Passenger Car Leasing

SIC 7515

Companies in this industry

Industry report:

This category covers establishments primarily engaged in extended-term leasing of passenger cars without drivers. Establishments primarily engaged in finance leasing of automobiles are classified in SIC 6159: Miscellaneous Business Credit Institutions.

Industry Snapshot

The passenger car leasing industry is composed primarily of companies that provide corporate clients with a range of fleet management services in addition to automobile leasing. Fleet management services can be classified broadly as vehicle acquisition, maintenance management, fleet disposition, and fleet support services, which range from fuel credit cards to driver safety programs. The National Association of Fleet Administrators reported that the most popular services in the early twenty-first century were vehicle ordering, delivery to individual drivers, insurance subrogation, and accident repairs. Most companies in the industry also leased light trucks and utility vehicles.

Leasing of cars to individuals boomed during the 1990s, and many automobile manufacturers coordinated more closely with their financing arms and dealer networks to capture a share of this growing market. The automakers' efforts lured some customers away from banks and independent finance companies. However, by the early years of the first decade of the 2000s, the automotive industry moved away from leasing in favor of offering very low interest rates for new car purchases as well as low-priced used cars. By the middle of the decade, leasing was back up again, offering attractive rates for shorter terms on nicer cars, with a large percentage of consumers qualifying for leases than ever before. The leasing industry took another hit at the end of the decade after the subprime lending market collapsed and resulted in an economic recession. Car leasing was particularly affected by the subsequent credit freeze. Car sales plummeted and some lease financing firms, including Wells Fargo and Chase, dropped their leasing programs altogether. Analysts predicted that leasing would increase again gradually once the economy stabilized but might never reach prerecession levels.

At the height of its popularity in the mid- to late 1990s, about 35 percent of all company cars in the United States were leased. That figure represented an increase of 400 percent from 1984. During the early years of the first decade of the 2000s, lease volumes quickly plummeted before going back up in the middle of the decade. There was a surge in new leases, particularly in 2006, amounting to a 21 percent increase over 2005. Rapidly declining at the end of the decade, leases hit a low of 10 percent in July 2009. According to the U.S. Census Bureau, in 2010 the passenger car leasing industry recorded annual sales of $5.3 billion, up from $5.2 billion the previous year and $1 billion more than recorded in 2003.

Background and Development

The automobile leasing industry developed in the 1940s as companies looked for affordable ways to provide their sales and service personnel with reliable transportation. For example, Petrolager, a large pharmaceutical company in Chicago, began by paying part of the cost for employees to purchase their own cars, but that became a losing proposition when the employees left for other jobs and took the automobiles with them.

In 1939 Zollie Frank, a car dealer in Chicago, suggested that Petrolager lease five automobiles for its salesmen instead of purchasing them. The benefits were twofold. Petrolager would retain control of the vehicles and avoid large cash outlays. Petrolager agreed, and soon afterward Frank and his brother-in-law Armund Schoen founded the Four Wheels Co., which many in the industry identified as the first automobile leasing company. In 1954 the company became known as Wheels, Inc. It remained one of the largest fleet management companies in the United States in 1997 with more than 160,000 automobiles under lease.

The industry developed slowly, however, especially after the United States entered World War II and wartime restrictions made it almost impossible for leasing companies to purchase new automobiles or replacement parts. However, the industry began to grow in the late 1940s during the post-war economic expansion.

Finance Leasing.
In 1946 three former servicemen--Duane L. Peterson, Harley W. Howell, and Richard M. Heather--formed a partnership in Baltimore, Maryland, to counsel companies on fleet management. By 1954 Peterson, Howell & Heather had incorporated and moved into the leasing business.

The company was credited with developing the industry's first "finance lease." Under the PHH Car Plan, Peterson, Howell & Heather would purchase automobiles and lease them to a client for a set monthly fee. When the lease ended, the company would sell the cars to pay the balance on its original loan. Any surplus was returned to the client, but the client was billed if the resale failed to cover the loan. In a "closed" or "walk-away" lease, by contrast, the lessee had no financial obligation at the end of the lease period.

In 1981 a U.S. District Court ruled that finance leases were conditional sales contracts, which eliminated many of the tax benefits of "open-ended" leasing. However, although the percentage of closed or "operating" leases increased, open-ended leasing remained popular even after the court ruling. Automobiles were often sold to the client's employees when the lease expired.

Competition.
The car leasing business grew rapidly in the late 1950s. In 1963 Time described the industry, reporting that leasing volumes had doubled to 600,000 vehicles in only five years. This explosion had led to the formation of a new, highly competitive industry worth $750 million, in which some 3,000 companies participated.

