Vehicle leasing continues a dramatic descent, in 2003 hitting its lowest level in a decade as more and more players, burned by residual losses in the billions of dollars, curtail their strategies or leave the game altogether.

Wildly popular in the 1990s, leasing peaked in 1999 with 3.7 million transactions. Since then, it's declined 52%, to less than 1.7 million retail consumer new-car leases written last year, according to Manheim Auction's 2004 Used Car Market Report.

The quick reduction in lease originations will significantly reduce off-lease volumes in 2004 and beyond. This year will be the first to see a substantial decline in vehicles coming off-lease, dropping below the 3 million mark. It's expected to fall below the 2 million mark in 2007.

Such reductions “absolutely” will bolster used-car prices, says Tom Webb, Manheim's chief economist.

“But let's not get carried away,” he adds. “There are still a lot of used cars out there.”

A record 43.6 million used vehicles at a value of $370 billion were retailed in 2003, according to the Manheim report. Franchised new-car dealers handled 14.7 million of those sales.

Leasing in the early 1990s was considered an innovative way for auto makers to put customers in mainly high-end vehicles with relatively low monthly payments at a time when new-vehicle prices were rising faster than personal income, Webb says.

But in the late 1990s, as new-vehicle prices leveled off and consumer income increased, the role of leasing changed from “an affordability fix” to “the preferred method to stimulate sales in an ever-more-aggressive fight for market share,” Webb says.

To keep monthly lease payments low, vehicle residuals were set unreasonably high. It got ugly when vehicles came off-lease in the millions, and those high residual forecasts hit the harsh reality of actual market value, usually in the auction lanes.

End-of-term losses averaged more than $2,500 per returned off-lease vehicle in 2002, and $3,187 in 2003. In a 3-year period, the industry's residual losses totaled nearly $20 billion.

Banks and independent leasing companies were first to ditch the market, uninterested in leasing cars for the sake of leasing cars. “Captive” finance companies, with a direct relationship to manufacturers, ended 2003 with a larger share (75% compared with less than 65% in 1999) of a smaller leasing pie.

“A financial institution would need to think long and hard about getting back into leasing after being burned,” says Manheim President and CEO Dean Eisner.

The typical lease today is on an upscale model that holds residual value better and attracts high-income consumers more amenable and suitable to leasing.

The days of those unbelievably low monthly lease rates are over.

Gone, too, is leasing's heyday — if that's what one wants to call it. Eisner doesn't.

“Leasing's ‘heyday’ wasn't putting people in cars they shouldn't be in, just to move the metal,” he says.

Adds Webb: “There's leasing done right vs. leasing to move the metal. It's wrong to put people in leases if they can't afford retail. And it's wrong to put a vehicle on a lease if it can't be retailed when it comes off lease.

“Done right, leasing increases customer satisfaction for the manufacturer, dealer and financial source. Done wrong, it has the opposite effect.”

Although leasing often is associated with 3-year terms, most are now longer. Auto makers' captive finance companies write as many 4-year leases as 3-year. Banks write as many 5-year leases as 4-year, says the Manheim report.

Meanwhile, used-car leasing, which never lived up to high hopes of becoming the next best thing, accounted for 700,000 transactions in 2003. That's a relatively small number of leases. But it's mostly of late-model, high-end vehicles, an important segment of sales, says Webb.

Highlights of this year's Manheim Used-Car Market Report include:

Rental: A decline in air travel prompted rental fleet downsizing, but quicker cycling kept new-vehicle sales to the rental market (and the remarketing of end-of-service vehicles out of the market) at nearly 1.7 million units for 2003.

Fleet: The total number of fleet vehicles in operation, excluding rental, has declined in each of the past five years but still remains above 10 million units. Fleet managers, like other remarketers in 2003, employed selective reconditioning to help offset faster vehicle depreciation.

Repossessions: The number rose to 1.7 million in 2003, reflecting the past willingness of lenders to finance less creditworthy customers.

Dealers: Franchised and independent dealers retailed nearly 30 million used vehicles, with certification programs growing and continuing to boost used vehicle sales. Buy-Here Pay-Here dealers had a record year and were active both as buyers and as sellers in the auction lanes.