The Story of Hertz Going Bust
bloomberg.com
bloomberg.com
To us, there is a quote in a different bloomberg article from last week [1] which strikes us as accurate. Attributed to Maryanne Keller, who is referred to in this article, it says:
> 'It’s a saga about gross mismanagement,” said Maryann Keller, a longtime auto-
> industry consultant who was on the board of Dollar Thrifty when Hertz acquired
> the company. “It could have been salvaged had he picked the right management,”
> she said, referring to Icahn.'
Icahn lost $1.6b. Thousands of us lost our jobs. But these C-suiters sailed the company to bankruptcy over five years, each of them extracting 7 or 8 figure bonuses. The CIO who laid us all off, for example, received $6.5 million compensation that year [2]. (Sidenote, the work we were doing was replaced with Accenture consultants, who couldn't handle it, screwing up so bad they ended up in court [3].)
One former colleague of mine wrote a post on LinkedIn suggesting Icahn was the unwitting victim of untenable debt situation, and while he may be correct that the debt made it difficult, Icahn can read a balance sheet and he understood the situation.
I can't speak about Marinello's performance, but I agree that the problem dates back to 2014 or even earlier. People have a widespread belief that Frissora was flying too close to the sun, driven by his aggressive personality. Despite his flaws, he had a great team of people who kept the business running, and it wasn't Frissora who fired them all. Nobody, it turns out, was a fan of him. But everyone agrees he was far better than the gang of unusually wealthy miscreants that Icahn replaced him with.
[1] https://www.bloomberg.com/news/articles/2020-05-27/icahn-fil...
[2] https://www.cio.com/article/3404205/how-much-do-cios-really-...
These corporate HQ moves don't seem to work out well (e.g. Boeing)
After a lot of consideration and soul searching, they decided not to move down because both his family and his wife’s family were in the North East U.S. and they had small kids who wouldn’t have adjusted well to a cross-country move.
So somewhat reluctantly, he resigned his job with Hertz and stayed back while the rest of the team moved down. It was difficult for him because he had worked there for a number of years to reach the level that he was at and essentially reset when he switched jobs.
Anyway, a short time after that, he found out that everyone he worked with and had made the move to Florida had been laid off by Hertz.
He dodged a bullet on that one. I always suspected the move was a strategic-but-unethical one by Hertz to terminate a whole bunch of people without drawing too much attention to themselves. (Older employees with families typically don’t make moves like that, and you can easily get rid of the rest after.)
Our department was an exception. We got to stay in NJ (they laid us all off two years later.)
Needless to say, leadership across ALL disciplines (mobile, front-end, backend, etc) was a fucking joke and they didn't listen to the red flags we brought up in literal sprint 1.
Sorry to hear about your Hertz experience.
From what I've heard, Accenture always sucked (except at C-suite sales, which I guess is all that really matters).
That being said, I've had nothing but good experiences working with McKinsey.
Accenture was just as culpable as Hertz in terms of incompetence and negligence.
The incentives encourage destruction through short term value extraction at the expense of long term health.
Whether or not it's true, I think you'll find this sentiment from any engineering level alum from a big company that died.
Specific metaphor chosen on purpose.
> Sidenote, the work we were doing was replaced with Accenture consultants, who couldn't handle it, screwing up so bad they ended up in court [3].
And elsewhere...
> I had the unfortunate opportunity as an Accenture consultant to work on the Hertz redesign. ... Needless to say, leadership across ALL disciplines (mobile, front-end, backend, etc) was a fucking joke and they [presumably Hertz?] didn't listen to the red flags we brought up in literal sprint 1.
I think it was about a year later when I heard the IT team was fired. The kicker: a lot were hired by IBM _and subsequently contracted to work for Hertz_ on the exact thing they were working on before.
Safe to say I didn't regret my decision at all
I showed them a chart on how the average age of their customer was going up and they were failing to get newer and younger customers. I also showed search trends on car rentals going down, and search trends on ride sharing going up. They didn't like my presentation at all =|
Smaller players would also be far less likely to enter less lucrative markets.
And unlike the big companies, there were no hidden costs, no upsells, no attempts to scam, no attempts to extort huge fees when trying to change the rental, ... didn't even charge us for forwarding a traffic ticket which would have totally been their right.
After my experience with Hertz (US) as a customer, the only reason why I'm not 100% happy with them going under is that I don't expect their large competitors to be much better, and less competition means the others can become even worse.
Companies seeking LBOs are not generally in a great financial position. As a result, they tend to go bankrupt at a much higher rate than would otherwise be experienced. Hertz LBO happened before Icahn (a HF manager) got involved. People like Icahn don't invest in a company to lose money — clearly he believed that the company still had value even after PE got involved.
And yet the aggregate US net worth is positive: about 5x its GDP. What sector have I missed?
Having debt in your capital structure indefinitely is a perfectly fine decision to make.
