Leasing-Yesterday, Today And Tomorrow: Top Lessors Talk About Leasing

The problem facing almost all concerns using passenger cars for business purposes has always been the determination of which method will best suit the particular requirements of each-company owner­ship, salesman ownership or fleet leasing.

The problem is common to all companies and does not change because of the nature of the business or the commodity being sold or serviced. It is pure­ly and simply a problem of transportation-how to get a man around a territory in the safest, fastest, and most economical manner.

It should be recognized that there is a definite need for each of these three methods of providing passenger car fleet transportation because seldom will any one plan fill the overall requirements of each fleet operator. Within one company it may frequently be advisable to use two and sometimes all three methods if a completely satisfactory fleet operation is to be maintained. There is, therefore, no need to adopt a hard and fast rule that a company will lease its vehicles or stay with company ownership or let the salesmen buy their own ears.

Flexibility to take care of all the various specialized needs that arise where passenger car use is con­cerned would seem to dictate that any company look at all three methods with an open mind.

Not so long ago there were only two ways in which any company could obtain the use of passenger cars for business purposes-employee ownership or company ownership. In the first instance the em­ployee was required to use his personally owned car on company business, with the company reimbursing him under any one of the hundreds of formulas used for reimbursing for mileage travelled while on company business. In the other instance, the com­pany bought vehicles and turned them over to the men to use in covering their territories, the com­pany taking care of all expense, reimbursing on an item-by-item basis for all motor vehicle travel ex­penditures and maintenance bills.

GROWTH OF LEASING

In recent years, however, the leasing of passenger cars for business purposes has grown steadily, rep­resenting a definite trend away from company ownership and salesman ownership. The advantages to be gained through leasing passenger cars from an in­dependent leasing company, as compared with leas­ing from a company's own employees, certainly offers many inducements to those firms who have been using their salesmen's personal cars for business pur­poses. The tax advantages, the release of capital, and the relief from administrative details which leas­ing makes possible have, likewise, attracted many companies formerly operating company owned fleets.

While all these advantages have undoubtedly con­tributed to the rapid growth of the leasing industry, probably the most important factor in this trend to leased operations is the realization that the man­agement of a fleet of motor vehicles is a highly spe­cialized activity best taken care of by automotive people skilled in handling the intricate problems of fleet management, and organized to handle large volume purchases of motor cars at low cost and the disposal of used motor equipment at highest possible prices.

A leasing company is, first of all, a fleet manage­ment company, taking care of the many nuisances and problems which beset any company operating passenger cars commercially. If it is functioning properly, the leasing company should provide trans­portation to any sales or service organization just as efficiently and effectively as though it were that com­pany's fleet department charged with the responsi­bility of providing company owned vehicles for busi­ness use.

In any discussion of the pros and cons of leasing versus company ownership, though, fleet managers invariably want to get down to an argument about who can do it best and who can do it cheaper. Al­most anyone, however, including most leasing com­panies, would agree that, all things being equal, com­pany ownership should provide the lowest costs available for motor vehicle operation.

Certainly, it is less costly than salesmen owner­ship where the company must establish a mileage al­lowance satisfactory to the salesmen regardless of the actual cost of operating motor vehicles. Certainly, too, company ownership should be less costly than leasing because all outside profits are eliminated.

MANY CONSIDERATIONS

Lower cost, while always important, seldom is the sole consideration in determining the type of fleet operation to be used by any company. Employee pref­erences, personnel policies, administrative simplicity, and any one of a host of other complicating factors may easily take precedence over the question of pure cost alone. The relative importance of each of these factors varies widely from company to company so that there is no such thing as a pure black or white solution.

Rarely, too, are all things equal between the leas­ing company and the fleet manager operating as a company employee, few of whom are allowed to op­erate a fleet without interference from top manage­ment. Only too often vehicle selections based on economy are overruled because the sales manager wants his men to have deluxe cars with all the trim­mings. The treasurer, on the other hand, often inter­feres with fleet operation by budgetary controls. Sel­dom under company ownership, are decisions taken based on actual costs of motor vehicle operation. The leasing company, on the other hand, can operate a fleet in line with what the current economics of the automobile industry dictates. It does not have to give way to inefficient practices to allow for fringe benefits to the salesmen. It is not affected by "no capital expenditures" edicts. It is not bothered by reciprocity. Nor does it have to worry about stepping on any­one's toes or "fighting City Hall".

