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Rafat Ali, Skift
December 7th, 2022 at 12:00 PM EST
It is indeed fascinating to hear how many operational tech changes are coming into the car rental business, much as it has been a late digital adopter compared to other sectors of travel.
Rafat Ali
Hertz has been a remarkable turnaround story of the pandemic, during which it went into a massive bankruptcy, came out of it under an investor group led by Knighthead Capital and Certares, and then went public a year ago.
It hired the former chief financial officer of Goldman Sachs earlier this year, Stephen Scherr, to turn around the business, and has been posting record earnings on the backs of huge demand — and high prices — for rental cars as part of the big travel rebound ongoing since last year.
I met Scherr in Riyadh last week at the WTTC Global Summit and talked about the big picture opportunities and challenges he is navigating the company through. For him, all the larger tech and consumer trends are playing in favor of his business and the overall car rentals sector. An edited version of my interview with him, below.
Ali: What drew you to join Hertz, a company that went through bankruptcy during the pandemic?
Scherr: It is both what drew me to the opportunity and it is kind of the mission we’re on, which is I’m running a rental car company at a moment of enormous change in the automotive space generally and in the whole sort of proposition of mobility. And both of those sort of circumstances and trends are weighing heavily in terms of how we want to run Hertz as a business. On the automotive side, obviously we are moving in a very big way toward electric vehicles and Hertz has taken a rather aggressive strategic stance.
Ali: What are the EV numbers that you have today?
Scherr: So we have committed ourselves to purchase 100,000 Teslas, 65,000 Polestars, and we announced that over the next five years, we would buy 175,000 General Motors electric vehicles. It’s kind of across their models. And we’ll take delivery on those beginning model year 2023.
Ali: What would that constitute as a percent of the fleet in coming years?
Scherr: Well, our objective is that we will have 25 percent of our fleet electric by the end of 2024. The economic dynamics of this are themselves changing quite a bit, meaning Tesla was and is a more expensive automobile. [General Motors] is going to manufacture across a range of models. Everything from a compact sedan all the way through to a very expensive [sports utility vehicle].
Ali: Right.
Scherr: Cadillac Escalade and Chevy Suburban and so forth. That diversity will be of appeal to our customers and the different price points along that will be an equal appeal to us in the context of how and to whom we rent electric vehicles.
So change one in the automotive space is the introduction and our adoption of electric vehicles in the fleet. The second element is that the way in which younger people are going to experience the automobile is itself changing, meaning for a long time, the only way you really experienced a car was you either owned it or you leased it.
Now, younger people are less inclined to be an owner or to lease a car, but they still want the experience of the car. And so our view is that they will change the pattern of engagement in the automobile such that they could subscribe to a car or they could rent a car. And again, this plays into kind of a dynamic change in the auto space that plays in terms of how we’re going to run our business.
Equally, among that younger crowd, there’s a desire to sort of engage more in an eCommerce channel and speak to very few people in the way in which they commission a car, rent it, and experience it. And this is where making up for lost time in the context of enhancing the technology foundation that the company runs on, and then improving the eCommerce channel through which they can rent a car, is a critical element of what we’re trying to do.
If you look at those that are now engaged in the automobile, and here again is another change, suddenly you have Apple and you have Google, let alone Tesla and Uber and Lyft, all of whom are engaged. My ambition is to make use of the iPhone and the iPhone can geo locate the car, it can open the car, it’s now increasingly becoming the key fob by which the car can start.
Ali: And this is possible today?
Scherr: This is possible today. And then equally we have telematics in these vehicles which are electronics that sense and understand where the car is and what’s happening to the car, such that when you return the car, we don’t need to ask you what’s the mileage or what’s the gas because we’ll know it.
Ali: I saw you were doing a pilot in Sweden or something where AI is doing the inspection versus humans doing inspection.
Scherr: So in fact, it’s not just there. We’re testing a technology at Dulles airport in Washington where we take a 360 degree picture of the car as you leave and then we take the same picture when you come back. There’s no more debate. Was this damage caused by me or someone else or the like? And so all of this technology is being implemented now. Importantly, none of this technology needs to be expensively developed by us. There’s third party technology that’s out there and so we’re using it to do it, but technology can do a lot of things for us. It can improve the customer experience in a very profound way. Equally, it can permit us to run the company much more efficiently. By that, I mean we can use data and AI to understand what the demand curve for our product is.
