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Leasing activity rebounds to 20% of new-vehicle activity this year

November 22, 2010

As strengthening prices of domestic used vehicles prompt automakers to offer attractive deals, auto leasing is regaining popularity after four years of decline.

Leased vehicles accounted for nearly 14 percent of new vehicle sales by Detroit automakers in the second quarter, up from about 8 percent a year ago, according to a July 30 report.


Industry-wide, leases have accounted for 20 percent of new vehicle sales so far this year, up from 18 percent last year but off from a peak of 36 percent in 1999.


"The popularity of leasing is on the rebound as residual values have recently firmed," Merrill Lynch auto analyst John Casesa said in a note to clients.


Vehicles coming off leases at the end of contracts usually are sold at resale auctions. When residual values, or used car prices, fall more than expected, automakers can lose money.

But with the firming of used car prices, which were up 2.7 percent in June from year-ago levels, automakers are expanding their lease offers, said Paul Taylor, chief economist with the National Automobile Dealers Association.


Together with sales to fleet and daily car rental companies, leasing offers another outlet for Detroit’s Big Three automakers to cut bulging inventories of unsold vehicles as they try to stem market share losses to Asian rivals.


However, foreign-based car companies are also enticing consumers with attractive lease offers, and the business could become more competitive than ever.


Toyota and Honda, which typically don’t offer aggressive consumer incentives, have some of the most lucrative lease programs, said Art Spinella.


Honda offers a three-year lease on its Accord sedan for as little as $189 a month, half of what the monthly payment would be if a consumer purchases it.


utomakers, which typically use leases to lure consumers into more expensive vehicles with low monthly payments, are also expanding their lease programs to support dealers’ growing factory-certified used-cars business, said Spinella, president of CNW Market Research.


Some of the vehicles that are returned at the end of a lease contract are mechanically and cosmetically refurbished and sold to consumers as certified used cars, backed by factory warranties.


It is very lucrative," Spinella said. "It is a pretty good profit generator for the auto companies."

Manufacturers usually extend factory warranties on late-model vehicles with low mileage and no major damages.


Consumers pay an average premium of $900 for a certified used vehicle as compared with a non-certified one," Spinella said.