There is agreement that the leasing and rental industry is about to enter an interesting, if not crucial year. Concern in spots over the new car market, tight money, model and equipment trends, the used car market, warranties, fleet and licensing programs, insurance, taxes, maintenance, and labor costs are but a few of the problems which lie ahead.
Thus, selected industry leaders . . . both manufacturers and leasing/rental companies . . . were asked by Automotive Fleet to provide their personal thoughts or those of their company on the prospects for 1968.
It is interesting to compare the statements of these industry leaders with the "Leasing Forecast for 1968," presented by Arno R. Neuber, executive vice-president, Automotive Rentals, Inc., Pennsauken, N.J., and which appeared in AF, October 1967. Neuber's forecast was based on the consensus of the membership of the American Automotive Leasing Association.
In the AALA forecast, the membership of this organization agreed.
Money-somewhat tight but generally sufficient for substantial and credit worthy lessors.
Money Rates-fairly stable, but on the "up" side.
New Car Sales-up for 1968; probably between 8V2 to 9 million.
Model and Equipment Trend-still favoring up-grading.
Used Cars-good market, with emphasis on clean cars. Better merchandising needed in the wholesale market. Inflationary effect caused by the increase in new car prices should be substantial. However, leasing company used car sales could be materially hurt by deductions for "non-warranted" cars.
Insurance-has and will be a real problem for some lessors. Premiums for all vehicles will undoubtedly rise. Lessors should take a professional approach to this subject and try hard to establish a long term insurance relationship.
State Taxes/Maintenance/Tire Expense and, in fact, all variable expenses will rise.
Personnel-clerical help will continue to be scarce. Salaries on the increase. Supervisory and management people must be developed and carefully trained. Hiring just "experience" is not enough.
Overhead Expense-there is an urgent need to review and control this expense. Your house must be in order to meet competition.
Continued growth of leasing is predicted-but so is the continued addition of new lessors in the field.
Leasing rates are on the rise-lessors are of necessity becoming more selective in accepting new business and are more closely analyzing the fleet before quoting. Usage, mileage, insurance hazard type of lease and credit checks are a "must."
How do the manufacturers see prospects for 1968 in fleet leasing and daily rental?
N. F. Roleson, Director of Fleet and Government Sales for American Motors Sales Corporation, voices these personal thoughts:
"I recently participated on the leasing panel at the National Professional Driving School Association on which Ford and Chrysler were also represented. The one thing that stood out in my mind was that there is nothing particularly new about this phase of the business.
"There is no question but that the daily rent-a-car and leasing business is growing at a rapid pace. Tight money is and will push more companies toward leasing because this will free up their own working capital. Naturally the same situation will make it somewhat more difficult for the leasing companies to obtain money, however, proper risks can certainly obtain the money at a price.
"I don't think there is any doubt but what the trend in these prosperous times is toward higher priced and well-equipped cars.
"The used car market has always been a gamble, however, in times of war and inflation, it would seem to be a good gamble (or the leasing companies.
"The recent changes in warranty as they pertain to other than the original owner, should certainly be reviewed by the leasing companies and their customers in light of the changes for 1968 made by the various manufacturers. This could have some affect on the lease rate."
"Fleet and leasing programs offered by the various manufacturers so far as we have been able to determine, will remain substantially the same for 1968 and there is little to be sad other than the fact that they are designed to and encourage the leasing of automobiles.
"Briefly, we can only say that, in our opinion, insurance, taxes, maintenance and labor costs will continue their sharp upward trend in keeping with the inflation spiral and this fact should certainly be considered especially with long term leases."
J. R. Longon, President, Chrysler Leasing Corporation, expresses his views concerning the prospects for the leasing and daily rental industry for 1968 with "You are absolutely correct that we are about to enter an interesting (if not crucial) year. All of the difficulties which could adversely affect the profitability and expansion tendencies of this vital market are directly ahead of us. At no time in the past years has there been such uncertainties as we face today. Increasing costs of material (as evidenced by the recently announced steel hikes), wage rate increases in the new labor contracts, Federal regulations concerning safety, the recent increase in bank lending rates, spiraling insurance costs, the uncertainty concerning corporate income taxes, are but a few of the dark spots that tend to cloud up one's crystal ball in forecasting for 1968 and beyond."
Longon's personal thoughts on the "Outlook for 1968" are:
"Daily Rental-With continuing expansion of airline passenger travel there is a corresponding demand for daily rentals at airport locations. Present over-crowded facilities and storage/service limitations for the on-airport rental companies will cause the peripheral off-airport companies to expand.
