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.