Financing, of course, is another important factor. Almost all treasurers recognize that just measuring cost-per-mile of operation cannot begin to tell the whole story. Typical of the treasurer's outlook is the following statement taken from a report issued by a financial officer of a large corporation to his presi­dent:

"One of the disadvantages we hear about leasing is that it is more costly to lease than to own. This is true. However, this objection overlooks the fact that money retained and used as working capital in our business earns a considerably greater return than we would pay in the form of interest through leasing. In I960, we earned 9.6% on our common stock­holders' investment. Hence, we can well afford to pay 6¾% per annum (3¼% after taxes) to earn 9.6%.

Thus, rather than getting into a discussion of whether or not the mechanical handling of a fleet of motor vehicles can best be done by a company itself or by a leasing company, it would be well to determine first that any capital released can be put to work to earn more after-tax money than the cost of the leasing company's services which, of course, must include the interest charges the leasing com­pany pays for its financing. Only if no gain accrues to a company as a result of release of capital, or if there are no possible tax advantages in the picture, can a company look at leasing solely from a stand­point of determining which will provide the lowest cost fleet operation-leasing or company ownership.

NUMBER OF CARS IMPORTANT

A company operating a small number of vehicles in which the amount of capital released cannot be too important, or whose fleet is not large enough to warrant the hiring of a qualified fulltime fleet manager, must approach this whole question from still another angle. There can be little argument in instances of this kind about who can do it better or cheaper.

A small fleet becoming an integral part of a leasing company's large fleet is almost certain to be more efficiently operated because it will be handled by a group of automotive specialists. And, certainly, it will be operated more economically because it will get the benefits that come from large volume pur­chasing of new cars and trucks, and the disposal of used motor equipment at highest possible prices through better marketing methods.

It is estimated that 52 per cent of fleets still op­erate on the salesman ownership plan which, before the advent of leasing, was the only way in which a company could acquire the use of a fleet of motor vehicles without going into company ownership. Here we have a fleet operator who must look at leasing from an entirely different standpoint than the operator of company owned vehicles. He has no capital in­vestment in motor equipment, having transferred this burden to his salesmen. He has no particular tax problem because all sales travel expense is treated as direct expense. He has no fleet management prob­lem because he is not a fleet operator at all, his fleet being made up entirely of the passenger cars owned by a group of private individuals, all of whom happen to work for the same company.

Salesman ownership at one time offered the easiest, simplest and least troublesome way for any company to acquire the use of a sales fleet. The salesman paid all the fixed expense-depreciation, license costs, sales taxes, interest, and insurance-while the com­pany leased the car from him on a per-mile basis, reimbursing him for business mileage only. The tight money market has changed all this, though, and the finance problems the salesman runs into today must necessarily become the company's concern if it wants to keep him on the road.

Leasing provides the use of sales cars in which no investment has been made by the company or the salesmen. It provides these cars at considerably lower interest rates than the retail finance charges salesmen usually pay when purchasing their own ears and it eliminates, too, the need for salesmen to make a cash investment in a down payment and large monthly payments to finance companies. Leas­ing, too, enables a salesman to turn his car over to his family and have the use of two cars without investing any more money than he now is spending to provide only one car for family use and company business.

More importantly, leasing makes it possible for a sales manager to hire a salesman without worrying whether he has a car or not, and it eliminates the arguments that have gone on for years between the company and its employees as to whether or not the company is paying enough for the use of its em­ployees' personal cars. No matter how liberal the com­pany is in its reimbursement policy, the sales force is never satisfied.

Variations in mileage allowances all the way from 6 cents per mile on up to 10 cents per mile are not uncommon in identical territories on exactly the same type of vehicle. And yet, the salesman getting 10 cents per mile will be just as dissatisfied as the salesman receiving only 6 cents per mile. There is no happy solution to this problem because the reim­bursement plan has been arbitrarily imposed by the company with the salesman having little chance to be heard as to his opinion of what he should be paid for using the family car for business purposes. At no time is there any attempt to relate the reimbursement figure to the actual cost of motor vehicle operation.