"I predict a continuing growth in suburban daily rental with particular emphasis by the neighborhood automobile dealer. This provides the dealership with additional revenue but also produces a form of 'demonstration exposure' for his new car line. It also relieves him of the problem of service 'loaners' while a customer's car is tied up for repairs.
"Leasing-By now most commercial fleets have evaluated the relative merits of mileage reimbursement vs. company ownership vs. leasing their cars and trucks. If a tight money situation develops many corporate treasurers will reconsider leasing their fleets as a means of freeing up working capital and reducing their costs of administering their own fleets.
"Any growth in leasing to individuals will depend on the lessee's satisfaction with good service rendered by the leasing company, rather than consideration of tight money or increased interest costs.
"Major problem areas for small lease/rental companies:
- Tight money will adversely affect smaller leasing company's growth. Finance sources put a ceiling on line of credit, require larger clown payment, or increase interest rates.
- Larger companies have ability to negotiate lower insurance premiums under a broad-coverage umbrella.
- Shortage of experienced lease salesmen or manager.
"Despite all of the negative factors which might-affect the past spectacular growth of this industry," adds Longon. "I still feel that 1968 will increase about 8-10% over 1967 with daily rental segment accounting for most of the growth."
R. E. Scott, Fleet Sales Manager for International Harvester Company, states "We should point out first that our exposure to this area (leasing and rental industry) of the truck business is largely second hand. Our primary participation in the leasing and rental business is confined to the sale of equipment to leasing company accounts and contracted dealers who are engaged in this type of business. Thus, having no real direct exposure to the ultimate rental and leasing transaction (other than occasional use of finance leasing as a finance tool) we are not properly qualified to make any meaningful projections. . . . Many of our leasing company and. dealer contacts have indicated an expectation of continued growth in leasing and rental and based upon this limited knowledge available to us, we certainly see no reason to feel otherwise.
"I'd be glad to share with you my own personal views with regard to the general subject of the automobile market outlook in 1968," writes H. M. Ramsey, Manager, Leasing Fleet Sales Department, Lincoln-Mercury Division, Ford Motor Company, "and more specifically, what I think will happen to the lease and fleet segment.
"First of all, the car industry in 1968 (including imports) should run between 9.0 and 9.5 million, up substantially from the 8.4 expected in 1967. Reasons for this increase, which could result in a record setting year, include, of course, the deferral of some Ford Motor Company units that normally would have been sold in 1967. More importantly, however, is my belief that the business climate in general will be improved due in part to the simple fact that 1968 is an election year. There's plenty of purchasing power around and all we're going to need to spring it loose is a little optimism that will probably be supplied by the illusion of economic euphoria that for some strange but almost infallible reason occurs in most election years. A cessation or lessening of intensity of the Viet Nam war could bring even a larger increase, with the industry then conceivably approximating 10.0 million.
"Fleet managers recognize the psychological value in having their salesmen drive modern, well-equipped cars. Accessories such as radios and air conditioning are very much wanted."
In addition to psychology, Gulp notes that there is a practical reason for the trend toward putting optional features on leased cars: these cars usually are sold after two or three years, and the "recovery" price is an important factor in calculating the cost of leasing.
"Obviously, a well-equipped car will be more in demand, and will bring a better price, in the used car market than a minimum-feature model." CULP
Gulp predicts the "finance lease" will continue to increase in popularity over other types, such as full-maintenance or net leases.
John A. Blessing, President, Commercial Credit Industrial Corp., Baltimore, Md., is "personally optimistic concerning the future of my company and other similarly well-financed fleet leasing operations for the year 1968. I anticipate an increase of at least 20% in the number of units owned by CCIC and leased to our clients. The tight money market and high cost of money will probably hurt some of the smaller local-type leasing companies, but we don't anticipate such a problem in our operations.
"The used car market and the methods used by the various major lessors in disposing of their used cars is another area that contributes to my optimism."
"For the last four months we have been able to dispose of our cars at an average gain over their unamortized book value. I don't expect the market to continue as firm as it presently is, and there probably will be a downward trend in prices once the strike situation is settled for all of the major manufacturers. However, I don't anticipate the down market that existed last year and earlier his year."
Armund J. Schoen, President, Four Wheels Inc., Chicago, Illinois, states "I think I can initially say the same thing I have said for many years! The leasing of ears and trucks is an ever expanding 'way of life' for American industry as long as we are engaged in the type of economy that is present and projected.
"We have experienced a healthy increase in business this fall and think the momentum will carry over into 1968. Next year (1968) we look for a 10% to 20% increase, provided the economy continues at its present high level."
