Lease Exec Sees Demand For More Fleet 'Flexibility'

The car and truck leasing and rental business, founded 60 years ago when the automobile was in its infancy, has burgeoned into one of the fastest grow­ing fields in the nation with $15.7-billion in revenues recorded during 1975 when 4.7-million leased or rented vehi­cles were in use. Still-incomplete figures for 1976 show both revenues and num­bers of lease-rental vehicles in an up­ward trend.

In a comprehensive study complet­ed last summer, The Hertz Corpora­tion found that growth of the lease-rental industry has far outpaced growth of the auto industry that spawned it. Although the Hertz study raised some industry eyebrows when the numbers were made public, no informed observ­ers questioned the basic startling growth of the industry - only the de­gree of growth as reported by Hertz.

The Hertz study forecasts further lease-rental growth, which is also a view widely held by carmakers. One top Detroit exec recently predicted that 40-percent of U.S. passenger car production will be earmarked for the non-buyer by 1980.

Although any number of industry insiders see continued expansion of lease-rental as a way of providing fleets with their wheels, questions of how at growth will take place prompt widely differing answers. The Hertz people, for instance, see increases in competition for the lease-rental client's patronage coupled with a blurring of the traditional differences between closed-end and open-end lease arrange­ments and ever-higher costs associated with automobile ownership.

Hertz, long an industry leader in closed-end lease transactions, has been putting additional emphasis on open-end contracts in an effort to keep ahead of changing industry trends. Looking to future demands of the lease-rental marketplace, Hertz Car Leasing Division Vice President Jose E. Menendez reported his firm sees a trend where clients will be demanding agreements that combine features of both kinds of traditional leases.

"The increasing sophistication of top managements at fleet-operating companies has spurred us to develop innovative programs that better serve our customers' needs," Menendez said. Responding to the Financial Account­ing Standards Board's new lease ac­counting procedures, Menendez said a new "flexibility" must be injected into lease agreements.

The Hertz leasing boss said a second factor that requires re-thinking of the open-end and closed-end lease prac­tices is the 50-percent increase in auto ownership and operating expenses that has taken place over the past five years.

Menendez was named to head the Hertz Car Leasing Division two years ago. Since then, the company has de­veloped a number of new programs that Menendez believes have the re­quired "flexibility" to meet changing marketplace demands. Heading the list of Hertz' new lease-rental options is the Used Car Protection Program. Un­der that plan, fleet clients who operate 500 or more cars under an open-end or finance lease can be guaranteed any used-car selling price surpluses over de­preciated book value, While Hertz ab­sorbs any losses. Cost of the Used Car Protection Program comes out to a fraction of a percent per month of the capitalized cost of the leased vehicles.

"With present inflation and Detroit reclassification of vehicle sizes and equipment, we feel the protection con­tract can have particular appeal, espe­cially in view of the accounting stand­ards changes," Menendez said.

Another arrangement Hertz people believe offers flexibility to fleet clients is the Individual Employee Leasing Plan. This program offers fleet lease rates to individual employees of Hertz' lease clients who would not otherwise qualify for company cars. The pro­gram gives the corporate lessee an add­ed benefit that can be passed along to workers in the form of improved em­ployee morale, with no additional cost to the corporate client.

"Again, the rising cost of auto ownership makes this program especi­ally appealing to both the employee and the company," Menendez reports.

The Limited Maintenance lease, still another Hertz effort to keep up with changing times, offers lessees protec­tion against specific engine and power-train malfunctions at a fraction of the cost of Full Maintenance agreements.

Menendez says this variation appeals to managers who are interested in averaging the major repair costs of their fleets.

Although demands of lease-rental clients are changing with the times, Hertz continues to offer its traditional Full Maintenance lease in both finance and closed-end versions. Under this complete package, Hertz pays for all necessary repairs and routine service as well as snow tires and replacement tires.

Like a number of other leading les­sors, Hertz has gone to the computer in its efforts to provide clients with de­tailed, comprehensive fleet data. Un­der the Hertz Managed Maintenance program, the typical lessee can opt for either a simplified or a more complete monthly analysis on both fixed and variable vehicle expenses. These month­ly computer printouts can also include special "exception" reports that single out any units which deviate from fleet norms.

"Moreover," Menendez says, "we are also able to handle the job of vehi­cle maintenance supervision, along with repair-order evaluation and pro­cessing, taking yet another burden from corporate staffs, especially for the large fleet with cars operated over wide areas of the nation." Variations of the Managed Maintenance program can be tailored to fit a client com­pany's particular needs, Menendez said.

To spread the word of its new leas­ing programs and its emphasis on open-end contracts, Hertz Car Leasing Divi­sion has opened new regional offices, expanded its sales staff and is beefing up its individual-lease efforts. In anoth­er move to stay on top of a changing industry, Hertz Car Leasing has broad­ened its activities in the retailing of used cars.

"We have always sold a number of our used vehicles to their original driv­ers - either directly or through the corporate fleet client," Menendez said. "Now, in addition, we have opened used car showrooms in three locations - Long Island City, New York, and San Rafael and Long Beach, California - to sell them to the public. We ex­pect to open additional locations in the future."

Anticipated residual values have al­ways played a major role in determin­ing lease rates, but Menendez believes the retailing of used fleet vehicles will assume increasing importance in the years ahead.

"The stricter odometer law will produce readings which will more ac­curately reflect true usage of cars being purchased second-hand," Men­endez explained. "Further, the re­cent vehicle price inflation will bring more sophisticated buyers into the used-car arena, and these buyers will quickly realize how many of these high-mileage vehicles saw service origi­nally in corporate, police, taxi and gov­ernment fleets."

With this realization of the true prior use of so many thousands of vehicles, Hertz people believe, lease-rental cars will tend to hold more ap­peal to used-car buyers because ac­curate maintenance records will more often be available.

Hertz and only about ten other firms make up the national leader ship of an industry that some experts contend has as many as 15,000 separ­ate firms currently writing rental and leasing orders. The car and truck leas­ing and rental business includes out­lets from neighborhood auto dealers who rent or lease only a handful of vehicles each, through major banks and retail chains that aggressively seek out expanded car leasing opportunities, to an estimated 600 firms that special­ize in the truck lease-rental field.

The industry's recent rapid growth has been accompanied by a long list of challenges that have been met and mastered. Industry leaders like Hertz' Menendez say such current challenges as the revised accounting standards and stricter odometer legislation will also be mastered as the industry con­tinues its upward growth trends based on the inherent advantages the con­cepts of leasing and renting provide fleet operators.