Hertz Was Really A Used Car Dealer, Not A Car Rental Company

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We all know what Hertz was before it went bust, it rented cars out at airports and the like, right? So, when people stopped flying therefore they ran out of money and went bust.

Well, yes, there’s some truth there. They did run out of money and they did go bust. But it’s not really, or not particularly, because no one was renting cars from them. Rather, it’s because in the economics of it they were rather more a used car dealer than a car rental company.

The details on Hertz are here. The important thing to note being:

Used-vehicle prices were down 17.6% on a year-over-year basis in April, marking the largest decline in the series, which began in 1996. Light-truck and SUV prices decreased 18.3%, whereas car prices moved down 16.8%. Vehicle retention value, measured as price/MSRP, fell 19.3%. In the light-truck/SUV component, retention value was down 20%, and in the car component it declined 18.6%.

To give the sketch of it. Hertz owned some – in different ways – 500,000 cars. Average time with the company for a vehicle is perhaps 13 months. Note, for some of these the price risk remains with the manufacturer, at least for the cars currently held it does. But for some large portion there were special vehicle companies which would borrow by issuing bonds. These would own the cars.

There is obviously a price difference between a new car and a used one although given the vast discounts available to those buying hundreds of thousands a year this can actually be positive. I know of at least one UK car rental company where the annual profit came entirely from buying new cheaper than they sold used – the rental business always lost money.

However, the importance is that Hertz was on the hook for the difference between new and used. Had to pay the SPV for changes in that book value. Used car prices plummeted, Hertz couldn’t find that margin to pay the SPVs, Hertz went bust.

Sure, Hertz had a business renting cars out. But the reason it went bust, the business risk there and thus what we would properly call the economic model was that Hertz was a used car dealer.

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jgh
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jgh

The “car rental” part of the business was essentially warehousing the stock until they could sell it.

John B
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John B

And used car values will plummet towards zero the closer we get to the internal combustion engine ban. Nobody will be making capital available for private or commercial vehicle purchase or to lease or rent. Then few either private or business will be able to afford a new vehicle and since they will not be able to use their current vehicle(s) will have none – buy horse futures. I don’t see this factor being considered in the drive to save the Planet by the political morons. But then I suppose if you can trash an economy with no consideration of… Read more »

Boganboy
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Boganboy

I must confess I’m looking forward to the return of the great horse shit crisis predicted by the modellers of the late 19th century. They evidently concluded that, in 50 years, the streets of London would be buried under 9 feet of horse shit.

Of course if we really needed to, we could just make all the petrol we need from hydrogen and CO2. The Germans worked out how to do this over 90 years ago.

Spike
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Spike

That was the same error as Covid and climate modeling, to neglect to consider people’s tendency to adapt and innovate, plus the self-limiting aspects of the predicted future. “Science” doesn’t predict, and scary predictions using extrapolation are not science but manipulation with numbers.

Mr Womby
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Mr Womby

And here was me thinking they made their money by selling overpriced insurance (e.g. CDW) and renting out GPS and baby seats etc. at extortionate rates.

Charles
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Charles

You have a strange definintion of “used car dealer”, which I would understand to be someone who buys and sells used cars, rather than only sells them.

But you might as well say that Hertz was a financial company as a car vendor. If they had financed their fleet directly from shareholder cash, they’d have had a fall in value but been able to keep the vehicles longer before sale and waited until the market recovered. By using a more complex financial instrument they got leverage which amplified the profits in the good times and the losses in the bad.