By Hertz Global Holdings recently announced its decision to sell roughly 20,000 electric vehicles (EVs), representing a decrease of approximately one-third of its current EV fleet. This development sheds light on the divergent strategies pursued by Hertz and its chief competitor, Avis Budget Group.
In a securities filing released on Thursday, Hertz stated that it would use some of the proceeds from the sale to invest in internal combustion engine (ICE) vehicles in order to meet customer demand. The specific types of EVs to be sold were not disclosed, although it is likely that a significant portion of the fleet consists of Teslas, which account for around 80% of Hertz’s EV inventory.
Hertz made a bold move into the world of EVs, with roughly 11% of its fleet—comprised of nearly 600,000 vehicles—being electric. In stark contrast, Avis took a more cautious approach, with an estimated 2% or less of its fleet consisting of EVs. These figures were derived from the research conducted by Goldman Sachs analyst Lizzie Dove in December.
The decision by Hertz to reduce its EV fleet did not come as a surprise. During an investor call in October, the company emphasized the high costs associated with EVs, including repair expenses and the decline in resale prices due to Tesla’s price reductions.
However, despite Hertz’s assurance that this move would positively impact its free cash flow—projected to increase by $250 million to $300 million over the next few years—the news has had an adverse effect on the company’s stock price. At the time of writing, Hertz’s shares were down 3.7%, trading at $9.01. Tesla shares also experienced a decline, down 2.9% at $227.25.
The lukewarm response from American car renters towards EVs is evident. Despite Hertz’s incentives, such as the offer of an additional free day with a two-day EV rental before Christmas, customers appear to have reservations regarding factors such as limited range and the availability of charging stations—particularly when renting vehicles away from home where overnight charging may be challenging.
These signs do not bode well for the demand for EVs in the United States. Sales growth in this sector is slowing down as electric models approach the 10% mark of new-car sales in the country.
Avis Outperforms Hertz: A Closer Look
In the world of car rentals, Avis has been making waves by surpassing its competitor, Hertz. With a market value almost double that of Hertz and a significantly higher revenue, Avis is clearly the preferred choice for investors.
Led by CEO Joseph Ferraro, who has dedicated over 40 years to the company, Avis has managed to outshine Hertz, which is now helmed by former Goldman Sachs chief financial officer, Steve Scherr. While Hertz has encountered challenges with its electric vehicle (EV) strategy, Avis shares have remained strong.
Despite a slight decline of 1.2% to $166.84, Avis shares have performed exceptionally well in the past year, with a negative total return of only 5%. On the other hand, Hertz has suffered a significant downturn of 47%. Such contrasting numbers highlight the clear preference of investors for Avis over Hertz.
In a recent interview with CNBC, Scherr acknowledged the need for a “strategic adjustment,” referring to the decision to sell a third of the EV fleet. He claimed that it was a response to the reality of the situation. Scherr remains optimistic, believing that this move will ultimately have a positive impact on the company’s performance. He also noted that there has been a strong demand for rental cars during the holidays, which is expected to continue into January.
Scherr joined Hertz in early 2022, around the same time the EV strategy was being implemented. He received a multiyear compensation package worth $182 million, primarily consisting of stock awards tied to the share price. In comparison, Ferraro received a total compensation of $13 million in 2022, including stock awards.
When Hertz initially announced its EV rollout in late 2021, investors reacted positively. The expectation was that renters would be willing to pay a premium for Tesla vehicles, while corporations would eagerly encourage their employees to rent EVs for business purposes to align with their environmental, sustainability, and governance (ESG) goals.
However, this bullish scenario has not played out as anticipated. The reality has been quite different from the initial optimistic projections.
Despite the setbacks faced by Hertz, Avis continues to stand strong, demonstrating its resilience in the car rental industry. With a larger market value and higher revenue, Avis has proven to be the preferred choice for investors looking for stability and consistent performance.
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