This category covers establishments primarily engaged in extended-term leasing of passenger cars without drivers. Establishments primarily engaged in finance leasing of automobiles are classified in SIC 6159: Miscellaneous Business Credit Institutions.
532112 (Passenger Cars Leasing)
The passenger car leasing industry is comprised primarily of companies that provide corporate clients with a range of fleet management services in addition to automobile leasing. About 30 percent of all "company cars" in the United States are leased. According to Consumers Research magazine, a third of all cars were leased in 1996 and one in four persons who bought a new car leased it. That figure represented an increase of 400 percent from 1984, and many industry analysts were optimistic that 50 percent of all vehicles would be leased during the early 2000s. However, after a record year in 1999 lease volumes quickly plummeted. A number of factors contributed to this decline, including zero-percent financing incentives that made new vehicle purchases more attractive, as well as weak economic conditions that had a negative impact on corporate spending and employment levels.
Fleet management services can be classified broadly as vehicle acquisition, maintenance management, fleet disposition, and fleet support services, which range from fuel credit cards to driver safety programs. The National Association of Fleet Administrators reported that the most popular services were vehicle ordering, delivery to individual drivers, insurance subrogation, and accident repairs. Most companies in the industry also leased light trucks and utility vehicles.
Leasing of cars to individuals boomed during the early 1990s, and many automobile manufacturers began to coordinate more closely with their financing arms and dealer networks to capture a share of this growing market. The automakers' efforts lured some customers away from banks and independent finance companies. However, by the early 2000s the automotive industry was moving away from leasing. Several leading finance companies exited the leasing business altogether, while those owned by automakers scaled back their activity. This was because of the hefty financial losses these institutions incurred when used vehicle values fell significantly during the early 2000s, affecting the residual values of off-lease vehicles.
The automobile leasing industry developed in the 1940s as companies looked for affordable ways to provide their sales and service personnel with reliable transportation. Petrolager, a large pharmaceutical company in Chicago, was an early case in point. Petrolager began by paying part of the cost for employees to purchase their own cars, but that became a losing proposition when the employees left for other jobs and took the automobiles with them.
In 1939, Zollie Frank, a car dealer in Chicago, suggested that Petrolager lease five automobiles for its salesmen instead of purchasing them. The benefits were twofold. Petrolager would retain control of the vehicles and also avoid large cash outlays. Petrolager agreed, and soon afterward Frank and his brother-in-law Armund Schoen founded the Four Wheels Co., which many in the industry identified as the first automobile leasing company. In 1954, the company became known as Wheels, Inc. It remained one of the largest fleet management companies in the United States in 1997 with more than 160,000 automobiles under lease.
The industry developed slowly, however, especially after the United States entered World War II and wartime restrictions made it almost impossible for leasing companies to purchase new automobiles or replacement parts. However, the industry began to grow in the late 1940s during the post-war economic expansion.
Finance Leasing. In 1946, three former servicemen—Duane L. Peterson, Harley W. Howell, and Richard M. Heather—formed a partnership in Baltimore, Maryland, to counsel companies on fleet management. By 1954, Peterson, Howell & Heather had incorporated and moved into the leasing business.
The company was credited with developing the industry's first "finance lease." Under the PHH Car Plan, Peterson, Howell & Heather would purchase automobiles and lease them to a client for a set monthly fee. When the lease ended, the company would sell the cars to pay off the balance on its original loan. Any surplus was returned to the client, but the client was billed if the resale failed to cover the loan. In a "closed" or "walk-away" lease, by contrast, the lessee had no financial obligation at the end of the lease period.
fIn 1981, a U.S. District Court ruled that finance leases were conditional sales contracts, which eliminated many of the tax benefits of "open-ended" leasing. However, although the percentage of closed or "operating" leases increased, open-ended leasing remained popular even after the court ruling. Automobiles were often sold to the client's employees when the lease expired.
