Viewing Leasing Today

Leasing has become such a major factor that today no fleet operator can afford to overlook its merits.

While leasing is not the answer for every fleet-a fact that leasing companies acknowledge-it at least desires consideration. A fleet manager who refuses to admit to the existence as a possible fleet vehicle is doing a disservice to both himself and his company.

Although Chrysler Corp. is the first automaker to go into the business of direct leasing, all auto com­panies recognize the importance of leasing.

General Motors Corp. has more cars on lease than any other auto company. AUTOMOTIVE FLEET estimates that GM placed more than 265,000 cars in lease service last year. This amounts to approximately 3.5 per cent of GM's total passenger car production. While GM dominates the leasing scene, the other auto companies are aggressively seeking new business.

In reviewing the role of the automakers and their own influence on leasing through their dealers AUTO­MOTIVE FLEET has compiled the following esti­mate on leasing penetration for the 1962 calendar year.

Leasing Competition Increasing

FALS has recruited some 235 Ford dealers (out of 6,600) and has 90,000 plus vehicles on lease through the FALS network. This compares with more than 70,000 by Peterson, Howell and Heather; 33,000 by Lease Plan International; and between 12,000 to 18,000 for others such as Hertz (Car Leasing Div.), Wheels, and Don McCullaugh.

While the auto companies are expanding in the lease business, the major national independent leasing companies still represent the major force, largely be­cause of their national distribution. Still, regional inde­pendents and auto dealers engaged in leasing are factors to be considered.

Sam Lee, president of Fleetway System Inc., an organization composed entirely of auto dealers operat­ing in eight Western states, said that leasing belongs in the hands of the auto dealer.

"With price competition as severe as it is, the small independent leasing company will find it more and more difficult to remain in business because of his high overhead costs," Lee explained. "The dealer, on the other hand, can operate a leasing business through his own dealership, using all the facilities of the dealer­ship, even though the leasing company is set up as a separate corporation."

Lee told AUTOMOTIVE FLEET that leasing of vehicles is merely another way to sell and finance motor vehicles."

"This is what the dealer has always done and he needs only to add a leasing department to offer the public a complete auto service-the sale of new and used vehicles," Lee said.

While Lee makes a strong point, the resourceful independent leasing company under good manage­ment has just as much chance to compete against the large national leasing companies as has the auto dealer. The entry of auto companies into the leasing field as well as increased competition among inde­pendents and auto dealers should result in a thorough shake-out in the industry with only the strongest sur­viving.

FINANCE AND MAINTENANCE LEASING

The two major types of vehicle leasing in force to­day are maintenance and finance leasing.

George A. Gulp, vice president of C.I.T. Leasing Corp., a subsidiary of C.I.T. Financial Corp., told AUTOMOTIVE FLEET that more than half of the 600,000 cars now under lease are under a finance lease.

"What's more, this growth is continuing as more and more lessees realize a cash bonus is waiting for them at the end of the lease period, provided their people take reasonably good care of their cars," Culp said. "Given the assurance of proper maintenance, the lessee can expect a rebate rather than an extra pay­ment when the vehicle's resale price is measured against the original cost less depreciation."

AUTOMOTIVE FLEET asked Culp to outline some of the advantages of a finance-type lease and what the fleet operator should look for in a finance lease. Here are his answers:

1. Original purchase-Cars should be purchased at a price close to the dealer's cost, yet one which will allow the dealer to make a fair profit. This will enable the dealer to give good service to the leasing com­pany and also will   insure that the car is properly serviced prior to delivery. A low capitalized original cost will make for a realistic book value when the ear is taken out of service, which normally would be two years later, Culp said.

IMPORTANT POINT

A point to remember here is that buying at a low price and reselling later at a comparatively high price works for the benefit of the lessee, since the smaller the difference between the first and the last price, the more the lessee can save on depreciation through proper maintenance," Culp said.

2. Financial stability-The leasing company must be a stable one which still will be in business when the leased cars come up for resale. It also must have sources of financing adequate to handle all require­ments on a continuing basis as well as the ability to finance original purchases with a clear title to the car.

"A leasing company with financial stability can expedite both the purchase and resale of a car," Culp said, "the former through prompt payment to dealers, assuring good service and good make-ready and the latter through having a clear title at hand without referral to any intermediary financial institution."

3.   Make and model selection-With a thorough knowledge of industry operations, the experienced leasing company must be able to offer sound advice to the lessee on the proper selection and equipping of cars which will do the best job for the least amount of money. Requirements for cars, models and equip­ment obviously will vary from company to company- and often within a large fleet, Gulp said, so picking the right car for the right job is an important factor in getting the best possible resale value.

4.  How much depreciation-The experienced leas­ing company can offer a staff experienced in fleet analysis and able to recommend the depreciation rate best suited for use by the lessee. Use of a fixed, stand­ard percentage for all clients inevitably will result in under-depreciation for some companies and over-de­preciation for others.

"Many factors such as type of use, expected traffic conditions, mileage, terrain, load to be carried and replacement schedules must be considered and weighed in arriving at a proper depreciation rate," Gulp said. "In a like manner, a lessee, should be allowed to increase the percentage on a particular car that is to be used for work that will make it wear out much faster than the bulk of the fleet."

5.  Incentive bonuses-The leasing company should pass along to the client any of the various incentive bonuses offered by automakers. This would include depreciation guarantees.