Carmakers were also beginning to take note of the industry. In 1962 Chrysler Corp. formed its own leasing company, the Chrysler Leasing Corp., which was phased out in 1968. Ford Motor Company and General Motors also announced special financing programs in the early 1960s to encourage car dealers to offer fleet leasing. By 1970 more than 11,000 car dealers were involved in leasing, and the total number of automobiles under lease in the United States exceeded 1 million.

Restructuring.
Rising interest rates, which reached a high of 21 percent in 1980, forced many small companies out of the industry. However, the Economic Recovery and Tax Act of 1982, which gave vehicle leasing companies substantial tax benefits, attracted several powerful new players. In 1987, for example, General Electric Company purchased GELCO Fleet Management Services, and Ford Motor Company purchased United States Fleet Leasing, Inc. GELCO was later renamed GE Capital Fleet Services.

Impact on Detroit.
Because leasing represented a major share of the domestic automobile market, leasing companies had a major influence on U.S. carmakers. Clients generally followed their leasing company's recommendations, from broad suggestions about size and optional equipment to specific models.

Until the 1960s, most leasing companies recommended standard six-cylinder automobiles with manual transmissions and very limited optional equipment. Then, in the 1960s, companies began recommending bigger cars with automatic transmissions, power steering, air conditioning, and radios. By the end of the decade, most corporate fleets consisted of full-size, eight-cylinder automobiles.

In the early 1970s, leasing companies began recommending intermediate-sized cars for better fuel economy. Intermediates accounted for 16 percent of the leased fleets by 1973 and 80 percent by 1977. In 1981, Peterson, Howell & Heather (later PHH FleetAmerica) became the first major leasing company to recommend compact cars. More than half the fleet automobiles leased in 1981 were four-cylinder cars. The most popular cars leased in 1995 were midsized: the Ford Taurus, the Honda Accord, and the Ford F-Series pick-up. Until the late 1980s, leasing companies almost never recommended foreign makes of automobiles even if they were built in the United States.

Corporate downsizing and cost-cutting in the early 1990s also affected the automobile leasing industry. Fleets were reduced either because corporations had fewer employees or because they eliminated benefits such as company cars. The number of car leasing establishments decreased significantly from 1,144 in 1990 to 531 in 1996. The number of industry employees also decreased, from 10,800 in 1990 to 5,700 in 1996, a decline of almost 50 percent. However, the largest leasing companies gained business during the same period.

In late 1999, the decline of personal use leasing continued, with leased cars accounting for 31.8 percent of the new car market, down 3 percent from the previous year.

In general, leasing companies that also provided fleet management services were optimistic about the future, as more corporations began to contract for services that previously were provided in-house or new services that offered better control of costs. Many corporations with large fleets also looked to leasing companies for help in meeting federal regulations regarding fuel efficiency.

The Uniform Consumer Leases Act was expected to be in force by the year 2000. This act was expected to have a negative impact on automobile lessors, primarily because it was largely a one-sided document, emphasizing consumer needs. It included language regarding lease rate disclosure, open-end lease restrictions, GAP coverage provisions, and limitations on determination of excess wear and tear.

Automobile manufacturers found that leasing increased brand loyalty and provided dealers with a steady stream of good used cars. However, some analysts worried that as leasing gained in popularity, the resulting flood of used cars could deflate prices and detract from new car sales. The trend toward used vehicle leasing was expected to combat such issues. In addition, some carmakers found that short-term leases meant that products needed to be updated more quickly, or consumers would likely switch to a competing product. In order to distinguish themselves in the increasingly competitive leasing field, manufacturers developed innovative programs, including a 12-year lease with replacement every two years, and a weekend-only lease for urban residents. In 1999 fleet dealers were focusing on customer service and marketing segments to retain their competitive edge.

Passenger car leasing remained a significant component of the nation's economy during the early years of the first decade of the 2000s. At that time, the National Association of Fleet Administrators, Inc. (NAFA) reported that its members were "responsible for the specification, acquisition, maintenance, and disposal of more than 2.7 million vehicles. These vehicles, with an average initial cost of $16,400, put NAFA Members in control of more than $44 billion worth of assets."

Nonetheless, the industry was not without its challenges. Although passenger car leasing industry revenues increased approximately 3 percent in 1999 and 2000, the U.S. Census Bureau reported that revenues fell almost 3 percent in 2001. By that year, the U.S. economy had started to decline. Although some industry observers noted that commercial leasing remained an attractive option for corporate America, the weak economy led companies in many U.S. industries to implement massive workforce reductions and cut back on spending. These factors challenged automotive leasing companies in 2002 and 2003 and likely had a negative impact on overall industry revenues.