Competition. The car leasing business grew rapidly in the late 1950s. In 1963, Time described the industry, reporting that leasing volumes had doubled to 600,000 vehicles in only five years. This explosion had led to the formation of a new, highly competitive industry worth $750 million, in which some 3,000 companies participated.
Car makers were also beginning to take note of the industry. In 1962, Chrysler Corp. formed its own leasing company, the Chrysler Leasing Corp., which was phased out in 1968. Ford Motor Company and General Motors also announced special financing programs in the early 1960s to encourage car dealers to offer fleet leasing. By 1970, more than 11,000 car dealers were involved in leasing, and the total number of automobiles under lease in the United States exceeded 1 million.
Restructuring. Rising interest rates, as high as 21 percent in 1980, forced many smaller companies out of the industry. However, the Economic Recovery and Tax Act of 1982, which gave vehicle leasing companies substantial tax benefits, attracted several powerful new players. In 1987, for example, General Electric Company purchased GELCO Fleet Management Services, and Ford Motor Company purchased United States Fleet Leasing, Inc. GELCO was later renamed GE Capital Fleet Services.
Impact on Detroit. Because leasing represented a major share of the domestic automobile market, leasing companies had a major influence on U.S. car makers. Clients generally followed their leasing company's recommendations, from broad suggestions about size and optional equipment to specific models.
Until the 1960s, most leasing companies recommended standard six-cylinder automobiles with manual transmissions and very limited optional equipment. But in the 1960s, companies began recommending bigger cars with automatic transmissions, power steering, air conditioning, and radios. By the end of the decade, most corporate fleets consisted of full-size, eight-cylinder automobiles.
In the early 1970s, leasing companies began recommending intermediate-sized cars for better fuel economy. Intermediates accounted for 16 percent of the leased fleets by 1973 and 80 percent by 1977. In 1981, Peterson, Howell & Heather (later PHH FleetAmerica) became the first major leasing company to recommend compact cars. More than half the fleet automobiles leased in 1981 were four-cylinder cars. The most popular cars leased in 1995 were midsized: Ford Taurus, Honda Accord, and the Ford F-Series pick-up. Until the late 1980s, leasing companies almost never recommended foreign makes of automobiles, even if they were built in the United States.
Corporate downsizing and cost-cutting in the early 1990s also affected the automobile leasing industry. Fleets were reduced either because corporations had fewer employees or because they eliminated benefits such as company cars. The number of car leasing establishments decreased significantly from 1,144 in 1990 to 531 in 1996. The number of industry employees also decreased, from 10,800 in 1990 to 5,700 in 1996, a decline of almost 50 percent. However, the largest leasing companies gained business during the same period.
In late 1999, the decline of personal use leasing continued, with leased cars accounting for 31.8 percent of the new car market, down 3 percent from the previous year.
In general, leasing companies that also provided fleet management services were optimistic about the future, as more corporations began to contract for services that previously were provided in-house or new services that offered better control of costs. Many corporations with large fleets also looked to leasing companies for help in meeting federal regulations regarding fuel efficiency.
The Uniform Consumer Leases Act was expected to be in force by the year 2000. This Act was expected to harm automobile lessors, primarily because it was a largely onesided document, emphasizing consumer needs. It included language regarding lease rate disclosure, open-end lease restrictions, GAP coverage provisions, and limitations on determination of excess wear and tear.
Automobile manufacturers found that leasing increased brand loyalty and provided dealers with a steady stream of good used cars. However, some analysts worried that as leasing gained in popularity, the resulting flood of used cars could deflate prices and detract from new car sales. The trend toward used vehicle leasing was expected to combat such issues. In addition, some car makers found that short-term leases meant that products needed to be updated more quickly, or else consumers would likely switch to a competing product. In order to distinguish themselves in the increasingly competitive leasing field, manufacturers developed innovative programs, including a 12-year lease with replacement every two years, and a weekend-only lease for urban residents. In 1999, fleet dealers were focusing on customer service and marketing segments to retain their competitive edge.
