Hertz Shifts Gears: Plans to Sell Part of EV Fleet and Reinvest in Gas Vehicles Amid High Costs

Hertz Global Holdings Inc., the renowned car rental company, is recalibrating its investment strategy in response to the challenging economics of electric vehicles. In 2021, the company had ambitiously ordered 100,000 Tesla EVs but has now resolved to sell about a third of its EV fleet in the US and pivot back towards gasoline-powered cars.

This decision comes on the heels of a recent regulatory filing in which Hertz disclosed the commencement of a sale involving 20,000 EVs. This process started last month and is expected to run throughout 2024, with a projected implication on the company's finances — specifically a non-cash charge of roughly $245 million from increased depreciation expenses to be reported in their Q4 results.

The move signifies a stark reversal in Hertz's sustainable transport ambitions, highlighting the diminishing consumer appetite for electric cars in the US. Specifically, the sales growth for EVs in the country has decelerated significantly, limping to a meager 1.3% increase in the last quarter of 2023, as buyers grapple with soaring costs and climbing interest rates.

Hertz CEO Stephen Scherr attributes this pivot to the ongoing high costs connected with EVs. Despite attempts to mitigate these expenses, Scherr acknowledges the challenges have proven daunting. This shift has also adversely affected Hertz's stock value, which saw a 4.3% dip to $8.95 in New York trading hours following the news, adding to a 32% slump over the prior year.

Despite the current climate, Scherr maintains that Hertz is closely monitoring EV demand to gauge future acquisitions. Consequently, existing agreements to purchase large numbers of EVs from automakers such as General Motors Co. and Polestar might be subject to extended timelines.

Hertz plans to allocate funds from the EV sale towards the purchase of gas-powered vehicles, seeking equilibrium between their EV supply and the anticipated demand. This backpedal away from EVs is a retreat from the strategy envisioned to capitalize on premium rental charges and strong residual values for the all-electric fleet.

The company remains observant of the EV market and is intrigued by GM's strategy to offer more economical EV models such as the upcoming Chevrolet Bolt redesign and the Chevy Equinox. Scherr believes these lower-priced options could fare better in the rental market.

The downsizing of its EV fleet is expected to favorably influence Hertz's cash flow and profitability both in the immediate and subsequent years. By the end of 2025, the company foresees the potential of realizing up to $300 million in cumulative incremental free cash flow over the next two years, driven by anticipated increases in revenue per day and decreased depreciation and operating costs.

In conclusion, growing depreciation expenses—exacerbated by Tesla's price reductions—and high repair costs are central to Hertz's strategic adjustment. These factors have not only undercut the company's financial performance, contributing to a miss in third-quarter earnings estimates but also have moderated the company's pace towards an EV-dominant future.

Hertz, EVs, Strategy