Leasing's New Lease on Life

SAN DIEGO — Vehicle leasing fell down a few years ago but now is getting back up and dusting itself off.

“There is a renewed focus on leasing,” says Eric Lyman, practices director for Automotive Lease Guide Inc., a firm that predicts vehicle residual values.

Leasing took a hit in 2008 when the former Chrysler LLC stopped offering it and the former General Motors Corp. curtailed it months before both entered bankruptcy.

But the reorganized Chrysler Group LLC and General Motors Co. are back in leasing.

More ambitiously, so are some international-brand auto makers with high sales goals. Those include Hyundai Motor America Inc., Kia Motors America Inc. and Volkswagen of America Inc.

“Hyundai and Kia are refocusing their sales strategy to drive the leasing business,” Lyman says. “And VW really is pushing leasing. VW is the most aggressive in marketing and focusing on its lease strategy.”

At the back end, auto makers also use leasing to replenish inventories of their popular certified pre-owned programs. Those offer consumers used cars with low mileage and extended warranties.

“Leasing is a way to populate the CPOs,” Lyman says at the National Remarketing Conference here.

Leasing became extremely popular in the 1990s. The peak leasing year was 1999 with 3.7 million vehicle deliveries. Ten years later, leasing was at 1.2 million units, or 13.5% of vehicle deliveries.

Auto makers began backing off leasing early last decade after they suffered heavy losses, primarily due to too many leases (75%-80% of some model lines) and overly optimistic residual-value predictions.

Vehicles had been coming off-lease with actual values consistently below what was forecasted two to three years earlier at the beginning of the leases.

Zero-percent financing was as much an industry effort to wean consumers off leasing as it was to jump-start vehicle sales after the 9/11 terrorist attacks.

Leasing started making a modest comeback in the mid-2000s. But it suffered a major setback in 2008 when financially troubled GM and Chrysler bailed and overall vehicle sales plummeted.

Now, it's enjoying yet another resurgence under better times and tighter controls.

No one has the magical formula to precisely forecast residual values every time, but the practice has become more accurate today.

Leasing has become more disciplined, centering on putting the right customer in the right car, as opposed to desperately trying to move the metal to offset auto-plant overproduction, a sin of the past.

ALG predicts that by 2015, leasing will reach nearly 20%. Many industry experts consider that a healthy level.

As residual losses mounted during the go-go days of leasing, some auto makers and banks resorted to a damage-control strategy of urging consumers to buy their off-lease vehicles.

But those days are over, thanks to better residual predicting and inventory controls.

“Gone are the days when we begged the customer to keep the car,” says Horacio Trujillo, senior manager-remarketing operations for Mercedes-Benz Financial.

However some banks in the leasing game happily sell off-lease vehicle to lessees. “We love people to buy cars that they lease from us,” says Scott McKim, a senior vice president of Huntington National Bank.

Even if customers don't buy the off-lease car, modern remarketing technologies, such as online auctions, help Huntington realize a good return when selling the used vehicles, he says.

Auto makers no longer offer subsidized rock-bottom lease rates to move the metal. But they must offer attractive lease terms, because today's consumers are “more frugal and cash paranoid,” says dealer Tammy Darvish, vice president of Darcars Automotive Group in Silver Spring, MD.

“Some manufacturers are supportive of leasing, some are not,” she says. “The manufacturers with strong captives (vehicle-financing subsidiaries) are the ones that will win. The ones with Mickey Mouse captives are going to be lagging.”

Done right, leasing is “a great product,” says Manheim Consulting's Chief Economist Tom Webb.