We can better price our product by building and using new pricing tools. We can equally move our fleet around, based less on intuition or requests from one colleague to another that I need more cars, you need less. And instead, think about every given day, where do we need cars to be moved and what’s the most efficient means by which that can be accomplished.
And you may have read, we’re working with Palantir to sort of develop these tools, because at its core, the rental car business is a series of math equations.
Ali: Correct.
Scherr: Right? It’s a question of how do I optimize price given demand that I’m seeing? What’s the mathematical equation by where I need to have a car here or there or the like? And where do I want to move cars? And then how do I forecast based on historical sort of data compilation, what does demand look like? And therefore, how should I size my fleet? These are all super exciting things that are happening.
Ali: It’s such a tech and economist angle of what the business is.
Scherr: Right. But listen, I came from 30 years on Wall Street and …
Ali: The quant, I guess that’s what the word.
Scherr: It’s a little bit of the quant that’s in me, okay? But perhaps more relevant, I view this business as an asset management business. It’s a risk business. I talk to those that run fleet at Hertz in a way that’s quite similar to the way, as [chief financial officer] of Goldman Sachs, I would speak to the commodities trader, which is how long or how short do you want to be? In one case, it was oil or gold or copper. In this case, it’s cars.
So what are you seeing in the market that’s causing you to go along oil on one hand or automobiles on the other? It just so happens, different than financial services, we’re buyer and seller. So we’re a trader of cars. Very often, 300,000 cars on each side of a buy sell over the course of the year. But we happen to have a business that we run in between those two. It’s sort of very interesting to me, running it like an asset management business and thinking about return on assets and how do you sweat your assets so that they earn of optimal value for you is essential to running this company.
Ali: In terms of the average daily pricing, that I think the numbers you gave in your last earnings call was $69 per day, is that holding steady?
Scherr: Yes. It’s holding steady. I’m only pausing because you need to distinguish between of fundamental shifts in pricing versus week on week shift in pricing, which is less a reflection of the market and more reflection of fairly conventional peak and trough. Right? So you run. You run low into Thanksgiving. At Thanksgiving, you run very high again. Then, you run low into Christmas and then from Christmas to New Year. So I don’t want to confuse.
Ali: But in general, so the prices that have been very high.
Scherr: Generally, generally speaking, pricing has held in the context of the broader market and utilization has held in at very elevated levels.
Ali: One of the things we’re covering heavily at Skift is the whole blended travel, which is people mixing business and leisure. Are you seeing that in the business?
Scherr: We are. But you know what’s interesting? This is a very real benefit to car rental companies and hotels. I think a little less so to the airlines because you’re going to fly to Saudi and then you’re going to fly out. You’re not flying twice or three times. So they may capture you on a different day and therefore their load balance across a week may be more attractive and interesting.
But here’s the example we are seeing, and I suspect it’s true of the hotels, which is, a New York-based lawyer goes to Los Angeles on business and has meetings Tuesday, Wednesday, and Thursday. OK? That person pre-Covid would’ve gotten on the red eye Thursday night, flown back to New York, because they needed to be in their office on Friday. Now, they can work remotely on Friday. So they stay in Los Angeles and then they’ll spend the weekend.
So suddenly, I’ve added three days of a car rental that I never would’ve had from that customer. The average duration of our corporate rentals, relative to pre-Covid, is 1.6 days longer than what it was, suggesting that this phenomenon is happening. Now, I don’t know that I’m necessarily convinced just yet that business and leisure are merging, meaning if you didn’t have this conference to go to in Saudi, I’m not sure you would’ve come.
Ali: Correct.
Scherr: But the fact that you’re here on business, you’ll extend a day or two in order to then take on a leisure component. But there’s very clear evidence that people are taking kind of more liberties with the ability to work remotely, so it’s not just happening in, what I describe, corporate.
In the U.S., we’re seeing families take more vacations in a year because they’re not just taking Christmas and Easter. They’re also traveling on the week that is Veterans Day or the week that is Columbus Day, kind of the secondary and tertiary holidays, because the family can go to Disney and the father or the mother can work remotely from Orlando in ways that would’ve been intolerable. It would’ve been a vacation day or a vacation week. And now, they can steal away. They can work remotely. It’s not frowned upon. And suddenly there’s a second or a third vacation that’s in the offering and they’re renting cars.
Ali: You mentioned subscription. Are you experimenting? Is that happening?
