Examining The Three-Year Lease

At the recent mid-year meeting of the American Automotive Leas­ing Association, the three-year extended lease was one of the major topics of discussion among the attending lessors. The following is an address prepared by Sidney Friedlander, Editor, Automotive Market Report and delivered by Michael H. Sivitz, President, Na­tional Fleet Leasing Corporation.

For many years, it had been quite easy to project the used values for two and three year old vehicles. In the last three or four years, this has become a bit more difficult. For example, the original oil crisis created a problem, with prices tumbling week after week. There was immediate ac­tion by some firms to get rid of all of their standard cars and to jump into smaller cars. This was advised against at the time, feeling that standard and larger sized cars would bounce back and there would be little or no change in the science of projecting values. Many leasing firms have since reported they erred in "panicking," in getting rid of their standard sized cars and switching into not intermediates but compacts and in some cases sub-compacts.

Now, it appears to be a whole new ballgame. The in­dustry has turned itself around. The trend is definitely towards the smaller car. One major firm, which buys and manages its own fleet, has gone entirely to compacts with great overall savings as a result.

One big question appears to be not only what the stan­dard leased car will be, but what it will be worth when it comes off lease three years hence.

So far, little reason is found to change AMR's projec­tion policy. It is their feeling that over a two year and three year period, projections have a way of maintaining or re­taining the same type of patterns.

It is true that mileage has been a significant factor over the several years that the odometer law has been in effect. Indications are that with Washington moving towards stronger enforcement of the law, mileage could become an even greater factor.

AMR has made a study and projection of the Chev­rolet Impala and the Chevelle Malibu Classic. The Impala is representative of the type of car that has generally been the standard lease vehicle. With the trend towards smaller cars, it is reasonable that the Chevelle, and other makes in the same category, will fortify their positions as the standard lease car this year.

The following figures which were offered take into con­sideration inflationary rises, all of which have been con­sidered in our previous experienced factors.

It is our estimate that a 1975 Chevrolet Impala Sedan equipped with air conditioning and vinyl roof is currently worth $3,700 at wholesale value. It is our projection that this car should be worth $2,195 as a three year old unit. It should be worth $3,050 in April, 1976, $2,545 in April, 1977 and by April, 1978, it should be worth the $2,195 projected.

A 1975 Malibu Classic Sedan is currently worth $3,470. Our projections value that car at $3,120 in April, 1976, $2,605 in April, 1977 and by April, 1978, the car should be worth $2,400.

As for the 1976 Impala, it is our estimate that it will be worth approximately $3,230 in April, 1977, $2,680 in April, 1978 and $2,200 in April, 1979.

The projections for the 1976 Malibu are $3,300 in April, 1977, $2,740 in April, 1978 and $2,500 in April, 1979.

Clearly, it would appear that the intermediate would seem to be the better car to lease. The third year addi­tional income would by far outweigh the depreciation.

The original projections made at AALA related to the value of three year old intermediates reflected the con­tinued scarcity of that make and model as a used car. How­ever, as the number of such units increases and the avail­ability is able to satisfy demand, it is likely that market depreciation for the third year could be greater, possibly by as much as $200 to $250.*

All of this is based on the continued popularity of intermediate cars at the expense of the larger models. This trend could reverse again and make the full size vehicle more popular. However, based upon manufac­turers' plans for the future, there is no reason to sus­pect that smaller cars will not be the vogue for several years to come.

The depreciating effect of excess mileage has always been difficult to properly assess and its importance has grown in the past three or four years. AMR has often observed that condition, not mileage, should be the most important item in the resale of any car. However, the manner in which the odometer act is written makes mileage more important than it really should be.

For example, the law suggests the consumer may judge the condition of the car by the mileage on the odometer. It also sugests the consumer may relate the mileage to safety and reliability of the automobile. Anyone who knows the automobile business knows that such a correlation is not certain nor exact.

It has been learned that standard and intermediate models, as well as the luxury models, hold up better me­chanically over periods of time normally set as lease terms, two and three years. In contrast, compacts and sub-com­pacts, until now at least, do not appear to be built to be high mileage cars. While no specific records are available, after 40,000 to 50,000 miles smaller cars lend them­selves to the need for more substantial maintenance. Con­clusions finalized come strictly from random interviews with dealers and fleet and leasing companies.

We are generally opposed to government interference in the auto industry. I think there has already been too much of that. We must have a warranty law to go along with the odometer law. But, the law must be a good one, without a lot of red tape - one written in simple and easily understandable language. If this is done, then the industry, as a whole, will be much better off, and that in­cludes leasing companies.

Condition and dealer integrity go hand in hand. The dealer who has earned a reputation for integrity - includ­ing leasing companies - can sell any car, almost without regard to mileage. If he is willing to back up what he sells, the consumer will come to him; if he doesn't, they won't.

*Obtained from Friedlander after original speech was presented.