Rent-a-Bailout Is the Wrong Road to Take

Instead of handouts, maybe the car rental industry as a whole should adopt the old Avis slogan, "we try harder." According to The Wall Street Journal, car rental companies were successful in getting language inserted into the so-called TARP "reform" bill that would give them a slice of the bailout pie. Passed by the House, Hertz (NYSE: HTZ  ) , Avis Budget Group (NYSE: CAR  ) , and their competitors are now pestering the Senate where the bill is under consideration.

At first blush, there's a lot to recommend the bill. According to the industry, they and fleet car purchasers are the biggest car buyers in the nation. The rental car companies purchase as many as 1.8 million cars a year, but because of the moribund economy, airlines have cut flights, while consumers and business travelers have cut back their spending. Hertz has said it may have to cut 4,000 jobs, and Avis has said that 2,200 job cuts are possible. Dollar Thrifty (NYSE: DTG  ) announced that it may reduce its workforce by 6%, or 400 jobs. By giving them TARP money, not only will we be helping out the car manufacturers, but the rental companies will be saved, too.

Follow the goldbrick road
On the surface, the argument is plausible, but when you dig a little deeper, you realize just how ludicrous it is. Giving the money first to Hertz, Avis, Dollar, or even privately held Enterprise is a circuitous route to bailing out Detroit.

Hertz and Avis are not going to spend a dollar on General Motors (NYSE: GM  ) or Ford (NYSE: F  ) cars for every dollar they receive from TARP. As we've seen in banking, a lot of the money that was given with the intention to make more loans available instead went for other purposes. The car rental companies will also peel off wads of cash for their own uses, too.

It's not that we can't, we won't
Moreover, the car rental industry has to replace its cars because of the wear and tear they endure as rentals. According to the Journal, the typical shelf life of a rental car is nine months, but because the used car market is weak, they're hanging onto them longer. The rental companies are going to have to replace those vehicles sooner or later regardless of whether they get a bailout, but they're looking for the government to finance the purchase.

If you look at the results of the secondary car market, you'll find used car dealers like CarMax (NYSE: KMX  ) and junkyard auctioneer Copart (Nasdaq: CPRT  ) stuck in reverse. CarMax lost $22 million in the third quarter while Copart saw profits edge down 1% in its latest quarter. Perhaps we should give them TARP money, too, so they can buy cars from Avis, who can then give the cash to Ford. Or maybe the airlines, who certainly queue up the customers at their car rental counters.

If what we're really trying to do is help out Ford, GM, and Chrysler -- and it should be obvious that the rental agencies aren't so selfless -- then we ought to just give them the money directly. We shouldn't allow it to be siphoned off by third parties and hope it winds its way through the economy and finds the road to Detroit.

CarMax is a Motley Fool Inside Value selection. Copart is a Motley Fool Stock Advisor pick. The Fool owns shares of Copart. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 30, 2009, at 2:54 PM, takomoto1 wrote:

    Carmax back in october layoff 620 service employees with a surplus of 1.5bill dollars the next month they increasre the 410k plan and retirement plan for the remanining emploees so they can make the FORTUNE 100 BEST PLACES TO WORK this company is not employees fiendly like lets on to believe.

  • Report this Comment On January 30, 2009, at 5:30 PM, westrip wrote:

    Coparts earnings are down because this company is aggresively expanding. The companies business model is recession-proof. Irrespective of the economy, people are going to continue to wreck their cars and that's where Copart makes their money. This company will continue to geneate great earnings.

  • Report this Comment On January 31, 2009, at 5:47 PM, UttBuggly wrote:

    BIAS WARNING ! !

    Having so been warned, the explanation is that I was laid off by Hertz after many years of service and so my comments may be a tad harsh.

    First, this is the same Hertz and Avis who sent a letter to Congress 2 years ago asking them NOT to give money to the rental car industry. This was so weaker competitors could fail and the Big Two could pick up any slack. NOW...here they are back with their hands out.

    Second...layoffs at Hertz have been carefully managed, but in the last 24-30 months, over 10,000 people at Hertz have lost their jobs. Salary increases were moved from 12 to 15 then 18 months. "Threatening" the loss of jobs to Congress NOW is idiotic...it's already happened and will continue until nothing and no one is left. (Please turn out the lights when you leave!)

    Third, HGH has no real intention of letting Hertz survive. From day one (following the sale of Hertz by Ford) it was apparent the New Emperor and cohorts were out to get their investment back, milk some cash, then carve up the pieces for a little extra pocket change. And, if it costs 40,000 workers their jobs, it's a small price so that wealthy vultures can add a few nickels to the pile they already have. Giving Hertz money just lets them bleed a once great company a little longer before the fire sale of the assets.

    Fourth, even if Hertz does survive for a while, the end is still very likely as virtually everyone who knew the business and the technology are now gone. They cannot support the expansion plans they're peddling on the street. Without successfully executing an expansion into China and India, the domestic travel and equipment rental components cannot generate enough profit for Hertz to re-acquire the talent and manpower needed for the expansion. Neat little Catch-22, conceived by idiots.

    Last, several people, including myself, suggested the senior executives take a $1/year salary (like Jobs at Apple, etc.) or at the very least, the average pay for the rank and file for a year or so. DEAD SILENCE was the answer. If they truly wanted to help the company, the country, and the employees, giving up several million in executive salaries and bonuses for a while would have been a nice start.

    Bottom line...they care for nothing except their slice of the pie.

  • Report this Comment On February 01, 2009, at 6:30 PM, twilson557 wrote:

    What the Obama administration needs to do to bail out the auto industry is not hand out money or provide loans for things other than buying or manufacturing automobiles. What's needed is plan old incentives like tax credits, deductions, or whatever that reward the actual purchase of North American built automobiles. Yes, including Honda and Toyota, provided the vehicles are built in North America. Because that is what puts people to work - demand for product.

  • Report this Comment On February 15, 2009, at 2:03 PM, JBNorCal wrote:

    The idea that handing out money to anyone that has their hand out will fix the 'problem' is crazy - if it is a bank (to big to fail), car manufacture (effect many others), or car rental co (WHY?). who is next - Starbucks (if they have to shut down a store where do I get my Grande Double Skim Mocha Cappuccino) ?

    Just as the "Big 3" need to reorganize, The car rental companies, like all other industries, MUST look deep inside themselves and see what is wrong. redo the look, what has been done is not working. retool, reboot, fire the dead weight, hire superstars

    The days of getting cheap cars from GM, Ford, & Chrysler then dropping them off after 6-9 month letting the manufactures worry about selling them is over. the rental companies will have to look at what they order, when they order and when they sell. they will have to plan, like most other businesses have to.

    don't stand there with your hand out, if you do you will end up under the control of the Govt - there is talk of a "Car Czar", do we need a "Auto Rental Czar" as well? we know the government can not run a business - look at those places they have tried!

    Let the government do their job (Defend the country, coin money, and negotiate treaties), and allow industry to do theirs.

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