Scherr: Not yet. But I’m, I’m really attentive to changing consumptive patterns, particularly among younger demographics because for Hertz to succeed, we can’t just be renting to 50, 60 and 70 year olds. We need to be renting and offering real experiences to the younger set.
I just look at my kids. I have four kids in their 20s. OK? Not a one of them owns a car. And frankly speaking, I’m not sure they really have appetite to own a car. But they definitely want to experience a car and they want the flexibility to sort of use a car and drive a car and make it part of a broader travel experience that they’ll engage in.
It matters to them if they’re going to New England during the fall or they’re going to the beach in the summer. It matters if they’re in a Mustang convertible. It matters. It’s part of the experience. And I think Hertz can sort put itself into the middle of that experience and be a real part of it in the context of what we have to offer.
Ali: When are the all the Tesla deliveries due?
Scherr: We have continuously taken kind of a very steady cadence of cars from Tesla as part of the 100,000 cars, so we’re now approaching 40,000 cars that we have in the fleet.
Ali: And the utilization of that is …
Scherr: Quite high. It’s high.
Ali: Are surprised you there?
Scherr: I’ll tell you what piece has surprised me. I’m not at all surprised at the take up in the leisure market and the willingness to pay quite a handsome premium for an [electric vehicle] relative to a combustion engine car. It also is an interesting opportunity for a leisure customer to experiment. The ultimate test drive of an electric vehicle is to rent from Hertz.
Ali: Right. Which is what I think the government is hoping.
Scherr: Correct. And by the way, even Mary Barra, the CEO of [General Motors], when we had announced what we were doing in buying and committing to 175,000 cars, she took note of the fact that a person who rents a General Motors car from Hertz is twice as likely to be a buyer of that car. We literally are the ultimate test drive where a person can take an [electric vehicle] or another car for two or three days.
The second piece is in corporate, and this I have found a little surprising. Maybe it shouldn’t have been. But we are seeing corporates put their employees into electric vehicles as part of their corporate rental program because they’re satisfying their own carbon footprint objectives. At the end of the year, we can tell a company, “You had X thousand employees rent X number of days in an electric vehicle. You spent Y dollars on those electric vehicle rentals,” and they can use that as part and parcel of their targets that they’ve otherwise been setting. The real interesting development, not so much a surprise, but an interesting development, is what we’ve been doing with Uber and Lyft.
Ali: Right. That was my next question.
Scherr: You alluded to it earlier, which was everybody was sort of spelling the demise of the rental car companies.
Ali: Rental cars. Certainly five, seven years ago, we were all saying, “I’m taking an Uber instead of renting a car.”
Scherr: Correct, so everybody was of a mind that, with Uber and Lyft, why would you rent a car? It’s cheap to take an Uber or a Lyft. You get to where you’re going.
Ali: It’s certainly not cheap anymore. That’s for sure.
Scherr: It’s not cheap anymore and it didn’t happen, meaning people still like the flexibility of having a car. Now you could make the argument that in a place like New York where parking is a challenge and so on, you’re probably going to look to take a taxi or an Uber or Lyft. But in cities like Los Angeles or Chicago or what we see among leisure travelers in places like Orlando, they want the car. They want the car to avail themselves of the flexibility to go where they want, do what they want, and so forth. And that’s been maintained. Now in the spirit of if you can’t beat them, join them, here it is. We’re now renting cars to Uber and Lyft.
And it’s a very interesting proposition in that, let’s just take Uber. Dara has set for his company fairly broad and fairly aggressive targets about being electric. Now, the problem that Uber has is that electric cars are expensive. Uber needs to maintain the relationship with the drivers wherein they do not become employees of the company as part of their business model. So that limits what Uber can do in terms of buying or subsidizing a car for that individual.
To the extent that they can’t afford an electric vehicle, it’s hard to imagine how they would achieve the corporate objective of being electric in as substantial a way.
So the much more cost effective means of which you get your fleet electrified is you facilitate your drivers to rent electric vehicles from Hertz. We rent those cars at much cheaper implied prices to them than we would get from a daily rental by a leisure customer, in part because the driver is keeping it, by and large, for four weeks. And it means we don’t need to touch that car five, six, seven times as we would if you were just renting that car.
Ali: So the costs are lower on maintenance.
Scherr: Yes, our costs are lower. So the margins that we make are still attractive. And Uber driver is making a lot more money by renting a car from Hertz. They don’t have lease payments. They don’t have financing costs. The insurance is much more affordable. Gratuities are higher among customers that get into a Tesla for an Uber.
