Dealers face end of leases

Dealers face end of leases

Velvet Spicer. Rochester Business Journal. Rochester: Aug 22, 2008. Vol. 24, Iss. 21; pg. 1

Abstract (Summary)
Ford Motor Co. last month reported a $2.1 billion loss related to unprofitable leases through its Ford Motor Credit Co. Chrysler LLC then announced its financing amt, Chrysler Financial, would stop offering leases as of Aug. 1. In today's economy - especially with gas prices hovering at around $4 a gallon - larger vehicles such as full-size trucks, minivans and sport utility vehicles are in less demand than their smaller, more fuel-efficient counterparts.

Drivers who like to pull away from a car dealership every three or four years in a new vehicle may have to rethink their game plan as the nation's Big Three automakers and their financing arms move away from leasing.

Ford Motor Co. last month reported a $2.1 billion loss related to unprofitable leases through its Ford Motor Credit Co. Chrysler LLC then announced its financing amt, Chrysler Financial, would stop offering leases as of Aug. 1. Many in the industry expect Ford and General Motors Corp. to make it less attractive for lessees by raising payment amounts.

"A critical element to being able to lease a vehicle is predicted future value," said Rochester Automobile Dealers' Association Inc. president Bradley McAreavy. "If you can't predict that, then you can't lease a vehicle."

In today's economy - especially with gas prices hovering at around $4 a gallon - larger vehicles such as full-size trucks, minivans and sport utility vehicles are in less demand than their smaller, more fuel-efficient counterparts. In turn, the gas guzzlers - manufactured primarily by the country's domestic automakers - have not held their residual value.

Three or four years ago, dealers predicted these vehicles would be worth much more than they are. As a result, finance companies and dealerships are taking a hit when drivers turn in their larger cars and trucks at the end of their lease, McAreavy explained. When drivers turn in their leased vehicles, the banks take those cars to auction; these days, they stand to lose a lot of money.

"There's nothing (dealers and financers) can do about that," McAreavy said. "Those leases are on the books and they're maturing and it just happens to be where the market is today. And all they can do is just take their lumps and sell the car."

The Power Information Network, a division of J.D. Power & Associates, reports nearly 20 percent of customers nationwide leased vehicles in 2005, the most recent year for which data is available.

Unless other options are available, the impact of a no-leasing policy through Chrysler, Ford or GM could send buyers elsewhere, such as import companies, to lease their vehicles.

"I find most lease customers are less loyal to the brand and more loyal to the payment," said Vision Automotive Group general manager Douglas Indovina. The dealership represents the Dodge, Nissan, Kia, Hyundai and Ford franchises.

Some 25 percent of Vision Ford's new vehicle sales come from leasing, Indovina said. That is insignificant compared with some other markets, such as Buffalo, where retirees and employees of the company's manufacturing facility there take advantage of favorable leasing plans. With Ford gradually moving away from leasing, Indovina said, sales in the Buffalo market likely will be more affected than in Rochester.

Dealers whose customers prefer to lease will face a dilemma, at least in the short term, he said.

"You are going to have to re-educate your customer, if they allow you to," Indovina explained, "because they're going to have to make a hard decision. They're going to have to stay without a lease. People will accept it at some point, but initially they're going to look for alternatives."

Historically, leasing has been a better deal for some consumers in terms of finances, McAreavy said. But that will soon no longer be the case: finance companies likely will raise rates and lower the residual values of vehicles, thereby minimizing their exposure.

"If I'm just out there looking to buy a vehicle and I have a choice between leasing and buying, if you give me a retail incentive that's pretty aggressive with a rebate, and that incentive is as good (as) or better than that lease incentive would have been, I'd probably buy that car because financially I'm indifferent," McAreavy said. "Give me the good deal and that's what I'll take."

Indovina added he expects leasing to remain an option, at least through Ford, but on vastly different terms.

"I think it'll be much more selective in the future," he explained. "If you have great credit you're going to be offered leasing. I don't think it will be a mechanism that will accept anybody."

Thirty-five to 40 percent of Patrick Pontiac GMC Jeep's vehicle deliveries are from leasing, Vice President Mark Pennella said. Though the traditional financers may back away from leasing, dealerships still have several choices to offer their customers, he added.

"We're just looking at different opportunities out there from different lending institutions that'll lease," he said. "And there are several of them."

Once the smoke clears from the Big Three's leasing changes, Pennella expects his dealership to return to a normal number of signed leases. Competition among financers plays a big part, he said, and he expects that to happen within the next three months.

"(Banks are) actively pursuing every dealer out there that might have had their primary lending institution back away from leasing," he said. "In the long run I don't think it'll be a big deal for the consumer at all. It's just going to he a different bank. They don't really care as long as the payment's in line."

Indeed, Pennella expects the car buyer to benefit in other ways as well.

"This is where it could get better. Manufacturers - and you're seeing it more from GM right now because they're big - are offering some pretty wild regular purchase deals instead of leasing," he explained.

Many deals include interest-free financing on top of big incentives to entice consumers to buy, Pennella noted.

"If I want to buy a car I get these great deals from the factory. If I want to lease a car I get the same (financing) deals, or similar, from an outside source," he said. "If it plays out the way I think it will, I think the consumer wins here."