Hertz Q3 Earnings Report Kills Two Tesla Myths With One Stone

According to the rental car company's CEO, BEVs represent "about 11% of the total fleet," currently comprised of 562,267 vehicles. That means Hertz has 61,8449 electric cars to rent. Stephen M. Scherr said that "Teslas are 80% of all BEVs in Hertz's fleet," or 49,480 units. If you take the whole flee, Teslas are 8.8% of all vehicles the company owns.

Scherr noted that "while conventional maintenance on electric vehicles remained lower relative to comparable ICE vehicles in Q3, higher collision and damage repairs on EVs continue to weigh on our results and negatively impacted EBITDA." The Hertz CEO elaborated on that when he said that "collision and damage repairs on an EV can often run about twice that associated with a comparable combustion engine vehicle."

In other words, you may really avoid changing the oil or replacing brake pads with BEVs, but that is far from the only expense they may present. Any fender bender can lead to very high repair costs. I have not heard of Hertz buying a Rivian, but owners are finding out that such services may cost them up to $42,000. BEVs are not being conceived with repairability in mind, and the Hertz report demonstrates that quite clearly.

The CEO also mentioned salvaged cars. When "MSRP declines" happen, "a salvage creates a larger loss and, therefore, greater burden." Scherr used a euphemism for discounts to mention the "difference between our carrying value and the market value of that car" that these measures create. He also did not shy away from recognizing that they were "driven primarily by Tesla."

The depreciation per unit per month increased by 52% in one year. It went from $185 in Q3 2022 to $282 in Q3 2023. Compared to Q2 2023 ($195), the depreciation increase represented a 45% jump in these costs. Remember that Tesla represents only 8.8% of all the vehicles the company owns. If that share were higher, the financial hit the rental car company had would also be more significant. This is certainly related to Hertz's decision to scale back on BEV purchase, even if the explanation is not as straightforward as it could be.

Scherr told investors at the Q3 2023 earnings call that the company's rideshare business is complementary to its EV strategy. In his words, the BEV fleet is focused on being a tool for the workers who need them for apps such as Uber. According to the Hertz CEO, there are "higher incidents of damage among EV rideshare drivers," which explains how the company discovered so soon about salvaged BEVs.

Due to these higher repair bills, the company decided to move the electric cars to the leisure channel, which left this business segment "over fleeted with EVs." This suggests that those renting a car for their vacation are not willing to spend time on chargers: they just want to drive, stop quickly somewhere when the vehicle needs more energy, and keep going wherever they want. Who knew, right?

I recently wrote about how the price cuts could negatively affect the electrification shift. At the time, I did not remember that Hertz had promised to purchase 100,000 Tesla vehicles. Ironically, that made the company shares considerably appreciate when it was announced. Scherr said that "taking account of the impact on depreciation, collision and damage and RPU (revenue per user) relating to our EV fleet, we estimate that had our fleet in Q3 been similarly sized but comprised solely of ICE vehicles, our EBITDA margin would have been several margin points higher."

Although he was very candid about what made Hertz's results worse than they should have been, the executive also said that "this frames our challenge in as much as it reflects on the stability of our underlying business." The rental car company is not alone: several carmakers are also reviewing their plan for electric car production because the demand proved to be lower than they expected. Hertz's problems show some of the reasons for that.

In a conciliatory tone, Scherr said that he and his team "nonetheless remain committed to our long-term strategy to electrify the fleet. We believe in the value of being a first-mover." That would give Hertz "a clear understanding of the key levers needed to deliver a more profitable EV rental fleet in a world that is moving toward electrification. Transitions of this magnitude are not easy, and there are important factors, including charging infrastructure, the pace of OEM production, and the growth of the EV aftermarket that we simply cannot control."

More than the financial results of a rental car company, what Hertz presented was an X-ray of the challenges BEVs have to beat. While they are not adequately addressed, turning electric cars into a mainstream option will be increasingly more difficult not because of what people want or think but due to what they can experience. Lowering prices and killing residual values is more of a Tesla blunder than something specific to them, but it will not help either.