With a full-grown leasing industry that has now reached maturity and a surprising degree of stability, there is no longer a logical or sound reason for any company to have to rely on using its employes' per­sonal cars for company business. It has not at anytime been too good an arrangement for either the com­pany or the salesmen. While there are many situations in which employee ownership is still practical-oc­casional usage, the need for luxury cars, low mileage city salesmen, to mention but a few-any company's basic fleet will, more often than not, be a safer, more dependable, and more profitable fleet if it is leased from a reliable leasing company rather than from a company's own employees.

There is no question but that leasing's spectacular growth is largely due to the fact that more and more commercial companies have learned that a lease program, if handled by qualified and experienced fleet management people, can take over or at least minimize, the many nuisances and problems which constantly beset any company operating a fleet of motor vehicles, at a cost equal to or probably slightly less than any company can obtain for itself. Leasing has made its mark and it is here to stay. It is the modern and, in many instances, the most logical way in which any company can obtain the use of passenger cars for business purposes.

 

Sam Lee is a veteran in the auto leasing field. He entered the auto business in Canda in 1927. He later moved to New York, where he spent five years with Chevrolet's factory operated retail store. In 1935, he moved to Chicago to join a Chevrolet dealership that was to become one of the largest fleet dealers in the country. Lee orgaznied his open company, Lee Fleet Management Inc., in 1948 in Chicago and later moved the operation to Cleveland. In 1960, the Lee companies were sold to Lease Plan International Corp. Currently, Lee is president of Fleetway Corp. and Sam Lee Associates, both located in Los Angeles.

ARMUND SCHOEN ON LEASING

By Armund J. Schoen, President, Wheels Inc.

 

As the oldest fleet leasing organization in the nation, we at Wheels and our associated companies, are in a unique position to scan the history of our industry, note the changes that have taken place, and look ahead to the future.

Aside from changes in the price of autos and the length of lease terms, three major developments stand out in the first quarter of a century of our industry's existence:

1. The leasing industry has grown up, transforming itself from a handful of small firms, to an industry with more than 1,300 firms in existence.

2. Leasing has changed from a tool of a handful of large, national companies to one that is used by all types of companies, large and small, in every industry.

3. The auto has become the dominant form of trans­porting salesmen.

In terms of our overall contribution to the nation's economy, it should be stressed that the auto fleet leasing industry releases to business as a whole ap­proximately $750,000,000 in working capital annually. If the contribution of truck fleet leasing is added, the automotive fleet leasing industry makes available each year to business approximately $1.8 billion in capital. In view of President Kennedy's stress on modernizing and improving our industrial plant, this sum is no small contribution to this effort.

The result of these developments has been to trans­form leasing companies into skilled specialists who perform a number of services which cannot be readily duplicated. Today it takes much more than cars to make a leasing company.

What of the future? Great as our progress has been, industry has only begun to tap the resources and services we have to offer. As a result of the many improvements in our operations, the company-owned auto fleet has declined to the point where it is smaller than leased fleets. As smaller firms, the haven of the salesman-owned fleets, become larger and more sophisticated, they too will follow the trend and gain for themselves the advantages of leasing.

Our industry has only reached the half-way mark toward saturation. The next 25 years will see leasing companies supplying more than half of all fleet cars used by industry.

A major frontier that awaits skillful penetration is truck fleet leasing. This segment of our industry is at the point where auto fleet leasing was in 1946. Of the 7,200,000 trucks used by industry, only 4 per cent are leased. The discrepancy between the popularity of auto leasing and truck leasing shows that as an industry we have an enormous untapped potential in this area.

I am confident that in the next quarter of a cen­tury the leasing of truck fleets by industry will make as spectacular gains as auto fleet leasing since World War II. There is no doubt in my mind that in this period the value of leased auto and truck fleets will mount to some $10 billion annually.