If there's a political will to favour equity over debt, the lawmakers should first remove the tax benefits of debt over equity. See https://en.wikipedia.org/wiki/Tax_benefits_of_debt
Either I'm missing a sector in the original analysis above (please tell me what it is), or the "common wisdoms" expressed there are false (and I should be more cynical), or...?
We're hearing this argument a lot recently, but aren't we past that already in 1980s?
As I recall, it was somewhat popular among companies to pile up leverages by buying a large potion of their own stocks. The reasoning was the same as today: it was supposed to benefit shareholders because a levereged BS has tax benefits.
... which subsequently resulted in those highly-levereged ("recap'ed") companies filing for bunkruptcy. So that hack was shunned by the time of 1990s. What does make this time different?
Mostly things haven't changed that much since the 1980s. The biggest difference is probably that individual investors are les likely to own specific shares, and more likely to own via an (index) fund.
(That doesn't mean that any particular balance between equity and debt is the right one. Just that the occasional bankruptcy is not a nail in the coffin.)
Aggregate US household net worth is now upwards of $100 trillion.
That puts the $25 trillion in US National debt in perspective.
Probably fairer to say that a decade of CEOs all failed.
Compensation incentives are there for a reason. Acting according to them just means fulfilling the shareholders wishes. (Unless the shareholders are idiots or impotent and the board set the wrong incentives.)
Running a riskier strategy that fails under a pandemic is a perfectly cromulent business decision to make. Shareholders and creditors knew what they were in for.
Not all gambles pay off. That doesn't mean taking on any risk whatsoever is wrong.
Though it's not just odds and payoff, but also risk appetite. There's something like risk-aversion, and a corresponding risk-return-tradeoff.
But unless we have evidence to the contrary, we can assume that the shareholders are broadly risk-neutral. Especially since lots of shareholding these days is via widely diversified index funds, who don't need to care whether a any single company they hold goes bankrupt as long as the expected value of gambles they take are positive.
Except there are low and high risk index funds as well. Just because you're invested through a passive index fund, doesn't mean you're risk-neutral.
As an investor, you can also always just add leverage to your index fund holding, if you want more risk. If your jurisdiction allows you, that is.
Huh?
Many people hold both bonds and stocks and other assets, like real estate.
Index funds give you broad diversification at low fees. That diversification mostly removes out company-specific idiosyncratic risk, but it still leaves you exposed to market risk, and no one in their right mind claims otherwise.
Even a risk averse person (and even more a risk neutral person) can rationally hold on to very risky assets. Risk aversion just means that you require a higher return for a given level of risk.
And a risk neutral person doesn't care at all about risk, they only care about expected returns. That's mostly a convenient abstraction like the famous home economicus.
I don't understand why a risk neutral person would want to prefer bonds and cash?
I don't know if that makes shareholders and board members "idiots," just that it's something the firm probably should've worked to mitigate a bit more effectively.
Example: EHI is still holding on, and they (from my understanding based on employees I've spoken with) had continuity planning in place for situations that might've significantly impaired travel.
Same with insurance, which is why there are many cases where insurance is a requirement (usually cases where people dismiss the risk).
Large investors have stock in many companies. Some are low-risk, some are high-risk. Ideally, these will balance each other out. In theory, this allows large, publicly-traded companies to do risky things. Amazon was a great example of this for years.
The problem is that some companies are perceived as risky or not-risky by different investors.
If 30% of their shareholders want a conservative strategy and 30% of them want a risky strategy, the conservative shareholders will always win because it's easier to build a coalition around "don't do anything" than it is around "do something". "Do something" can mean any one of a billion different strategies, and it's very hard to get a large group to agree on one.
That's quite a big leap. Humans are exceptionally good at gaming objective metrics if that's all that matters... setting the right incentives is by no means something any non-idiot can do; it's in fact exceptionally rare to find people able to set right incentives for an entire organization (or for it's leadership; if the leadership doesn't inherently have the right motivation, I don't actually think you can fix that via a set of incentives; probably the best you can do is constantly-modifying incentives, tracking aggressively any sign of misaligned motivation etc)
However, CEO and shareholders are playing a repeated game here. So they can retro-actively reward last years performance by giving more (or less) money for next year.
Mostly, shareholders do want CEOs to take some amount of risk. And giving your CEO eg stock options means you want to encourage risk taking.
If you want your CEO to be careful, you pay them in eg long term company debt instead.
Exactly how you align the precise risk appetites is a harder problem. And there might be some loopholes clever management can exploit. But the broad strokes are clear.
I think that's OP's point: the board should understand that, and set them appropriately.
I always wonder if its worth going cheaper or more expensive when renting cars. Stuff like this is interesting, I wonder how many other corners are cut at the cheaper places.
With massive rental cars franchising you never know. Rental car is always a potential problem and should be treated as such.
