In many ways, the first quarter of 2022 will go down as one of Hertz’ best quarters ever. To put that into perspective, Hertz’s adjusted EBITDA of $614 million was its best first-quarter performance since 2007.
Yet vehicle sourcing remains the industry’s biggest challenge and will continue to do so through 2023. In this environment, Hertz is embarking on the largest car rental initiative since the invention of consolidated rental facilities. This initiative, of course, is electrification.
Other major car rental companies have been renting electric vehicles in small numbers and in pilot programs for years. Yet Hertz was the first to go public in a big way last year when it announced a 100,000-unit deal with Tesla – supposedly for the fleet in calendar year 2022 – and another deal. for 50,000 Polestars over five years.
During Hertz’s first quarter conference call, CEO Stephen Scherr and Chief Financial Officer Kenny Cheung dig deeper into Hertz’s plans to grow electrification and how that will change fleet dynamics for Hertz and, by extension, leasing. of cars. This call was Scherr’s first. While interim CEO Mark Fields may have started Hertz’s electrification initiative, Scherr will be the one to execute it.
Scherr put Hertz’s electric vehicle efforts to date into context: Teslas are available in its daily rental fleet in 30 markets and are available to Uber drivers. Hertz plans to expand to 40 markets by the end of the year, with both the Model 3 and now the Model Y.
“A considerable portion of our fleet will be electric by the end of the year,” Scherr said on the call, though he didn’t specify exact numbers. Anecdotally, a recent passerby from LAX in Los Angeles saw about 100 Teslas in Hertz’s rental lot. That happens.
Efforts are also underway to expand the charging footprint.
Infrastructure planning should not be overlooked, especially on airports which also need to coordinate with utilities to provide additional power that will serve not only rental fleets, but also airport visitors and electric vehicles. much larger ones that will serve the “airside” operations of airports. And it’s not as simple as threading a new cable.
Certainly, Hertz and the rest of the industry will also face challenges related to the logistics of charging, especially at airports with the need to turn cars around quickly. (One solution: encourage renters to charge on the road and return the EV with enough charge to spin it up quickly.)
While the actual number of EVs Hertz has fleeted may be vague, one thing is clear: Hertz is poised to reap first-mover advantage in this new EV rental market. What does this actually mean?
First, there is an opportunity to grow electric vehicle rentals in the corporate space. Hertz achieved its impressive returns last quarter without fully benefiting from normal business operations, which amounted to 63% of 2019 comparisons and 35% of pre-covid international inflows.
“The electric vehicle is proving very attractive to our corporate customer,” Scherr said. With electric vehicles, “they meet their own ESG and carbon footprint objectives”.
Indeed, ESG (environmental, social and governance) has become in two years one of the main drivers of the adoption of electric vehicles in corporate fleets. Companies can probably pay a premium for fulfilling their mandates.
Let’s move on to another area of B2B — rentals to TNCs (transmission network companies). A significant percentage of Hertz’s Teslas are allocated for rentals to Uber drivers. That company is experiencing 80% utilization and driver waiting lists, Scherr said.
Rental to TNCs is not a new business for Hertz, and it had been a good stable business before the pandemic. But let’s remember that it’s still a small number of Teslas that are flocking to early adopter Uber drivers. (Knowing the low margins in the ride-sharing market, the jury is still out on whether it makes sense for Uber drivers’ bottom line to rent a Tesla Model 3 or Y instead of a lower-cost ICE sedan.)
Nonetheless, the fact that TNCs, businesses, and consumer outlets lease EVs enables multiple channels that ensure high usage. Additionally, the dynamics of this type of B2B leasing could translate to other types of fleets, Scherr said. (When an adequate supply of Ford E-Transits becomes available, leasing them from last-mile delivery companies is a no-brainer.)
On both the business and leisure side, electric vehicles command higher prices while realizing lower maintenance costs and less downtime for routine maintenance. The fact that the Tesla Model 3 is an aftermarket champion mitigates the high initial cost.
Here’s why EVs are important in this very tight supply market: With reduced maintenance needs and costs, EVs should be able to stay in the fleet longer than traditional ICE vehicles. So, could a Tesla reasonably remain in the fleet for 24 or even 36 months instead of 12? We will know in 24 to 36 months.
If so, EVs — especially Teslas — should enjoy an even better amortization curve while still posting a high daily rate.
Even bigger in terms of fleet, Hertz is not exclusive with Tesla and Polestar. Opening up acquisitions to other EV makers further diversifies the fleet and hedges against a particular automaker’s supply constraints, while easing Hertz’s vehicle turnover burden.
Finally, with the car rental industry enjoying record rental rates overall, everyone is trying to figure out when the balloon is going to deflate. In that regard, Scherr said he thinks EVs have “a nice defensive floor” when it comes to pricing. “They’re a rare component of the fleet just on a relative basis,” he said. “Therefore, (our) ability to hold the price, I think, is higher.”
Of course, with the first mover advantage comes the burden of laying down a track without a tested game plan. Since much of this is theoretical, we’ll have to wait to find out how Hertz solves these problems and then learn from them.