HARLEY HOWELL OUTLINES PHH'S GROWTH

By Harley W. Howell, President, Peterson, Howell & Heather

In 1947, Peterson, Howell & Heather wrote what we believe was the first finance type lease ever to be applied to company cars provided for traveling representatives.

The PHH finance lease plan was designed for the company which did not wish to tie up its working capital in company owned cars but did wish to en­joy the economy inherent in the principle of paying the actual cost of owning and operating a fleet of cars.

In 1947, a company's only alternative to company ownership was a full maintenance lease plan under which the lessor established a fixed monthly rate to cover such expense items as repairs, tires, insurance, tags and depreciation. At the time depreciation was literally non-existent and maintenance expense was minimal because cars were replaced at the end of one year's service.

Among the first companies to adopt the PHH finance plan for passenger cars were: Johnson & Johnson, Sunshine Biscuits, E. I. duPont deNemours & Com­pany, Inc., Pennsylvania Salt Mfg. Co., Textron and Minneapolis-Honeywell Regulator Co. Through the years these companies have expanded their use of the finance lease and are continuing to find new adaptations for it.

The PHH finance lease plan not only solved the problem of releasing working capital but it also gave fleet administrators unlimited flexibility in the man­agement of their own company fleets. Under the fi­nance lease plan administrators were able to select the right kind of car and equipment for the job and replace it at a time best suited to their individual requirements.

In short, fleet administrators learned that the PHH finance lease plan is an effective tool to assist them in achieving their objectives. PHH has never con­sidered its finance lease plan to be a substitute for fleet management, which continues to be of primary importance.

More recently PHH has applied the finance lease idea to a plan for leasing cars to individuals and this is meeting with wide acceptance by executives who are not eligible for company cars, as well as doctors, lawyers, and other professional men.

The PHH finance lease has, without a doubt, con­tributed greatly to the growth and expansion of PHH through the years. It has been accepted as an alternate means of financing by a wide and im­portant segment of American industry whose man­agement may be credited with finding new and con­tinued applications for the finance lease for many-years to come.

 

NEXT PAGE: JOHN ROLLINS SAYS SERVICE IS ESSENTIAL

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JOHN ROLLINS SAYS SERVICE IS ESSENTIAL

By John W. Rollins, President, Rollins Leasing Corp.

Full maintenance leasing has from its very incep­tion provided a basic service in that all the transpor­tation functions are handled by specialists for a fixed monthly rental rate, and without the need for ad­ditional rentals after the unit is sold. It's long term growth has been remarkable and in recent years accelerating as leasing companies have improved techniques learned from experience.

Rollins, as one of the oldest national full main­tenance leasing companies in the industry, has many distinct memories of leasing companies that started out with great hopes and expectations.

Many of these promising companies fell by the wayside because they were unable to provide the service necessary for good customer relations. Some were not strong enough to grow as leasing expanded from regional to national stature. The lack of skilled experienced personnel created many problems beyond their ability to satisfactorily solve many costs in order to produce profits that would support every increas­ing capital demands, and establish rental rates that would be competitive-yet produce profits.

The past has brought many changes and at the same time, maturity as an industry.

While the problems of the past can no longer be considered critical as far as the day by day opera­tion of the industry is concerned, their continued solution and refinement can be considered one of the goals of the present.

Here is one of our industries most preplexing problems: The proper evaluation of the customer, his needs, and desires before the sale is closed. It is relatively a simple matter to establish contract terms with a lessee, yet here the art of communica­tions becomes most important at the driver, leasing company employee level. All too frequently poor communications at this level destroy the relationship between lessee and lessor.

Under leasing, ownership of an auto is no longer a prerequisite to obtaining a job and Rollins is proud of its contribution in this area. However, when leased cars are used as a fringe benefit to obtain salesmen or to keep them satisfied, transportation costs suffer, and all too frequently reflect on the leasing company. This is an area where the leasing industry can by furnishing management with proper costs help man­agement control such costs to the benefit of both lessee and lessor.

The future of the leasing industry, when we con­sider the progress made in the last decade, can be as bright and grow as large as the men in our industry have the vision and courage to let it ex­pand. We are a service industry serving a vital need to industry, and good service can only lead to more and greater opportunities to expand our important function.