One factor that worked against the leasing industry during the early years of the first decade of the 2000s, especially in the consumer market, was zero percent financing incentives from automakers. These offers affected the leasing market in two ways. First, they brought down the value of used vehicles. This worked against the residual values of leased vehicles (the amount vehicles are worth at the end of a lease), which is a key factor when determining monthly lease payments. As Automotive News explained in its February 1, 2003, issue, Automotive Lease Guide figures revealed that average vehicle values following a 36-month lease had fallen to 47 percent of sticker price, a decrease from 53 percent in late 1998.

In the past, some leasing companies overstated residual values in order to lower monthly payments for consumers and increase new lease volumes. These practices contributed to the significant financial losses incurred by banks and other financial institutions during the early twenty-first century. In August 2002, the Pittsburgh Post-Gazette cited results from a Consumer Bankers Association survey revealing that, on average, both automaker-owned and independent finance companies lost $2,451 per vehicle in 2001. This was an increase over per-vehicle losses of $2,342 in 2000 and $1,200 in 1998. In the wake of these losses, leading financial institutions like Bank One Corp., Bank of America Corp., KeyCorp, and GE Capital Corp. stopped offering vehicle leasing.

Zero percent financing deals also hurt the automotive leasing market because they made buying a new vehicle more attractive than leasing one. According to the Association of Consumer Vehicle Lessors (ACVL), new lease volumes fell from 2.57 million in 2000 to 1.5 million in 2001, a decline of 40 percent. This trend continued in 2002. From January through November 2002, the ACVL reported that, compared to the same period the previous year, new lease volumes dropped almost 15 percent. Considered together, the ACVL explained that these figures meant that lease volumes fell about 50 percent from 2000 to 2002.

Vehicle leases peaked in 1999 and fell considerably until 2003. Following the September 11, 2001, terrorist attacks on the United States, dealerships were forced to offer attractive incentives on new cars to boost the economy that left the leasing segment stagnant. However, according to industry observers, passenger car leasing showed signs of recovery in the middle of the first decade of the 2000s, following a five-year downturn.

Despite the improved economic conditions, industry analysts were studying other issues the leasing industry faced during that time. Final figures at the end of a lease were not realized, resulting in millions of dollars lost as predicted values fell short of real values. According to Automotive News magazine, American Banker reported numerous banks lost money on more than 90 percent of leased cars turned back into the dealer in 2001 and 2002. Many banks, such as SouthTrust, Wachovia, National City Corp., and KeyCorp, exited the leasing business. Some banks that remained in the business of leasing were Wells Fargo and Huntington Bank. That figure dropped slightly in 2003, with 82 percent losing money. As a result, lessors began to take a pragmatic approach when it came to predicting the residual value at the end of a lease.

In 2005 Ward's Dealer Business reported that leasing figures climbed 2 million vehicles, or 14.2 percent. Interest rates were on the rebound, making leasing a favorable option again. Industry analyst Raj Sundaram, president of Automotive Lease Guide, forecast new lease volumes of 16.5 percent in the middle of the first decade of the 2000s.

In 2006 Dun & Bradstreet reported that the 1,600 establishments in the passenger car leasing industry generated over $5 billion in revenue and employed 17,500 people. That year, car leasing was up 21 percent over 2005, the best percentage rate since 2002. Due in part to the improving economy and to the increase in interest rates, leases were again popular for giving consumers access to better cars at lower monthly payments. Banks were re-entering the lease financing market as returns were improving.

Although leasing regained some footing in the middle of the first decade of the 2000s, the entire auto industry was severely affected by the economic recession at the end of the decade. Giant automakers Chrysler and General Motors declared bankruptcy in 2008. As credit sources became constricted or completely disappeared, leasing companies were left with no way to underwrite their customers. During 2008 some of the country's biggest auto leasing companies stopped writing leases altogether, including Chrysler Financial, GMAC Financial Services, Chase Auto Finance, and Wells Fargo.

In addition, sharp depreciations on leased vehicles caused billions in losses. Because leasing terms are based on the company's ability to sell prior leased vehicles, when the car depreciates in value more than what is anticipated, the lessor cannot recover the cost of the vehicle. For example, according to Automotive Lease Guide, after a three-year lease, a Cadillac CTS was selling in the used auto market for 52 to 55 percent of its original value. During 2008 resale value dropped to 36 percent. In 2008 Ford and GMAC covered losses of $2.1 billion and $1.2 billion, respectively, due to the depreciation of value of its leased vehicles. When residual values decline, lessors are forced to increase the price of the lease. Hardest hit by the credit crunch in the leasing market were lessors of high-end vehicles, which depend on leasing for up to 70 percent of their business.

