Auto recalls put a dent in Hertz, Avis as fleet supply shrinks

Photo by David Paul Morris / Bloomberg—Getty Images

General Motors (GM) isn’t the only company struggling under the weight of millions of auto recalls.

The pain has trickled down to car rental companies, which are struggling with added costs and low supply due to the faulty vehicles.

This includes Hertz (HTZ), which said Tuesday that the recalls have impacted its bottom line and its annual results will be “well below” initial expectations.

Nearly 44 million vehicles have been recalled in the U.S. this year, according to the National Highway Traffic Safety Administration. GM alone recalled about 28 million cars for safety repairs, including those with faulty ignition switches that were linked to driver deaths. While car rental agencies are not required to have recalled vehicles fixed, many will not send out cars with known safety concerns.

Hertz initially expected 2014 earnings of $1.70 a share, but the high number of recalls and an ongoing audit of past financial results led the company to lower its outlook. Investors took note: Hertz’s stock dropped as much as 13% Wednesday. It’s largest intraday plunge since Nov. 5 and erasing all the company’s stock gains for the year.

The recalls constrained the supply of available vehicles, which “limited the company’s ability to convert demand into transaction days.” While limited supply is often associated with higher prices, that wasn’t true for Hertz since most vehicles are booked ahead of time.

“Fulfilling advance reservations and contracted business consumed the majority of available fleet,” Hertz reported in a filing with the Securities and Exchange Commission. “This left the company without inventory to capture more of the higher-rate leisure close-in rentals.”

Avis (CAR), which reported its second quarter results on Aug. 5, said that recalled vehicles cost the company in the tens of millions. The company had close to 125,000 recalled cars through the end of July, approximately one-third of its peak fleet. That’s almost double the 70,000 recalled vehicles throughout all of 2013. The record number of recalls “played havoc with fleet and operational logistics,” said CEO Ron Nelson.

Avis held onto more cars than it normally would to meet high customer demand, adding to its overall fleet costs that it anticipated would be up 3% year-over-year.

“It is a constantly evolving issue and some cars have been grounded for literally months because of an inability to get parts and some cars we can fix overnight because it is just a flash to the car computer,” said Nelson when asked about the added expenses. “But I would say at least through the first — at least through July, let’s put it at that, it is an eight digit number.”

Not every rental company felt the recall impact to the same degree.

Enterprise Holdings — a private company that includes Enterprise Rent-a-Car, Alamo and National — said that the spat of faulty vehicles didn’t have a material impact on its business, according to spokeswoman Christine Cavallini. In fact, the company benefited from the overflow of people who rented cars while their recalled vehicles were being serviced.

Both Avis and Hertz expect the ongoing impact to diminish over the third and fourth quarters of this year, pending the stream of faulty vehicle announcements trails off.

Late Wednesday, billionaire investor Carl Icahn revealed in a SEC filing that he has taken a large stake in Hertz.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.