"The foregoing does not mean that everybody in the leasing business is always going to make money because of the growth. However, I think that the lessons learned in the last two years should have made the lessors of full maintenance leasing aware of the fact that their prices must be realistic, especially so since they are dealing in contracts which are, for the most, of 24 and 36 months' duration.
"Government, that is, both state and federal, concerned with safety, credit and advertising, will also be something which are unknowns over which no one has any control. But, it has been shown that the interest of these political groups is growing and this, too, will have to be a matter of concern and can have a vital dollar effect on operations.
"Somewhere along the line it is to be expected that the manufacturers will become less involved in subsidies to commercial fleets - that will, I think, be a healthy day for everyone!
"With the population increase such as we have, and looking forward to some time in the future to be rid of the Viet Nam situation, the disposal of used cars should be reasonably easy. If this factor is a volatile one - while the market is there, the question is - is the price going to be a good one? We have yet to face a reduction of excise tax some time in the future, plus the possibility of an economy drop in business activity, both of which would have a great effect on the pricing of used cars."
"You raised several points regarding the 1968 passenger car leasing market," writes Hubert Ryan, Vice President and General Manager, Car Leasing Division, The Hertz Corporation, New York City.
"Warranties-The time and mileage provisions have been somewhat reduced-properly so in our opinion. Warranty of a piece of machinery for five years or 50,000 miles is excessive and unnecessary." RYAN
"New Car Market - We now expect to see an adequate supply of the most popular makes and models through the 1968 model year with neither troublesome shortages nor over-production.
"Tight Money - Since your letter of November 22nd the prime rate has gone up. If there is another rise in 1968 it will add to everyone's concern - but efficient companies will master the problem.
"Model and Equipment Trends - Onward and upward! Excelsior!
"Insurance Costs - Probably up!
"'Taxes - Likely up!
"Maintenance and Labor Costs-Anyone who doesn't expect these to rise is probably unaware of reality. Could, parts costs and labor rates possibly remain static in today's world?
"Used, Car Market - Anyone who can predict this with assured accuracy could open a consulting service and name his price. But, experience in past markets and some knowledge of what may come enables us to forecast the market at least a few months in advance. Our best guess is that the used car market appears to be quite stable and strong for 1968.
"Hertz and, 1968-Hertz looks for a strong and prosperous 1968 and our budgets and forecasts reflect this and our confidence in the American market."
Stanley Chason, Vice President, Trucking & Distribution Operations, Lease Plan International Corp., Great Neck, N. Y. states "The leasing and rental of vehicular and other capital equipment will expand considerably in 1968. There is an increasing awareness on the part of corporate; management of the advantages accruing to leasing. The expertise available in the leasing companies for the selection and engineering of equipment as well as the ability to finance will be a strong determining factor in the selection of a lessor. We are experiencing an increasing demand for sophistication in E.D.P. systems and controls. This plus the emphasis on low cost money will tend to minimize the expansion efforts of the new or smaller leasing companies.
"Increased competition on vehicle leasing his started a move towards diversification in service capabilities by the major companies in the automotive leasing industry that will intensify through 1968." CHASON
"I believe the greatest area of growth in the industry to be in full service truck leasing, on long term contracts. This area has been neglected in the past because of the relative ease and glamour attendant to the signing of major passenger car fleet contracts. We are going into a period of tightening money and reduced profits in industry. The costs of moving a product from the assembly line to the ultimate consumer are greater than ever and have become a matter of major concern to manufacturers. As a result, the private truck fleets are coming to the attention of financial management and will be prime candidates for sophisticated full service leasing.
"In conclusion, 1968 will be good year for those leasing companies that will be prepared to offer a broader range of programs in search of new business."
Henry D. Spielman, Treasurer, Transportation Vehicles, Inc., New York City, lists "our educated guesses in the areas which you question."
"New Car Market: Basically we feel there will be an upward trend of 5% in the '68 market as compared to the '67 market.
"Tight Money: Money rates have already increased, but toe feel an adequate supply will be available for those companies that have firmly established themselves with a lending institution.
"Model and Equipment Trends: We feel the definite trend is toward more expensive models with more equipment.
"Used Car Market: We feel that the current strong used car market should continue through the 1968 model run - perhaps even showing a slight increase, due to higher new car prices.
"Warranties: Although much agitation is being shown on this subject, it is our feeling that there will be no significant changes during the '68 model run as opposed to the '67 model run.
"Fleet and Leasing Programs: Same comment applies here, as was made concerning warranties immediately above.