6.  Simple lease-The lease should be clear, concise and brief with a maximum amount of simple English and a minimal number of legalisms.

WIDESPREAD SERVICE

7.  Broad-based service-Leasing companies which operate primarily on a local basis cannot properly service a fleet that has vehicles which operate on a regional or national basis.

8.  Widespread dealer organization-The leasing company should be able to provide for local delivery and servicing of a broad range of makes and models so that the lessee can have complete selectivity in his choice of a car. In addition, working through a local dealer offers the dealer an opportunity to service the car on a continuing basis.

"In our company, we also make a practice of mak­ing "clean deals-the dealer from whom we purchase a new car is not forced to take a used car as part of the transaction," Culp said. "This is an obvious added benefit to the dealer and thus is an added induce­ment, in addition to the leverage of mass buying power, in getting a favorable price and complete make-ready."

9.  Safety-A strong, continuing safety program can help any fleet user to hold down extra costs resulting from accidents-lost time and money, excessive maintenance¹ and high-price repair work. Fleet opera­tors with such programs always find that their units operate at maximum efficiency and are in better con­dition at the end of the lease period, so the leasing company which can help in formulating a good safety program for the lessee is offering an extra benefit.

10.  When to sell-According to Culp, experience in proper timing and a "feel" for the used car market is all-important. The leasing company must be able to recommend replacement schedules which will result in cars coming off lease at times when they will bring optimum prices. Premature replacement will mean that the fleet operator is losing some valuable service time from the car. Tardy replacement will mean exces­sive maintenance for the work accomplished.

"What it boils down to is timing which will result in maximum operational use with minimal mainte­nance cost," Culp explained.

11.  How to sell-Probably even more important than the timing is the manner in which cars coming off lease are sold. The leasing company must have men who are skilled in merchandising used cars at the best possible price through all of the methods used for disposition of used cars. This includes new car dealers, used car dealers, wholesalers and auctions. The marketing department must be capable of decid­ing which of these to use for a specific car at a given time and place so as to realize top dollar for the car.

"Again referring to our own company, when we sell cars directly, bids are based on visual inspection of the car and are on an "as is" basis," Culp said. "This obviates any unnecessary haggling over recondition­ing the car since the dealer is not buying a mythical "average" car at a price worked out as fair for all cars of that particular make and model at the given time."

12.  Who gets the "overage" bonus-Since one of the key features of the finance lease is the possible bonus at the end of the lease period for the ear that has been kept in good shape and therefore commands a premi­um price, the leasing company should not share in "overage" resulting from that good care. If the leas­ing company shares in overage, it should also stand ready to share in any "underage" or penalty paid by the lessee when maintenance has been so poor that the used car brings less than the book value or origi­nal price less depreciation.

"This sharing would, of course, negate much of the economy inherent in the finance lease," Culp ex­plained. "We feel strongly that the lessee who earns an average bonus through proper maintenance should get all of it. As for the argument that a share in the average would act as a stimulant to the leasing com­pany to get a better price for the used car, it seems to us that getting top dollar for the car is something the leasing company must do to retain its customers."

Analyze Finance, Maintenance Lease Procedures

13. No fees-The leasing company should not access buying or selling fees which result in reducing the price of cars coming off lease. In effect, this causes an unwarranted increase in the depreciation of the car over which the lessee has no control, no mailer how assiduously his man has cared for the car.

"The finance lease is most economical where the lessee is conscientious in proper care and maintenance of the vehicles," Gulp concluded. "There need he no concern for the open end, or contingent liability fea­ture, on a finance lease where both parties approach the lease from a sound business standpoint. On the contrary, this feature should be a plus."

Proponents of maintenance leasing also claim many advantages for this form of leasing, some of which are in conflict with those put forth by those who favor finance leasing.

Those who advocate maintenance leasing state that it is a fixed cost type of leasing with all lease costs covered-purchase, delivery, maintenance, repairs, in­surance and the sale of the used vehicle. A company that adopts a maintenance lease is out of the auto business. All fleet expenses can be budgeted in ad­vance for the period of the lease and are covered by the monthly rental to the leasing company.

In maintenance leasing, all risk of depreciation is borne by the leasing company which sometimes can be of considerable advantage to the lessee. Losses re­sulting either from the decline of used car prices, mis­used vehicles and wear and tear are borne by the leas­ing company. This is a major difference from a finance lease under which the lessee stands behind the lessor and is responsible for any deficiency in the deprecia­tion reserve set up to cover the anticipated price of the used vehicle. In the finance lease, the lessee is inti­mately concerned with the price the used car will bring and is utterly dependent upon the ability of the lessor to obtain top dollar for the vehicle.

Maintenance leasing, like finance leasing, can be more economical than company or salesman owner­ship. Maintenance lease rates are based on the cost of the vehicle, estimated maintenance and repair costs, the estimated resale value of the car and the cost of money to the leasing company.

In maintenance leasing, a company is actually entirely dependent upon the performance of the leasing company. For the duration of the lease, a company is "married" to the leasing company. Thus, companies investigating a maintenance lease should satisfy them­selves in advance as to the ability of the lessor to de­liver the services involved in the contract.

Obviously, both finance and maintenance leasing offers many different advantages to the fleet user. A fleet should first decide if leasing is the answer to its car requirements and then analyze the merits of both types of leases. Above all, choose a reputable leasing company.