And Uber provides subsidy to the driver in the form of a dollar or so of an added payment for every electric ride that the driver engages in. The driver is making off considerably better in a rented [electric vehicle] from Hertz than they otherwise would in the older combustion engine car that they were likely driving.
Ali: Well that’s fascinating. Moving on, you’re not seeing any weakness in demand with the economy and everything else?
Scherr: I lived a professional life where my entire existence was as a risk manager, so all I did was peer around corners and try to think about where could I sort witness and experience risk. There’s no question that the economy is at risk of softening, and if the economy softens, inevitably demand for all travel will come off. We’re not seeing it yet, but I think it would be foolish not to assume that that risk is not there.
Now, in the case of the rental car industry, and I’ll speak for Hertz, I can do a number of things different than the rest of the travel industry. If demand falls off, I can sell cars. I can lower and tighten my fleet and I can do that rather quickly. And then if it turn turns, yet again, to the positive side, I can use the used car market, again, both to buy and sell very, very quickly so I can manage my fleet.
Second, there’s almost no one that makes a decision to go on a vacation or not or to go on a business trip or not because the rental car is $5 up or down. So we’re a taker of that demand. The overall cost of that trip, including hotel, airline, and rail car, is way more heavily on the leisure sort of customer who’s making a decision about whether they can afford or are inclined to take the vacation.
The business traveler is making that decision based on whether the market requires that they go on the business trip, meaning if a consultant or a lawyer or an investment banker is going on a business trip, that decision is based on client engagement and the prospect of commerce. They’re not likely making that decision because the rental car or the hotel or the airline is 5 percent or 10 percent higher or lower. There are more macro elements that are playing out. I just feel that our part of the travel space is better equipped to handle change in the overall economy and in the demand curve. I could sell 20,000 cars next week. A hotel chain cannot dispose of rooms. And the airlines can only mothball or park in the desert they’re playing, but it’s very difficult to simply just rid themselves of the fleet.
Ali: Last question. What your relationship today with online travel agencies and how do you see the state of direct vs indirect channels?
Scherr: Your question’s super timely because one thing that I’m looking at now is re-energizing the Dollar and Thrifty brands. I think to their credit, Avis has done a really good job with Budget. Hertz has over the last several years, not paid the kind of attention to the Dollar and Thrifty brands that it ought to.
The reason I want to do this is because I’m dealing with multiple customer channels, including those come through the OTAs. Those people are much more motivated by price than they are level of service, brand value, or loyalty programs, and so I’d sooner use my Dollar and Thrifty brand in through the channel of the OTAs because I can capture quite a bit of price sensitive demand at a lower cost because I’ll run less new cars. I’ll run a lower service proposition than what I offer my best customers through Hertz. And so I’m still making very attractive margin through the OTA channel and I can preserve Hertz as a much more sort of elevated brand for those that want the kind of service and the car, the new car choice, and the loyalty points and program that I can offer them. And so your question’s a timely one because I’m now beginning to explore what we do with those two brands.
Ali: The margins on cars for OTAs, it it low?
Scherr: I think that there’s a lot of changing dynamic at the OTAs that I’ve been watching, including the potential for consolidation of multiple brands that they own, in common. And I think there’s opportunity for the OTAs to actually gain customer loyalty to them as opposed to the underlying product.
Ali: Expedia is trying to revamp their loyalty program, for instance.
Scherr: Correct, so I’m not particularly minded to fight that. And so if I can identify a price point on a volume of cars that I can sell through the OTAs and they can do what they want with that as part of, for example, a package that they may sell to their customers, which could include a hotel, airfare, and a rental car, I’m not particularly minded to unpack that. They can make a decision about what their profit margin is on the totality of that package. Maybe there’s a little bit in the airline and a lot in the rental and a little bit in the hotel. I don’t know, but that’s kind of their business. And they will wind up paying customer acquisition. They’ll wind up paying loyalty, which would be what they are desiring in the context of creating a greater sense of loyalty tha the travel customer owes them.
Rafat Ali, Skift
December 7th, 2022 at 12:00 PM EST
Tags: ceo interviews, hertz, mobility, stephen scherr
Photo credit: Hertz car rental at Tampa International Airport on Tuesday September 28, 2021 in Tampa, Fla. Casey Brooke Lawson / Hertz
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