During 2008, the National Vehicle Leasing Association (NVLA) declared that leasing was not dead. The advocacy organization noted that leasing would weather the storm and find a place in the marketplace once again when the economy improved. The NVLA noted that many consumers would not want to sign a 72-month loan to purchase a vehicle, which had become increasingly necessary to keep monthly payments manageable. Compared to a six-year purchase agreement, many consumers, the NVLA argued, would opt for a shorter, three-year lease agreement.

Despite difficult times, there were some signs of hope by mid-2009. For example, General Motors reentered the leasing market in August 2009, although the leasing programs were limited to high-end vehicles like the Cadillac CTS. In addition, used car prices were beginning to firm up, which pushed up the resale value of leased vehicles that hit the used car lots. Edmunds.com analyst Jesse Toprak told Automotive News in July 2009 to expect car leasing to rebound gradually through the end of the decade. "We'll never see the crazy numbers of the 1990s," he said. "But we could see a 20 percent rate in two years and beyond."

Current Conditions

Edmunds' predication seemed to be coming true, as the future of passenger car leasing looked bright as the nation entered the second decade of the twenty-first century. According to a report by leasetrader.com included in the March 2012 issue of Credit Union Journal, leasing will account for 42 percent of car sales by 2020, up significantly from the 2012 average rate of between 23 and 26 percent. John Sternal of leasetrader.com said, "The younger generations have the mentality that they want a different cell phone every one or two years. They will make up a large portion of consumers shopping for cars eight years from now." Other figures, such as those from the Manheim 2012 Used Car Market Report, showed that leases rose 17 percent in 2011 to 2.1 million units, which was 85 percent higher than the 2009 figure of 1.1 million.

Others in the industry, however, were not as optimistic. A study by Experian Automotive showed that lease penetration was actually down slightly in the fourth quarter of 2011 (from 23.7 percent at the same time in 2010 to 23.1 percent), after rising for two years, and the company predicted that may be where it will stay. Paul Cuevas of J.D. Power and Associates noted in Automotive News that "There are real reasons why those who are optimistic about leasing should be optimistic, but the realities don't seem to be following those reasons." Some of the reasons Cuevas believed the leasing market had "topped out" were that, after the economic recession at the end of the first decade of the 2000s, lenders were wary of losing money on inflated residual values, consumers were keeping their cars longer, and low interest rates encouraged drivers to purchase rather than lease.

Industry Leaders

The largest vehicle leasing company in the United States and the world, Eden Prairie, Minnesota-based GE Capital Solutions Fleet Services (commonly known as GE Fleet Services), was founded in 1957 as the General Leasing Co. General Leasing, which changed its name to GELCO Corporation in 1972, acquired six other companies between 1968 and 1974, including Interstate Vehicle Management; the Interstate Fleet Corp.; Selig Leasing Co.; Lease Plan, Inc.; and the Valley Leasing Co. In 1987 the company was purchased by GE Credit Corporation, which formed GE Capital Fleet Services. In 1996 the company acquired JMJ Fleet Services and began offering fleet management services to corporate and governmental customers throughout Australia. GE Fleet Services was a business unit of the giant General Electric Company and recorded revenues of more than $22 million in 2011. That year, the company was responsible for approximately 1.4 million vehicles.

PHH Vehicle Management Services (also known as PHH Arval), business unit of PHH Corp., was the second-largest company in the industry in the United States, with a 2011 fleet of 300,000. The company also oversaw another 245,000 fleet cars. PHH was founded in 1946 as Peterson, Howell & Heather, Business Consultants, with the intention of advising companies on fleet management. The business was incorporated in 1954 and moved into leasing with the industry's first finance lease program. In 1975 Peterson, Howell & Heather became the first major leasing company to recommend compact cars to its clients.

The company became the PHH Group, Inc., in 1978. The fleet management division retained the name Peterson, Howell & Heather until 1986, when it became PHH Fleet America. PHH Fleet America acquired the domestic operation of Avis Car Leasing, Inc., in 1986. In 1988 PHH Group became the PHH Corporation. In 1997 PHH was acquired by HFS, Inc. (predecessor to Cendant Corp.), and in 1999 it was sold to Avis Rent A Car. In 2001 Cendant bought Avis and reacquired PHH in the process, making it one of many subsidiaries, which it then spun off in 2006. PHH agreed to be acquired by General Electric in 2007, but the deal fell through in 2008. PHH Corp. recorded total sales of $3.1 billion in 2011.

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