It is interesting to note that in a recent study by Robert Nathan Associates, leased automobiles in 1986 are reported to have approximately 67 percent of the commercial fleet market, versus 56 percent in 1973. Over the last three decades, there has been a movement to leasing over company ownership, and we believe this trend has been created primarily through services offered by lessors to their customers. From the standpoint of the American Automotive Leasing Association (AALA), we would also like to believe that our professionalism has enhanced the industry and made leasing more attractive.
AALA has been the industry's historian and record keeper for over 30 years. All commercial leasing companies are members and meet twice yearly to diagnose industry conditions as well as to discuss current governmental actions that affect leasing. The top subject of discussion in the automobile leasing industry is the recent wave of acquisitions. Certainly, the acquisition and sale of fleet lessors by major commercial concerns is not new.
What does appear to be accelerating is the tendency for financial institutions to play a larger role in the fleet leasing industry. While these financial giants may not have a significantly lower cost of funds than prior owners, they do bring an apparent capability to capitalize on higher debt/equity ratios. Higher leverage could mean that, in the long run, their cost of capital will be reduced and an acceptable rate of return generated on lower gross margins.
The widespread restructuring in all areas of the economy has presented significant new credit evaluation concerns for lessors. Leveraged buyouts, spinoffs, foreign investments, and the volatility of the economy have forced lessors to accept considerably more credit risk. The challenge of managing this risk will determine a lessor's capability for growth and profitability in the future.
The status of tax legislation and, more specifically, "investment tax credits" and/or "accelerated depreciation" has over the years been an "on again/off again" affair with government. Current conditions can best be described by the title of the famous Civil War saga Gone with the Wind. However, the reduction of tax benefits by roughly two-thirds by the Tax Reform Act of 1986 has virtually eliminated tax benefits as a consideration in determining whether to lease or purchase vehicles.
The news from AALA's Washington D.C. staff is that the tax provisions of the budget bill currently being debated in Congress will have little effect on automotive leasing. While some in Congress may continue to view leasing as a "tax dodge," in all practicality, tax benefits were passed on to the lessees in the way of price reductions. Tax benefits in their heyday were being offered to qualified lessees in deals as low as five percentage points under prime, obviously not the true cost of borrowing but the monetary value for the tax benefits in place at that time. Thus, the intent of Congress to stimulate the economy was accomplished, and this has worked well in our industry.
While Congressional legislative action is at a standstill, federal regulatory agencies have increased their influence on the leasing industry; particularly through such items as odometer regulations, Environmental Protection Agency concerns over ozone depletion, IRS regulations implementing the Tax Reform Act of 1986, and so forth. While this scenario may sound foreboding, it actually bodes well for lessors because the regulatory agencies do not enact new laws, but merely interpret existing ones. Moreover, the regulatory process is more rational and substantive and, as such, is more amenable to sound economic or marketplace arguments.
Given the political pressure being put on the federal government to reduce spending and get the deficit under control, coupled with a critical presidential election year, AALA expects the public policy debate to shift from the federal level to the state level in 1988. State governments are under increasing pressure to intensify their current efforts to raise revenues to make up for the loss of federal funds without raising personal income taxes or real estate taxes. As a consequence, states will be looking to regulate and tax businesses not already under their jurisdiction. In this context, vehicle leasing is potentially vulnerable. As a result, lessors must continuously update themselves on legislative issues and actions and become more active politically.
Competitive pressure for market share continues to intensify. Newspaper articles and financial journals attest to earnings decline in our industry. This competitive pressure has created a low-cost service to the customer. In spite of these pricing pressures, the quality of our service has remained relatively high, as proved by the increased market share of leasing over company ownership.
While the ability to reduce costs and increase service is the backbone of our American competitive system, whether this trend can continue in the future is questionable. Several past presidents of AALA remarked about this situation as they completed their terms. It continues to remain a dominant concern in our industry because it focuses on the quality that we are able to offer our customers, while continuing to earn an acceptable return for the stockholders. Certainly the development of vehicle leasing is predicated on the ability to render service to the client.
Looking forward in our industry, AALA as an association believes there will be continued growth. This view has been confirmed by those companies making recent acquisitions. Where the overall industry growth will come from is a matter for conjecture. One growth area could be government fleets which, at present, infrequently use leasing. Individuals under driver reimbursement programs is another growth area for fleet lessors. It would appear that every emphasis will be placed on ancillary activities such as customer cost accounting, insurance, advisory and consultant capacities, warranty recoveries, and travel arrangements.
We believe that additional vehicle manufacturers, coupled with reductions in manufacturers' fleet departments, will create more reliance on lessors for product evaluation. Just as the 1980s were instrumental in the development of creative financing arrangements for customers, so the 1990s will require innovation in the evaluation of manufacturers' products. Special emphasis will be placed on actual depreciation of product, and considerable discussion will center around the marketing of used vehicles. It has been suggested that one of the important avenues for evaluation of our leasing services is to develop a clear analysis of the mileage factor and its related maintenance costs on the leased product. In other words, to the extent that we as lessors "can accurately," as opposed to a "by-guess-and-by-golly approach," ascertain or assist our customers in what their real future usage costs will be on a product, leasing will become a more valuable service.
Our industry will focus on educating the fleet manager so he or she will understand how we in leasing can help reduce the routine or mechanical aspect of the job. Certainly this concept is no different from what all American companies have been doing over the last several years, stripping away unnecessary work functions to increase productivity and become "lean and mean machines." The leasing industry does and will continue to support the fleet manager in this type of endeavor.
While the leasing market has been dominated by the domestic manufacturers, it appears that our future will be influenced by the influx of foreign manufacturers, or perhaps we should more correctly state "foreign nameplate products and/or transplants." The development of "foreign nameplates and/or transplants" through manufacturing and distributing facilities within the United States will make an inroad in the future. For example, it is estimated that there will be over 27 new "foreign offerings" entering the U.S. marketplace. Manufacturing capacity for cars - imported and domestic - is estimated at 15 million, versus a market sales projection of 10 million.
The overall increase in manufacturing capacity will create pressure to increase product prices. This pressure will require innovative, imaginative and. as yet, unknown marketing techniques for used-vehicle sales.
The development of computerization, the transfer of data, the interaction of computers - all will result in considerably less reliance on printed mail reports and represent more sophisticated service to customers in our industry. On-line systems have proliferated in recent years and will continue to be enhanced as fleet managers demand more timely, relevant, and comprehensive data.
The needs of today's lessee requires the lessor to be able to offer flexible and dynamic approaches to information needs. One direct way of meeting this need is by increasing the availability of on-line information systems with the ability to transfer and massage lessee data into meaningful in-house management reports. In fact, one could say we are not in the car and truck leasing business any longer - we are in the information business - and it's just begun.
These, then, are some of the issues and concerns that we as lessors and lessees have and will continue to face in the future. - John W. Kolb
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