Hence, the main property you should be looking for is how does the rental company manage problems. Starting from the rental garage (when you point to some issue like worn out tires) and throughout the road. Also it means you should make some trial and errors.
I live in downtown Toronto and don't own a car. I use car sharing for local needs, but the traditional car rental companies for when I need to leave the city. Enterprise has been consistently terrible. On multiple occasions I've had to wait hours past my scheduled pick-up time due to either understaffing, overbooking, and/or due to other events. Enterprise apparently has a deal with insurance companies where they loan cars after accidents. I once had to wait 12 hours for a car as they were over-booked due to accidents after a snow storm. One time I was rear-ended in an enterprise-rented car. The other person's insurance dealt with the damages, but 18 months later they called me up, demanding payment for the time the car was in the shop.
I used to rent from national/alamo as they would rent to me w/o mandatory extra insurance when I was under 25. They were bought out by enterprise and almost immediately went downhill.
Hertz has always had a car available when promised. I can also take the rentals across the border to the US w/o extra fees. Twice they had to upsize my car for whatever reasons and they gave me a discount to deal with the greater fuel consumption.
As somebody who is a loyal Hertz customer, I worry what the company will look like after the bankruptcy.
Also, great experiences with Hertz. I've rented through them in many countries and it's always been great service.
As for the article blaming their fleet for sticking with sedans for too long, to me as a European traveler, this is a feature. One time, I rented from a different company, which "generously" stuck me with some monster SUV, and I mostly hated the experience.
I also like sedans, particularly small ones that don't use much fuel. And all of the rental companies have sedans in their fleets. The issue is that they depreciate quickly because of Americans' preferences for trucks and SUVs.
I'm gonna make up some numbers here, but they illustrate the point. A Toyota Tacoma that costs $30,000 new might retain 75% of it's value after 3 years and 30,000 miles (these numbers are approximate). So you sell it for $22,500 and you take a $7,500 depreciation hit.
Meanwhile, an Hyundai Elantra that costs $21,000 retains 55% of it's value over that same period, so you can sell it for $11,500 and take a $9,450 depreciation hit.
As a general rule, trucks seem to retain their value very well, followed by SUVs and then sedans (at least in the US). Luxury sedans devalue the most.
The issue that Hertz had is that they bought a bunch of sedans and then the market preference shifted heavily to SUVs (with oil prices being low). So their initial calculations showed that they'd be able to sell their cars on the used market for price $X, but then they ended up being worth a lower amount, $Y, when consumer preferences shifted.
I can understand trucks retaining their value, as there is a clientele who drives them for utilitarian reasons (though not necessarily the ones who buy them new). I can understand why luxury sedans devalue quickly, as they are bought for prestige.
But it is not self evident to me why SUVs would have superior utilitarian value to regular sedans.
Crude oil was going for $113/barrel in 2014 (which is likely around the time that Hertz made the decision to buy sedans) and then went down to less than half of that a year later. While the price has fluctuated since then, the prices have remained fairly low. Meanwhile, Americans like SUVs for reasons that I don't fully understand, but it's just a fact. And when gasoline is cheap, it doesn't cost that much more to buy one, so demand is high, and therefore resale prices go up (at least compared to sedans).
But they're the only agency that actually rents cars I have any desire to drive.
I got a brand new full-size Volvo S90 sedan for what all the other agencies charge for a janky Corolla or something. And this wasn't a lucky upgrade scenario, they just had better cars at lower prices when booking.
The trunk on the Q60 wasn't big enough to hold all our luggage, the car required super-premium gas, it got crap gas mileage, and after the trip Hertz tried to bill me $150 for gas, even though I had paid the premium for a gas fill up at the end. I swore I would NEVER rent from Hertz again. I even cancelled a reservation I had with Dollar Rent-a-car when I discovered that they were owned by Hertz.
If I got a rental car that required premium gas, I'd still fill it with regular.
That being said, I hear you.
The only company that insisted on doing a personal credit pull for a rental that was being paid for on corporate card. And then declined me because "details didn't match". And then (initially) refused to refund my prepaid rental.
Enterprise on the other hand has always been a cakewalk for me.
Perhaps I'm thinking about this the wrong way. Oil changes cost next to nothing, the customer pays for fuel, everything from brakes to suspension components on down to wiper blades are irrelevant when they sell the cars before any of that stuff needs to be replaced. Maybe tires actually are their biggest wear item?
While you might generally not have to replace tires before, say, 30k miles, the tires on a rental car do not exactly live an easy life, and when you're talking about fleets going up to 50k miles, they'll absolutely be needing replacement.
It also makes me wonder if Dollar Thrifty was letting them get illegally low, or just below the Hertz standard.
Hertz's troubles seem pretty unrelated to the experience as a consumer.
While Turo is great for your weekend trip or whatever, it is not at all good for a business traveler.