so the number of lease returns will swamp the used car market over the next few years.This would be the right time to buy a used vehicle if you're in the market for one.

Singelguy Village-idiot Sun, 08/13/2017 - 19:38 Permalink

The only problem is that lease returns are crap. The lessees never took care of them other than maybe change the tires and brakes. They didn't care about the rest since it was not their car and they knew it would be going back. If you are thinking about buying a lease return make sure you have a trusted mechanic check it out from bumper to bumper.

In reply to by Village-idiot

edotabin Sun, 08/13/2017 - 14:54 Permalink

I never buy new cars. There is no reason to. I buy non-rental cars that come off one year leases and that have a 5 year bumper to bumper warranty.  This way, i still have 4 years of full coverage (more than many us manufactureres offer to begin with) remaining and someone else took the depreciation. With car sales facing problems, there is an abundance of cars to choose from.The rental cars companies offer abused cars at very high prices. There is no reason to buy them.

edotabin BullyBearish Mon, 08/14/2017 - 00:55 Permalink

It may take a while to locate but I find 'em. It's worth searching a month or two for a car you'll keep until the 10/100k mark when the powertrain warranty expires. I use the internet. It would be good to befriend a car salesman too.So now I'm thinking of trading my car in. The dealer I bought it from is giving me 2.5K above market value for my car if I buy a car from them. I stopped by. I talked to the mangers, the sales people etc. They know what I'm looking for and how much I'm willing to pay. They know I have the cash. I'm just waiting for the right opportunity. They do come along more frequently than you would think.EDIT: Also search the internet within 250 miles of your location. They will have the VIN# and a free carfax report. Rentals are clearly marked on carfax.

In reply to by BullyBearish

edotabin Seasmoke Mon, 08/14/2017 - 00:58 Permalink

Yes. Leases usually have a 2 year minimum but cars are returned early all the time. You just have to be friends with people in the biz and they will hook you up. The great deals aren't going to fall in your lap.I usually look at Hyundai because they are fantastic cars, they take a big depreciation hit and have a fantastic warranty. I'd put the Genesis up against much more expensive cars anytime.No bluff to call. I just call 'em that in my mind. You just gotta work at it a bit. They are out there.

In reply to by Seasmoke

jin187 edotabin Sun, 08/13/2017 - 15:23 Permalink

Amen to that. Got my last car the same way. A year-old hail damage trade-in with a single owner, and not a blemish inside, loaded with bluetooth and other goodies, and for the same price as a rental trade-in. I've had it for 3 years now, and haven't had to do anything but scheduled maintenance. In comparison, the car I had before was a rental. Probably had a dozen instances of either recall work, or electrical and fuel failures. It died at exactly 100,003 miles. Even if it had died at 99,999, it wouldn't have mattered anyway. Government Motors canceled my warranty a year after I bought it, when they became "New GM". Apparently "New GM" owns all the same properties, patents, and trademarks of GM, but conveniently isn't responsible for any of their obligations.

In reply to by edotabin