One question facing many investors during the COVID-19 pandemic: Will Avis (NASDAQ: CAR) follow rival Hertz (NYSE: HTZ) into bankruptcy? After all, it's easy to imagine that Avis's business would also be struggling mightily with transportation and travel statistics plunging. The truth is a bit of a mixed bag, and Avis's second quarter does show how abysmal business has been, but it also shows why Avis isn't likely to follow its rival into bankruptcy protection anytime soon. Let's dig in.
A tale of two stories
First, let's take a look at the harsh truth. Avis, which generates the majority of its business from travel to and from airports, was hit hard during the second quarter with total revenues declining 67% compared to the prior year. However, even the dismal revenue figures showed sequential improvement with revenues down 78% in April, compared to the prior year, but only down 59% in June. Avis felt the pain on the bottom line, too, reporting a net loss of $481 million and an adjusted net loss of $388 million. Simply put: The second quarter was about as painful as everyone anticipated.
Setting the rough top- and bottom-line figures aside, second-quarter data also gave investors a silver lining and reason to believe Avis isn't following Hertz into bankruptcy. Management did an impressive job of quickly reacting to the impacts from COVID-19 by reducing its costs, reducing its workforce and vehicle fleet, and increasing liquidity. Second-quarter expenses declined 47% compared to the prior year as management quickly removed over $1 billion in costs and is now targeting to remove over $2.5 billion on an annualized basis. That new $2.5 billion target is far more cost-cutting than management initially thought possible with the original $400 million announced in late March.
Another example was Avis not only disposing of more than 100,000 vehicles but cancelling over 185,000 vehicle orders in the quarter. Avis's ending fleet at the end of June was down 26% compared to the prior year. The company also reduced compensation for senior leadership, among a number of other small changes, and reduced the workforce by roughly 60% compared to pre-pandemic levels. Those moves obviously weren't ideal, but they were strategically necessary. Management also prioritized increasing liquidity to help survive the business downturn. Avis completed a $500 million offering of senior secured notes for additional liquidity and also amended its credit agreement -- approved by 97% of its lenders -- to increase the amount of authorized debt by $750 million.
The road ahead
Management deserves credit for not only reducing costs, increasing liquidity, and quickly adjusting to business during COVID-19 but also for thinking outside the box with ideas such as a $35 million floor plan for a financing facility designed to accelerate direct-to-consumer vehicle sales. You read that correctly; Avis also sells certified pre-owned vehicles.
Avis's liquidity at the end of the quarter was $1.5 billion. Originally, management anticipated a cash burn of roughly $900 million. Avis's second-quarter cash burn actually checked in at $580 million, and while that's still an alarming number, management seems confident it's under control. In fact, management believes its quick and decisive actions will lead to both positive cash flow and adjusted earnings before interest, taxation, depreciation, and amortization (EBITDA) for the remainder of 2020.
Hertz filed for bankruptcy due to a culmination of questionable management decisions in recent years, and through the gloomy second quarter, Avis appears well positioned to survive COVID-19, thanks to strong management, and take advantage of its bankrupt rival once transportation and travel demand returns. Investors would be wise to anticipate a slow recovery in Avis's business, but thanks to management's strategic moves, the company isn't likely to follow Hertz into bankruptcy in the near future.
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