Special Coverage

NADA Convention & Exposition

NEW ORLEANS – Auto leasing is expected to make a partial recovery, but not a full one, when credit markets eventually free up.

So says Tom Webb, Manheim auto firm’s chief economist and lead author of its annual Used Car Market Report, indicating leasing may be past its prime.

“I’m afraid leasing is not coming back to what it once was,” Webb says at the National Automobile Dealers Assn. convention here. “It won’t be as strong as before.”

Leasing peaked in the late 1990s and fell in the early 2000s. It started to make a comeback, until 2008 when the credit crisis hit and several major leasing firms, including Chrysler Financial, GMAC LLC and banks either cut back or completely pulled out of the leasing business.

“There were some significant residual losses on big SUVs and pickups as gasoline prices soared, but it wasn’t so much that as the financial markets getting so screwed up that hurt leasing,” Webb tells Ward’s.

New lease originations fell from 2.7 million units in 2007 to just below 2 million in 2008, the lowest in more than a decade. Most of the drop occurred in the fourth quarter, according to the Manheim report.

“The last time we had a leasing reduction like that, new-vehicle sales still were high,” Webb says. “Last year, both leasing and sales were down significantly.”

While forecasters see new-car sales rebounding in 2010 and 2011, the same isn’t being predicted for leasing.

“Some (finance firms) might get back in leasing, but it won’t be as strong again,” Webb says. “A lot of players have been burned too many times, although sometimes of their own making. Often, people get out of leasing when they should get in, and they get in when they should get out.”

Count Chrysler LLC among those out of leasing for good.

“To use leasing as a way to obviate credit restrictions or overcome customer financial restrictions is undesirable,” Chrysler President Jim Press tells journalists here. “The situation we are at now is normal.”

To a large extent, leasing got “a bad rap,” Webb says. “It is a financial product that, used correctly, can be a win-win.” It also has been hailed as a good alternative to buying, a way for some customers to avoid a long-term car loan. “You don’t do a customer a favor by selling them a car with a 6-year loan if they’re on a 3-year trade cycle.”

The result is that the loan and trade cycles are out of sync, and the customer ends up in a negative-equity situation of owning more than the vehicle is worth.

The reduction in leasing of late will mean a shortage of 3- and 4-year-old vehicles in 2011 and 2012, as fewer models come off lease.

“Dealers at that time will be complaining about the lack of enough good-quality used cars,” Webb says. The good news for remarketers is that those impending off-lease vehicles are expected to sell at relatively high prices.

The Manheim used-car report indicates used-vehicle sales fell 12%, from 41.4 million units in 2007 to 36.5 million in 2008. For franchised dealers, the average net profit on a retailed used vehicle was $99 last year, compared with an average loss per new vehicle of $139.

There was a net loss of 5,000 franchised and independent dealers in 2008, the report says.

Repossession volumes reached a record 1.67 million units last year, up 12% from 2007, Manheim says.