"Leasing Is A Way of Life"

AUTOMOTIVE FLEET interviews an industry pioneer for answers to today's perplexing problems and the future of the leasing industry.

Leasing's phenomenal growth has seen many industry-wide changes in the last few years. Today, faced with recent interest rate increases and generally lower resale values which affect leasing's profit picture and account relations. AUTOMOTIVE FLEET interviewed Armund J. Schoen, president, Wheels, Inc., Chicago, seeking realistic answers to the many complex problems now current in the leasing field.

The interview with Schoen took place in his well-appointed office on Chicago's north side automobile row. His opening remark that "Leasing Is A Way of Life" may well become the clarion call of the industry. This belief is strongly evidenced in the answers to the questions presented.

A. "Within the past five years, the big swing has been to the finance lease, making it competitive with company-owned fleets. Leasing has to be a part of our economy as long as money is as tight as it is. And this sudden surge to finance leasing can be attributed to the increase in interest rates, causing management to look earnestly at their capital commitments and investments. Treasurers and other financial people are assessing and testing the methods for the use for their money. It has become a tremendous factor. That is why so many companies are moving in the direction of finance leasing. It makes available a fund of money for other capital investments. Companies are beginning to realize that they cannot get ready and available funds from their company-owned fleets."

Q. Exactly how deeply and in what manner has the recent interest rate increase and generally lower resale values affected leasing's profit picture and account relations? How is the adjustment made?

A. "We have been asked to hold the line on increases, but how do you hold the line when we have been raised 1¼ percent since the first of the year. There is too much governmental interference. Most of the people in our business have had a cost of living increase. But most contracts in force today do not call for an increase on equipment rates for any now being used. In other words, they do not have an escalator clause in the contract. Most people in our industry do not have it, and will not lay themselves open to an escalator clause. All we can do is to raise prices to reflect any increase in price. There is a definite squeeze on profits."

Q. Generally how are recognized, older leasing companies financing today?

A. "The sources for financing today for the leasing field are banks and the big finance companies long affiliated with motor car companies. Major activities of the leasing companies are in a state of flux due to changes. Bankers are not too keen to fiancé leasing companies. All they want is operating profit. Banks will not help in building fleets. Middle line companies may be rudely awakened. It shocks people who come into our field and who have not experienced the competitive price war or years of operation. We are experiencing a down period in 1966, and in 1967, it may not be too much better. If Viet Nam lets up, the picture may change. I believe conditions will continue at the same level this year, with no further drops, and this applies price-wise, too. Production of new cars has moderated, and auto production may definitely decide the future."

Q. What changes have taken place in the insurance package a leasing company can offer today compared to five years ago?

A. "Insurance companies today do not know what to do with fleet leasing operations. In our 29 years in business, we have not pursued the placing of public liability and it has never been part of our insurance package. We are often criticized for this, but we feel that the lessee should place this insurance in the company they now place their general insurance with. You do not penalize a good company with the performance of a bad company and charge a rate that is ridiculous. Have them write their own public liability based on their performance with a company of their own choosing. If a company has had a bad performance record and places their own insurance, if there is a beating, then the insurance company can absorb some of the losses because of the other profitable insurance coverage. If we are cancelled out by an insurance company, the lessee is not covered, and this creates a bad image. We have lost some business with our policy, but it did not cause problems for our accounts."

Q. Is there an advantage to a dealer affiliation? If yes, what?

A. I think so. I think this whole leasing business is an extension of selling an auto. Dealer affiliation is a great advance. There is a better understanding of everything that is involved in leasing. The dealer is better equipped to have people living with you who are familiar with current operations. Companies that are independent lose some continuity. They do not have proximity of relationship. Working with our dealership has many advantages."

Q. Since your company offers both maintenance and finance leases, what trends do you detect and expect to be evident for the future?

A. "There seems to be an aversion to maintenance leasing, especially on 100 or 200 car fleets. Maintenance leasing companies have taken some large beatings.

Q. Do most of the leasing company accounts utilize and value your cost analysis service?

A. "There are two schools of thought on this. We have the service and we supply it but not for the majority of our accounts. It is on a 60-day cycle. You can see where you were. It probably is best for a company to do this in their own offices if they have the machine time, but it is necessary to see the figures every 30 days. Since gas and oil and leasing costs are 80 percent of the cost of operation, you can spotcheck gasoline mileage, tires, maintenance, etc. Our way of operating is a good one. We do not do all the things others may do. But people today are looking more and more into what these statistics mean. Just how valuable are they? Do we really need them? Incidentally, the cost is terrific."

Q. Are you considering entering the individual leasing field? Why?

A. "We are not entering the individual leasing field unless there is no more fleet leasing available. As long as there are commercial fleets doing business nationally, we will not go into this market. Individual leasing brings problems, with credit a prime factor."

Q. What do you consider the biggest potential threats to leasing?

A. Two things. First, the government, the IRS and taxation. Second, the war between companies that is ripping the market apart with price cutting. The little companies are really hurting."

Q. Does AALA have any program to minimize the non-professional way that many non-members go into business or operate?

A. "AALA is an organization for professionals, and not organized to educate leasing companies. Problems facing us are big ones for the entire industry. The little companies benefit from our activities. Right now we are faced with such problems as state taxation of interstate commerce, a proposed IRS method of equipment financing and other tax problems. What AALA does is for the good of our entire industry."

Q. Besides being competitive in costs, what are the most persuasive elements in converting a company-owned fleet to leasing?

A. "We sold 'saving money' in 1938 to companies who had their salesmen using their own cars and paying them 4 cents a mile. Most of our transactions in the beginning were with sales managers and vice presidents of sales who were besieged with salesmen problems.

Common complaints were 'getting too little for their mileage' or that they 'could not afford' the type of car the company wanted them to drive. With maturity, companies realized that they must supply their men with transportation if it is needed for business. Leasing is an excellent way for uniformity. It relieves the sales executive of this problem. Men can now dress themselves in the best way possible and work towards getting new business and not have to worry about their automobile."

Q. How do you dispose of used cars?

A. "There is no one way of disposing of used cars. You dispose of them the best way you can. There are auctions, which have been abused, trade-ins, wreck sales, etc."

Q. How do you handle warranties?

A. "We educated the Big 3 on warranties for five years, and to set up their own fleet warranty departments and to visit each leasing company on a once a month basis. We handle warranties on an excellent basis. The Big 3 are following it pretty well. There is a unanimity for the five year warranty, with either a 12 & 12 that means something, or a 24 & 24 that means something. We must get a warranty on the power train that also means something."

In summarizing the interview with Schoen, we came away with the feeling that "Leasing Is A Way of Life" and that it is becoming "true to life" to a greater number of companies for various reasons ... surrounding capable company personnel, released capital, taxation, knowledgeable purchasing and disposal, and professional fleet management.