"Insurance: Definite increase - the amount varying by company and its individual experiences.
"Taxes: We expect a general increase in this area, however, the exact amount is extremely difficult to foresee at this point.
"Maintenance and Labor Costs: Needless to say we expect an increase in these areas and our guess is that it will be some 5% over our 1967 costs."
How does the rent a car segment of the industry see 1968?
Jules W. Lederer, President, Budget Rent-A-Car Saunders Leasing System, Inc., Birmingham, Alabama, writes "I get the impression that all CATRALA members are quite optimistic about 1968.
"As businesses in America tend to become bigger and much more complicated, the need for specialists continues to grow. More and more businesses, large and small, are coming to understand that they are expert in their own fields, but not equipped to properly select, maintain and manage modern trucks, tractors and trailers. The day of the shade-tree mechanic has passed. Also, the days when the Model T Ford could be repaired with a screwdriver, a pair of pliers and some baling wire has long since gone. The initial engineering, the preventive maintenance and inspections and the repair of modern vehicles is something for specialists and the leasing companies have more and more to offer in this field. Also the leasing companies can be of real service in setting up driver selection procedures, driver training and safety programs and can assist in the many problems of licensing, fuel tax reporting, handling of accidents, etc."
"With this growing complexity of business and truck engineering, maintenance, etc., I am sure that there will be substantial, continuing growth in 1968 and beyond, more or less regardless of general business conditions. The bigger and more complicated the vehicles and the longer the trips, the more the customers need the services of the well-established knowledgeable leasing organizations.
"Growth percentages of 1968 over 1967 will, of course, vary company by company from less than 10% to 40% and above. My estimate is an average of 18%.
"As to problems in 1968, we will continue to find that many of them are caused by ill conceived laws and government regulations. Many of these problems would disappear if law makers and regulatory officials would just remember that the rented or leased vehicle is not anything new or special that should be singled out. We who rent and lease vehicles do not operate these vehicles. Our customers operate and use them and renting and leasing is simply a substitute for ownership." SAUNDERS
And The Economists . . .
Forecasting an industry trend, at best, can be risky. But a quick glance at the news headlines from every section of the country brings these statements to the fore:
"Leaders See Business Pickup in '68"
"3 Forecast 1968 Economy Gains With Inflation Taking Its Bite"
"U.C. Forecast Panelists Agree Economy Will Advance in '68"
Specifically, after a year in the doldrums, virtually every sector of the economy should enjoy improved business at least in the first half of 1968.
This was the opinion of ten corporation executives who took part in the semi-annual business outlook conference conducted by the First National Bank of Chicago.
There was wide agreement on a good year in 1968, and marked only by a difference in opinion "as to its strength and vigor." Forecasts were made despite "an unusual number of cross currents in the economy which make the outlook in the money markets the most confused it has been in years."
Other uncertainties include the question of Vietnam; whether and when taxes will be raised; strikes and their effect on the economy; the extent of future price increases; possible credit tightening; and the flurry of speculation against the dollar in overseas markets following the British devaluation.
It was agreed, however, that greater spending by government agencies and the consumer will more than offset any adverse influences early next year.
Representing the automotive field at the conference was Franklin H. LaRowe, treasurer, General Motors Corporation, who stated: "There is no question of the underlying strength of demand in today's market. Consumers have the ability to buy and assuming that confidence is maintained, this augers well for sales in 1968. Assuming continued expansion of economic activity generally, total vehicle sales of 10 ¾ million units, including over 9 million passenger cars, is a, reasonable expectation."
In fact, estimates by the McGraw-Hill Department of Economics based on U. S. Department of Commerce. Manufacturers' Shipments, states "Among the durable goods industries, autos, for example, expect car and truck sales to rise 10% next year. This gain would represent a substantial carry-over in sales lost this year because of the strike. But the auto industry expects a slight decline in the level of investment this year."
Summing it all up for 1968 forecasts, J. A. Livingston, financial writer, in the Chicago Daily News, December 26, 1967, stated:
"The Boom Goes On! Economists forecast a prosperous 1968. Production will rise, the standard of living will rise, stock prices will rise. . . The resurgence in Detroit is the big booster. Auto sales are expected to reach 9,100,000, including foreign cars. This would compare with estimated sales of 8,400,000 cars in 1967. Inference: The recent outburst of optimistic forecasts by motor car executives can't be laughed off as commercial ballyhoo."
1968 promises to be a most interesting year! Whether it will be a crucial year, too, for the leasing/rental industry . . . only time will tell!
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