HUBERT RYAN VIEWS LEASING

By Hubert Ryan, Vice President, Hertz Corp. General Manager, Car Leasing Division

 

Car leasing today enjoys widespread acceptance as an effective and efficient method of providing business-car transportation in our economy. Why?

When a company's forces reach sufficient propor­tions to logically require the use of a fleet of passenger cars, there usually are three alternative pro­cedures available to management:

1. The company buys a fleet and presents the cars to salesmen on loan for their business and personal needs.

2. The company requires its salesmen to purchase their own cars and reimburses them on a mileage basis.

3. A company provides business transportation through a national fleet lessor, with either a finance lease, a full-maintenance lease or combination of both.

Some misconceptions exist in some quarters, how­ever, about what constitutes leasing.

Leasing, with all of its recognized benefits, has been portrayed by some operators, for unscrupulous motives or from lack of information, as a get-rich-quick device for car users; According to their mythical magical formula, a car can be leased, operated for a period of time and then be disposed of at a nice profit to the lessee or lessor, or both. The idea has been repeated in print as well by a few writers who had no doubt been misinformed. Common sense and a rudimentary knowledge of economics naturally should tell anyone that this is clearly not possible under ordinary conditions, even with special tax situations available to a lessee or lessor.

The only possible exception might be a shortage-economy period, during which a lessor could obtain vehicles at a pre-arranged price and, after they had served his useful purpose, sell them in the open market at a time when such cars were not readily available.

Several years ago, the president of a large leasing company addressed a meeting of security analysts. He drove home one point: that his company never had represented such an eat-your-cake-and-have-it-too appeal as a reason for leasing. He said he did not see any possible basis in fact for such a rosy expectation.

The leasing of passenger cars is not a gimmick or a trick, nor is the leasing of other basic commodities as it is practiced by The Hertz Corporation and other reputable lessors. It has become part of our economy because it is a convenient and business­like arrangement that offers the businessman a num­ber of substantial benefits.

In 1961, industry sources reported there were about 240,000 cars in leased service with full or partial maintenance supplied by the lessor, and with revenues of about $307,000,000. For 1962, the forecast is for 275.000 leased ears with a volume of $353,000,000. Another 250,000 automobiles are estimated to have been "finance-leased" during 1961.

Services included under maintenance leases are repairs, maintenance, insurance for fire, theft and collision, license plates and guaranteed deprecia­tion. Any or all of these and, in some instances, even other services arc furnished, depending on the lessor and his contract with the customer.

The future of car leasing, economists report, is unlimited. Only a small fraction of the potential has been realized. Each year innovations are being made in the original concept of the fixed maintenance lease. In addition, more companies arc offering fleet leasing services. These operational advancements and the entry into the market of new lessors ultimately bene­fit present and future lessees-they offer them a more comprehensive choice of suppliers, leasing plans and sources from which to obtain their needs.

RECONDITIONING VITAL IN LEASING

By H.F. Brey

 

Car reconditioning is vital to the leasing industry-vital from a profit standpoint.

A car in good condition at resale time can spell the dif­ference be­tween a profit and a loss for a leasing com­pany. Conse­quently, leasing firms should stress good car con­dition since it means money in the bank.

Lease Plan International Corp. Inc. recently instituted a new pro­gram of reconditioning cars. The company established a network of used car reconditioning depots lo­cated strategically throughout the country. According to H. F. Brey, vice president of Lease Plan, ap­proximately 80 per cent of the company's used cars are transported to these depots for extensive clean­up work.

The reconditioning includes shampooing of headliners, replac­ing or repairing upholstery, washing engines, regrooving tires and repairing or replacing bumpers and chromework.

'In short, when a car emerges from one of these depots, it has the appearance of a clean, sharp used car and it brings the highest at­tainable bid for its class at an auto auction," Brey said.

Brey said that the program has been very successful for Lease Plan.

"We find on the average that for every dollar we put into recondi­tioning we receive two dollars in return so that our clients net the difference," he said.

Good car care is paying off for Lease Plan International. It can pay off for other fleet users.