Economics, Politics, Travel

Cruisin’ For A Bruisin’

June 10, 2020
hertz-corporation

“I hear hurricanes a-blowing
I know the end is coming soon
I fear rivers overflowing
I hear the voice of rage and ruin…”
– Creedence Clearwater Revival

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Recently, Faceplant and other social media outlets have been ‘alive’ with stories
about the COVID-19 impact on the airline industry.
Rightly so – it’s devastating. But that nasty iceberg carries a lot of baggage,
and not just in its overhead compartment.
The story is larger, and it ain’t pretty.

On May 11th, the car magazine Road & Track published a story about the effects of COVID-19 on the car rental business in America. Its evaluation was not good news. Two days later, another R&T article focussed specifically on Hertz and gave a detailed account of its predicament. The numbers were quite staggering.

Mere months ago, Hertz had between 550,000 and 650,000 rental cars (depending on sources) installed on 12,400 lots around the world. Hertz’s parent company also owns Dollar and Thrifty car rental companies which raises those numbers significantly. These companies (Enterprise and Avis/Budget, too) operate with a constant turnover of vehicles so that they have the newest models in stock for customers. Part of that turnover involves selling off older models as used cars and bringing in new, updated vehicles once mileage numbers reach a pre-calculated figure. As part of that ‘business model’, last year Hertz purchased a further 1.7 million U.S.-made vehicles. This purchase alone accounted for approximately 10% of the entire output of the U.S. automotive manufacturing industry.

At the end of the first quarter, this year – March, the true beginning of the impact of the virus – Hertz had a debt load of almost $19 billion with less than $1 billion in cash reserves. The share price dropped by 82%. They renegotiated with lenders, and the first ‘adjusted’ payment was due on May 22nd.

Late on that same Friday Hertz filed for bankruptcy essentially setting in motion a veritable waterfall of global insolvency proceedings against it. The creditors – of which there are many – unanimously rejected Hertz’s ‘business as usual’ stance while they maneuvered for more time.

Now operating under bankruptcy protection and restructuring, practically any outcome is possible. But this event only hints at the bigger picture.

A sell-off of Hertz assets is likely – they’re already unloading big-ticket vehicles such as their Corvette Z06s and Camaro ZL1s. The sell-off addresses two major points: It creates some much-needed cash flow, and it reduces overhead. The latter will surely mean closing a number of under-performing rental lots. However, because of the virus and the global lockdown that has accompanied it, most locales will be under-performing, with perhaps airport locations taking the biggest hit. The TSA announced recently that domestic air travel in the United States is down 94% since the end of last year. Foreign long-distance travel hasn’t fared much better.

car rental signs at airportIn general, this one segment of the travel industry has reached a calamitous state. I have personally experienced this downturn. Twice since February I have rented cars for short shopping trips, and the rates have been insanely low. A rental a week ago for a camping trip (a premium 4×4) resulted in a total cost for four days (taxes in) that was less than I would be paying for one day (pre-tax) in normal times! I actually visited the rental office in advance and asked if the agreed cost was a mistake or an oversight. Not at all, I was told. It was explained to me that obviously rental cars make no money sitting in lots. Plus, without mileage being added onto the cars they will not meet company accounting matrices that trigger resale. This same company was renting a Toyota Yaris or a Hyundai Accent for as little as $9 a day, pre-tax!

There are two other aspects of this issue that compound the dire consequences that could await a car rental industry collapse.

1. The selling-off of assets. The assets are, of course, the cars themselves (most of the locations are leased) which brings us to the used car market. For decades the used car industry, which is sometimes euphemistically referred to as the ‘pre-owned’ auto market (think: Little Old Lady From Pasadena) has thrived. Year-on-year increases in sales were the norm. At the end of March, sales figures were off – down by 20%. So imagine hundreds of thousands of vehicles suddenly entering a used car market in decline. What happens to THAT business model?

2. The car manufacturing industry. As noted, a sizeable chunk of Motor City’s output goes to the car rental industry. (Another big chunk goes to corporate leasing and fleet sales. With most companies, big and small laying off employees, even in middle and upper management, and some shuttering altogether, the market for leased vehicles and fleet sales has diminished significantly.) What happens to Ford, Fiat Chrysler, General Motors, and others? Less demand – significantly less demand – means fewer new vehicles required, means smaller quotas, means fewer new cars, means fewer assembly line workers, means shuttered plants in towns existing almost completely because of the auto industry. At various times over the past 30 years (economic downturns), each of these auto behemoths survived only because of U.S. government bailouts. They were all kicking the government tires within the past month for some form of a cash infusion, loan guarantee, or significant tax break. What happens later? Next month? Next year? What of the big overseas automakers that supply vehicles to the rental market: VW, Toyota, Hyundai, BMW… how long is THAT list? It should be noted that prior to the pandemic ’lockdown’ various auto manufacturers began experimenting with short-term rentals from their own new car lots across Canada and in the United States. That’s direct competition.

While yet another large company with equally large brand name recognition goes down, the effect of Hertz’s imminent demise goes much deeper than might be noticeable at first blush. Here’s the second blush.

