Leasing: Future Growth Projections

It's a mature market characterized by canny lessees, innovative financing, new emphasis on vehicle services, and heightened competition for regional primacy. And it could all change - overnight. That's the consensus of experts Automotive Fleet asked to forecast the future of U.S. commercial vehicle leasing.

"We consider the national market for the largest commercial fleets to be mature," said Kurt Feuerman, a securities analyst for Drexel Burnham Lambert in New York. "That market is not expected to grow at a rate any faster than the economy itself."

Top executives at Gelco offered a similar view. "We're not in a situation where we're going to see 15 or 30 percent growth a year," said a company spokesman. "We're in a mature business. But there will be lots of churning, lots of fleets changing."

At Peterson, Howell and Heather, marketing and communications manager Donna Startzell was carefully optimistic. "Leasing is being chosen with increasing frequency," Startzell said. "It will continue to be the best option for most fleet operations."

There was no disagreement from John Harris, vice president of Virginia's small American Leasing System. "We've seen stability in the national market for years, and I think we'll continue to see that," Harris predicated.

And there was a cautionary note from J. Ferron, executive director of the National Automobile Dealers Association's Industry Analysis and Dealership Operations Group. "There will be growth, but it will be slower and more volatile than most conventional wisdom has indicated," Ferron wrote with Jake Kelderman in a new book called Betting On The Franchise. During an interview with AF, Ferron added, "All participants in leasing are now going to be just that much more aggressive."

Despite their generally confident outlook, the experts emphasized the industry's biggest potential stumbling block: its vulnerability to governmental whim. With recent IRS regulation and the passage of last year's Deficit Reduction Act, key questions rose as to the status of vehicle lease agreements containing TRAC clauses, and the tax treatment appropriate for personal use and "luxury" cars. Then, as those issues were headed toward possible clarification, the U.S. Treasury Department proposed to replace the current income tax system with a "modified flat tax." Among the deductions and exclusions that would most likely be eliminated under such a plan are ITC and ACRS - both crucial leasing incentives.

"If the Treasury proposals affecting ITC and ACRS pass, there will be a great impact on many leasing companies," said one Gelco executive. "Some companies are in our business only for the tax benefits, and those benefits have been very productive for them. If they're eliminated, there's a question of who would stay in the leasing business? Some companies may drop out; we could see others coming in."

The prudent businessperson, says Ferron of NADA, will study all such legislation carefully, trying to predict the next "curve in the road." Elimination of ITC and ACRS would raise the cost of leasing, but the impact would have to be balanced in the area of ownership," Ferron said. "What would happen to ownership? Would elimination be offset by interest deductibility for vehicle purchases? If there is a tilt toward taxing consumption, that will affect how cars and trucks are purchased and leased."

What about short-term effects of the DRA? Harris of Americar foresees a "severe impact" - but not necessarily one that is negative. "Professional leasing companies can deal with the 1984 tax bill very competently," Harris said. "They can point out that it affects deductibility not only on whether you lease, but deductibility as it affects ownership as well. The people who are going to get hurt are those who've gone after the luxury car market. Luxury car lessors are going to find their customers facing more out-of-pocket real costs. They're going to find the IRS waiting there at the end of the year with a collection plate, and they're going to be in trouble."

While the Washington factor remains uncertain, analyst Feuerman predicts a clear pattern of movement within the industry itself. "If there is growth in leasing, it will occur in the regional markets," said Feuerman, who recently tracked the fortunes of Minneapolis-based Gelco, the nation's largest vehicle lessor. "We see the major forces in the business shifting their attention there ... perhaps acquiring smaller, mom-and-pop type concerns."

It's at the regional level, Harris said, that independents offering a full range of vehicle services will survive - and thrive. "Cars are becoming computers on wheels, and people are less able to cope with them," Harris said. "Looking ahead, the lease company that can offer good physical service facilities to the fleet customer is going to have a distinct advantage."

Not surprisingly, executives at Gelco think such advantages will accrue mostly to the major lessors. "Even though we're in a mature industry, there's plenty of opportunity in the management of vehicles," said one Gelco official. "And in that area, there's no end to what we can provide. In national account purchasing, maintenance programs, financial reporting ... We have a definite niche there, and there will always be a need for our kind of services with the big fleets."

In part, at least, Startzell of PHH seemed to concur. "As business becomes more complex, the advantages do go to the largest lessors," she said. "That's because we have the resources to be more complex."

By all accounts, the lessee of the future will demand nothing less. Lessees are clearly becoming more sophisticated," Startzell said. "They're requesting - and receiving - more as the size of their fleets grow and vehicle costs go up. Every vehicle means dollars, and companies are beginning to realize the huge value of the fleet asset. That increased awareness is reflected in the more sophisticated technology we're seeing to monitor vehicle operating costs."

Computerized operations will continue to revolutionize the leasing business, the soothsayers agreed. "And we don't think that's negative," added one. "In fact, we think computers will enable us to communicate better with our lessees."

Like Feuerman, Ferron, Startzell, Harris, and the other Gelco executives, outgoing AALA board chairman Stan Chason also pondered the industry's future during a speech to the group's twenty-ninth annual convention in Miami last March. After noting the advent and popularity of creative financing such as commercial paper, LIBOR funding, and lessee-funded leases, Chason turned his attention to the years just ahead. "Taking everything into consideration, we still have one of the most dynamic businesses around - one that is progressing rapidly into the world of high technology," the leasing veteran declared. "Those are heady words for an industry that grew out of the automobile business, and that is a tribute to you and your ability to stay on the leading edge of change.

"We probably wouldn't recognize our business if we could crystal-ball it three to five years from now," Chason concluded. "But we will still be enjoying and profiting from it - whatever form it evolves into."