Leasing Makes Mild Comeback

Vehicle leasing is making a modest comeback after its go-go years of the 1990s.

Leasing peaked in 1999 with a 25% penetration of total sales of 17.4 million cars and trucks. The low point was 2003 when 13% of 16.9 million vehicle deliveries were leases.

The lease numbers are nudging up. About 2 million vehicles, or 14.2%, were leased in 2004.

Leasing will increase to 16.5% in 2005 and hit 20% in a few years, predicts Automotive Lease Guide President Raj Sundaram.

Why the renewed interest?

“As interest rates go up and as residual values stabilize, leasing becomes more attractive,” says Sundaram.

But the terrific lease terms of yesteryear will remain a memory. Back then, auto makers subsidized leasing to move the metal and build customer loyalty with low monthly leasing payments. The strategy was structured on overly optimistic forecasts that vehicle residual values would be higher than they actually turned out to be.

That led to millions of dollars lost as predicted values collided with real values. Auto makers backed off from what briefly had been the wonderful world of leasing.

Hefty sales incentives of the last four years also converted many lessees into buyers.

Lease terms today are higher than before because they are built on a more realistic prediction of what a vehicle will be worth when it comes off lease in a few years.

Manufacturers also do a better job of remarketing off-lease vehicles, especially through certified used-car programs that fetch higher prices for reconditioned 3- and 4-year-old vehicles with low mileage and warranties.

Although leasing is on the rise, it's unlikely to be as prominent as it once was.

“We won't get back to the very high lease levels of before,” says Greg Smith, of Ford Motor Co.'s president of the Americas and executive vice president.

He says a 15%-20% lease rate for mainstream vehicles is just about right. Ford once was leasing as much as 30% of its standard lineups. Smith says luxury-vehicle leasing can run as high as 60% without becoming out of whack.

The number of consumers leasing vehicles varies by region. For instance, the Northeast has traditionally had a high concentration of leasing, notes auto consultant Mary Ann Keller.

“American Honda (Motor Co.) moves off-lease cars from the Northeast to where there's a greater demand for used vehicles,” she says. “But moving vehicles adds costs.”

She notes that banks with leasing portfolios persuade about 30% of customers leasing vehicles to buy them when they come off lease.

That can be effective remarketing. But auto makers shun it. For manufacturers, convincing would-be new-car buyers to purchase vehicles they've been leasing “is not an attractive proposition,” she says.

Nor is that particularly attractive to dealers who want to sell or lease a new car to a person coming off a lease, says Larry Stolle, an auto industry business development executive for IBM.

“I don't call it end of lease, I call it brand reentry,” says Stolle.

Used-Vehicle Leasing Is Steadily Gaining Customers

Used-vehicle leasing, once considered the next best thing, is gaining customers steadily, says one of the concept's pioneers, Tarry Shebasta, president of LeaseCompare.com.

Increased quality of late-model pre-owned vehicles, the certified used-car phenomenon, “more predictable residual values” and higher profits than on financed vehicles give second-hand vehicles a leasing edge, Shebasta tells the National Remarketing Conference in Dearborn, MI.

More than 672,000 pre-owned vehicles were leased last year — a record, Shebasta says, “as more dealers and Internet followers of our website recognized the advantages, not the least of which is the opportunity to re-lease vehicles coming in off first leases or loans.”

Re-leasing affords its own set of benefits in that it “mitigates residual losses, keeps the customer for the dealership, provides F&I revenue if the off-lease vehicle had no extended service contract and, most of all, provides the dealer with a profit on the new lease and the opportunity to buy back a 6-year-old car that's probably as well kept as it was on the original lease,” Shebasta says. In most cases a short-term lease can eliminate a negative equity situation, inasmuch as residual values for the second lease are “less likely to deteriorate than we've seen on newer cars.”

Some predictions had used-car leasing blasting off in the late 1990s. It didn't.