On the same day that Road & Track published their Hertz story the CEO of Boeing was interviewed about how the aircraft maker was coping with the effects of the COVID-19 virus. Among other things, he said, “…with certainty…,” at least one major American airline would collapse by the end of the year. I suppose that might have been a veiled reference to an anticipated drop in Boeing’s sales figures, a warning of sorts. But think of this… The airline industry was in upheaval long before the pandemic arrived. Consolidation, buy-outs, sell-offs, bankruptcies, even incestuous code-sharing deals have been the norm for more than 20 years. Remember Canada 3000? What about Canadian Airlines, Wardair, and Pacific Western Airlines…? All three, over the course of several byzantine ‘deck chair’ shuffles, ended up as part of Air Canada.

panam-twaToday, because of the virus, Air Canada has lost more than a billion dollars and cut more than 20,000 jobs since January. WestJet, Air Canada’s only real national competitor, has canceled 18,000 domestic flights in the last month alone. Both airlines are now having talks with the Trudeau government about some form of emergency relief. And that’s just in Canada.

In the U.S. both PanAm and TWA, once the most recognized brands in the sky, went under (in 1991 and 2001 respectively). Continental completed its merger with United Airlines less than 10 years ago, and now the Continental brand has been almost entirely erased. Delta Airlines absorbed Northwest Airlines. American Airlines took over U.S. Airways and America West Airlines (and what was remaining of TWA in an earlier deal). Eastern Airlines was completely liquidated due to bankruptcy. Virgin America was purchased by Alaska Airlines. Braniff, Frontier, and Aloha Airlines just disappeared. Thomas Cook Airlines collapsed in a single afternoon just this past September, stranding thousands of passengers worldwide. Their assets were liquidated by the end of the year. In Europe, Air France and KLM merged, and Alitalia has had such dire financial problems for years that it is now being run by the government of Italy.

The list goes on and on. Virgin Australia and South African Airways are now bankrupt. Other airlines are canceling orders for new planes, and mothballing new ones that have already arrived. Airbus SE, the Europe-based competitor to Boeing, has 60 of those new airplanes stored in hangars with no buyers. They are predicting a minimum of 8,000 grounded planes by September. With an average of 6 full crews per plane (times two for the long haul flights), it’s possible that more than 90,000 pilots, navigators, flight attendants, and other staff will be out of work.

What about hotels in the age of isolation (he says with only a hint of irony)?

More than two months ago CBC News headlined the following:

“Canada’s hotel industry hammered by COVID-19.
As occupancy plummets, hotels closing, cutting staff and worst is yet to come.”

Susie Grynol, the CEO of the Hotel Association of Canada, was quoted as saying:

“The hotel industry virtually crashed over the last 10 days.
In a period of 48 hours last week, occupancy dropped by 50 percent across the industry.
Today we’re sitting at under 10 percent, which is not enough to sustain business operations,
so in the last two days, we’ve seen at least 100 hotel closures.”

That was the third week of March.

In mid-May, HospitalityNET, a U.S.-based travel and leisure industry member organization whose focus is primarily hotels, released a press communique with the following double-barrelled subject line:

“Hotel Industry On Brink Of Collapse Releases Roadmap To Recovery”

hotelFor perspective, the first industry ‘roadmap to recovery’ was issued on March 1st! Consider the escalation of the global pandemic crisis since then.

I’ve spent the majority of my television career producing food- and travel-based TV programs. Since the late 1980s, I’ve cultivated relationships with the travel and leisure industry worldwide to assist in the production of those shows. Business connections for ground, air, transportation, restaurant, accommodation, resorts, government tourism agencies, and public and private consultants on a location-by-location basis fill my Rolodex. I’ve come to know many of the personal contacts across the industry very well. I can tell you when I talk to some of these people their outlook is dim, and the only ‘recovery roadmap’ they believe in is the one where everything returns to normal. Why? Because that’s the foundation on which their original business was built, and, more importantly, it’s how it operates. We can balk at that statement and say that it’s the same for everybody, that we’re all going to have to ‘adjust’ and learn to live with the ‘new normal’. But are we, the consumer, ready for the new tax on the new normal? Cost.

Are we willing to spend $1,000 to fly from Vancouver to Toronto for a visit? What about paying $4,000 in Economy Class to get to the south of France or the north of Italy only to discover your €1,000 per night hotel room has a shared bathroom down the hall? What about arranging a second mortgage for a night on the town for two in London’s West End? (Only partially joking.) The concept of ‘budget’ travel will need to be redefined in the world of the new normal.

There are at least two major hotel chains that have put wheels in motion to divest themselves of resort properties in Asia and the South Pacific in the last couple of months. I’m sorry – how’s THAT going to work?! You have a resort in Bali, or Malaysia, maybe Fiji that you wish to sell. Who’s going to buy it? Hotels have been taking over the management of other properties with or without rebranding for decades. Maybe these other hotels required a dose of austerity to stay afloat, and maybe the corporate board saw it as an astute business opportunity. But purchase a five-star (or higher) resort – with all the costs associated with running it – when it’s already languishing at barely 10% occupancy? When it costs $5,000 per person just to fly there? As they say in the Deep South: That dog don’t hunt!

