Hertz's EV and AI Missteps Trigger Lawsuits and Financial Strain

The rental car industry has recently experienced a boom, yet Hertz, a major player, finds itself in a precarious situation, facing lawsuits, financial struggles, and controversial technological implementations. This downturn is largely attributed to a series of missteps, particularly concerning its electric vehicle (EV) strategy and its use of AI for damage assessment.

The Ill-Fated EV Bet

Hertz's troubles began with an ambitious, yet ultimately flawed, embrace of electric vehicles. Following CEO Mark Fields' declaration that "Electric vehicles are now mainstream," Hertz announced plans to add 100,000 Teslas to its fleet by the end of 2022, though it only acquired about 35,000. They also intended to purchase 65,000 Polestar EVs over five years and consider GM's electric brands. This bold move came after Hertz emerged from bankruptcy the previous year, seeking a strategic advantage.

The rationale behind this EV push was multifaceted: - Cost Reduction: Hertz anticipated lower operating costs due to high and volatile gasoline prices, and significantly reduced maintenance expenses for EVs (no oil changes, fewer complex transmissions, and fewer parts to break down). - Industry Trend: At the time, the industry signaled a strong shift towards EVs, with Tesla's market cap exceeding $1 trillion and traditional automakers investing heavily in battery technology.

However, this strategy backfired significantly: - Higher Repair Costs: Contrary to expectations, Hertz found EV repair costs to be 20% higher than comparable internal combustion vehicles. Minor collisions often required specialized, expensive parts and labor, primarily from the manufacturer. - Low Adoption: Despite the investment, customer adoption of EVs was low due to range anxiety, a lack of charging infrastructure, and the unsuitability of EVs for long-distance vacation travel. - Depreciation Disaster: Hertz expected EVs to retain strong resale value. Instead, a combination of soft demand, trade disputes, and an influx of cheaper EVs from China caused prices to plummet. For instance, Ford cut the price of its F-150 Lightning by up to $7,000, severely impacting the resale value of existing used models.

This depreciation had a profound impact on Hertz's financial model. Rental car companies heavily rely on asset-backed securities, borrowing against the value of their vehicles. A drop in used-car prices means Hertz has to pay a larger difference to its lenders. A mere 1% drop in used-car values cost Hertz approximately $75 million. This issue had previously contributed to their bankruptcy. In the fourth quarter of 2023 alone, Hertz incurred $245 million in charges related to EV depreciation.

In response, Hertz began selling off its EV fleet, including 20,000 vehicles, many of which were Teslas, just two years after their acquisition. Some barely used Tesla Model 3s were listed for as low as $20,000, roughly half their original purchase price. Hertz even resorted to offering these EVs directly to renters at heavily discounted prices.

Ironically, after Hertz offloaded its EVs at a massive discount, the EV market experienced a resurgence. In 2026, the EV index was up 12% year-over-year, while non-EVs were up only 1.7%. Hertz had, in essence, bought at the peak and sold at the bottom, missing out on the subsequent market recovery that benefited other rental companies still holding EVs.

The AI Damage Assessment Controversy

Adding to its woes, Hertz implemented an AI-powered damage assessment system in partnership with UVeye in 2025, aiming to "transform its vehicle maintenance process." This system, however, has led to customer complaints and further legal issues.

Customers like Jessica Fields, a loyal Hertz Gold member, reported being billed for minor or non-existent damage detected by the AI. Fields was charged $160 for two minuscule dents and an additional $190 in administrative fees, totaling $350. When she attempted to dispute the charges, the provided email link was non-functional, and Hertz staff refused to show her the alleged damage or connect her with a manager.

A critical aspect of this system is that Hertz is reportedly the only car rental company in the U.S. that issues damage assessments to customers without human review. This means the $190 administrative fee is essentially "free revenue" for Hertz, as no human labor is involved in the review process. While Hertz claims fewer than 3% of scanned vehicles are billed for damages, the accuracy of these AI-detected damages remains questionable. This move highlights Hertz's focus on cost-cutting through labor reduction and potentially extracting more revenue from customers.

Financial Instability and Shareholder Lawsuit

Despite some reported increases in net and gross income, Hertz is in deep financial trouble. The company is burdened by significant debt, totaling $18 billion, including $12.7 billion in vehicle debt and substantial corporate debt. This results in massive interest expenses, reaching $259 million in Q2 2026 and $515 million for the first six months of the year.

Hertz's reported GAAP net income of $64 million in Q2 2026 was not from core business operations but rather from gains on real estate sales and revaluations of other financial instruments. The adjusted net loss for the same period was actually $47 million, indicating that the company is not profitable from its primary business.

The most recent controversy involves a lawsuit against Hertz for allegedly misleading shareholders. During a Q1 earnings call, CFO Scott Haralson stated that Hertz had $837 million in liquidity, projected to reach nearly $1 billion by the end of Q2 and over $1.5 billion by year-end. This implied a stable financial position with sufficient cash to cover obligations without incurring more debt.

However, just six weeks later, Hertz announced a $350 million bond offering at 6.75% interest and cut its profit forecast. To secure this capital, Hertz issued 37 million new shares and lent them to JPMorgan Chase, allowing an affiliate to sell these "Borrowed Shares" and use the resulting short position to facilitate transactions for note investors. This effectively meant Hertz was enabling betting against its own stock, without receiving proceeds from these short sales. This action diluted existing shareholders and occurred despite a significant portion (around 30%) of Hertz's tradable stock already being shorted.

The lawsuit alleges that Hertz's management, including CEO Gil West and CFO Scott Haralson, knew about the impending need for capital while assuring investors of strong liquidity. Although Hertz technically met its liquidity goal of $984 million, it did so by incurring more debt and diluting shares, contradicting the earlier assurances.

In conclusion, Hertz, once a dominant force in the rental car industry, is struggling with the fallout from its EV strategy, controversial AI implementation, and a precarious financial situation. While the rental car market is generally thriving, Hertz's specific missteps have left it in a vulnerable position, characterized by high liabilities, minimal profit, and ongoing legal challenges.