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So, in the end, what we’re dealing with here isn’t the COVID-19 impact on car rentals, or airplanes, or hotels, or any of the small and medium-sized interstitial companies that supply or rely on the big names. This is about the future – short and long term – of the entire travel and leisure business.

Some people may not be aware that the Travel and Tourism Industry is the largest industry in the world – it’s huge. In terms of 2019 numbers, the industry contributed over $9 trillion to the global economy (U.S. dollars). Almost a third of that went directly to America’s Gross Domestic Product. Individual cities, counties, provinces, states, and regions can thank tourism for significant additions to their bottom line. There are entire countries where tourism is the major monetary provider to their GDP: Mexico, Thailand, Macau, Hong Kong, Morocco, Panama, Greece, Croatia, and Iceland, plus many of the smaller island nations in the Asia Pacific region.

In 2017 numbers – the latest year for which accurate statistics exist – tourism supported about 119 million jobs worldwide or almost 4% of the global workforce. With a few minor exceptions (mostly political hotspots like Iran, Libya, and Afghanistan) year-on-year tourism arrivals have increased in every country in the world since 2000. And now we’re not allowed to leave home.

If you ever wondered why gazillions of dollars are spent – in any denomination you care to choose – on convention centres, hotels, sports stadiums, and airport hubs, it’s because of the Travel and Tourism Industry. When tourists and travellers arrive anywhere (by plane), and drive around (by rental car), and stay for a while (in a hotel) they bring money with them and they spend it. In bars, taverns, and souvenir shops; at baseball, football, hockey, and soccer games; on clothing, gasoline, food, concerts… everything. That’s the true trickle-down economics of this global problem. And therein lies the math that, for the moment, no longer adds up.

Yes, it’s a complex issue, and the health and welfare of every human on the planet is and should be our combined primary focus. However, decisions are being made to move forward. Some of those moves are baby steps, some are giant galumphing missteps, but we are moving.

In the most ironic example of how twisted this whole tourism problem is, and how the Travel and Tourism Industry touches practically everything in our lives in one way or another, consider the fate of the Galapagos Islands.

The islands are an administrative province of the country of Ecuador and have been a designated UNESCO World Heritage Site since 1978. Because of its environmental protection policies (there are many for good reason) tourism is frowned upon by the locals and the mainland government, and as such travel and tourism is strictly regulated. Tourists are allowed on only two of the so-called ‘main’ islands – and only then after being screened – and banned from the remaining twenty. However, tourism dollars are what feed the islands’ economy, which in turn provides the administration overhead and support for the many ecological and environmental programs, research projects, and marine protection so necessary to its survival. In the last two months they have lost $50 million because of COVID-19 and – you guessed it – the lack of tourism is to blame. The result…? The administration efforts, including the programs and projects, have been curtailed, and only a return of tourism will bring it all back.

Sometimes it’s the small things. As I was finishing this piece this morning I received an email from ROAM Mobility, a small Canadian communications company that provides an American phone number and a second Smartphone SIM card for travellers to the U.S. Here it is in part:

“Dear Valued Customer: To call COVID-19’s impact on travel severe would be an understatement.
As a business built on enabling communication for travellers, Roam Mobility has, unsurprisingly, been significantly affected.
As a result, we regret to inform you that Roam Mobility will cease operations on June 30, 2020.”

roam-mobilityIt was a great system, and one of those little travel perks that filled a void. You pay a small fee for the phone number (which is yours to keep), and a VERY small fee for whatever day-to-day service you wish: phone only, phone and text, phone and data, or a phone, text, and data bundle. It switches on when you ask it and switches off when you tell it to. The best part… No exorbitant roaming charges on your home provider, and all outgoing phone calls and texts are free to anywhere in North America; data is available at varying low rates depending on which U.S. provider you connect with. I’ve been using them for the past five years and saved a bunch of money.

The house of cards has caught a breeze.

Is there an upside to any of this? I sure hope so. When you’re given the green flag, travel. Maybe small concentric circles locally at first. Go out, go shopping, go for dinner, read that newspaper at your favourite coffee shop again. Visit friends, relatives, co-workers, go out with them, see stuff, experience stuff. Buy something – small, medium, large, or Tall, Grande, Venti – whatever your poison. Purchase a keychain, a Smart TV, a car, a popsicle. TWO popsicles. Take a car, a bus, a train, a ferry, a plane – go somewhere beyond your block, your city, your country. Or stay regional – it doesn’t matter, it will all make a difference.

I’ll leave y’all with this…

Robert Louis Stevenson in his first career as a travel writer said it best:

“I travel not to go anywhere but to go. The great affair is to move!”

Sources: CNN, Forbes, Wall Street Journal, New York Times, World Economic Forum, WorldAtlas, Statista, Hospitality Net, CBC, Boeing, Airbus

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But wait, there’s more! This from a June 15, 2020 article in Vanity Fair. A ‘Pandemic Zombie‘…?

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