Passenger car leasing remained a significant component of the nation's economy during the early 2000s. At that time, the National Association of Fleet Administrators, Inc. (NAFA) reported that its members were "responsible for the specification, acquisition, maintenance, and disposal of more than 2.7 million vehicles. These vehicles, with an average initial cost of $16,400, put NAFA Members in control of more than $44 billion worth of assets."
Nonetheless, the industry was not without its challenges. Although passenger car leasing industry revenues increased approximately 3 percent in both 1999 and 2000, U.S. Census Bureau figures reveal that revenues fell almost 3 percent in 2001. By that year the U.S. economy had started to decline. Although some industry observers noted that commercial leasing remained an attractive option for corporate America, the weak economy led companies in many American industries to implement massive workforce reductions and cut back on spending. These factors challenged automotive leasing companies in 2002 and 2003 and likely had a negative impact on overall industry revenues.
One factor that worked against the leasing industry during the early 2000s—namely in the consumer market—were zero-percent financing incentives from automakers. These offers affected the leasing market in two ways. First, they brought down the value of used vehicles. This worked against the residual values of leased vehicles (the amount vehicles are worth at the end of a lease), which is a key factor when determining monthly lease payments. As Automotive News explained in its February 1, 2003, issue, Automotive Lease Guide figures revealed that average vehicle values following a 36-month lease had fallen to 47 percent of sticker price. This was a decrease from 53 percent in late 1998.
In the past, some leasing companies overstated residual values in order to lower monthly payments for consumers and increase new lease volumes. These practices contributed to the significant financial losses incurred by banks and other financial institutions during the early 2000s. In August 2002, the Pittsburgh Post-Gazette cited results from a Consumer Bankers Association survey revealing that, on average, both automaker-owned and independent finance companies lost $2,451 per vehicle in 2001. This was an increase over per-vehicle losses of $2,342 in 2000 and $1,200 in 1998. In the wake of these losses, leading financial institutions like Bank One Corp., Bank of America Corp., KeyCorp, and GE Capital Corp. stopped offering vehicle leasing.
Zero-percent financing deals also hurt the automotive leasing market because they made buying a new vehicle more attractive than leasing one. According to the Association of Consumer Vehicle Lessors (ACVL), new lease volumes fell from 2.57 million in 2000 to 1.5 million in 2001—a decline of 40 percent. This trend continued in 2002. From January through November 2002, the ACVL reported that, in comparison to the same time frame the previous year, new lease volumes declined almost 15 percent. Considered together, the association explained that these figures meant that lease volumes fell about 50 percent from 2000 to 2002.
The largest vehicle leasing company in the United States and the world, Eden Prairie, Minnesota-based GE Capital Fleet Services was founded in 1957 as the General Leasing Co. General Leasing, which changed its name to GELCO Corporation in 1972, acquired six other companies between 1968 and 1974, including Interstate Vehicle Management; the Interstate Fleet Corp.; Selig Leasing Co.; Lease Plan, Inc.; and the Valley Leasing Co. In 1987, the company was purchased by GE Credit Corporation, which formed GE Capital Fleet Services. In 1996, the company acquired JMJ Fleet Services and began offering fleet management services to corporate and governmental customers throughout Australia. In 2003, GE Capital Fleet Services was a business unit of General Electric subsidiary GE Equipment Management, which recorded sales of $4.3 billion in 2002. At that time, the company employed 3,500 workers and was responsible for more than 1.2 million vehicles.
PHH Arval, a subsidiary of Cendant Corp., based in Hunt Valley, Maryland, was the second-largest automobile leasing company in the United States. PHH also provided a full range of fleet management services. In 2001, the company employed 1,200 workers. PHH was founded in 1946 as Peterson, Howell & Heather, Business Consultants, with the intention of advising companies on fleet management. The business was incorporated in 1954 and moved into leasing with the industry's first finance lease program. In 1975, Peterson, Howell & Heather also became the first major leasing company to recommend compact cars to its clients.
The company became the PHH Group, Inc., in 1978. The fleet management division retained the name Peterson, Howell & Heather until 1986, when it became PHH FleetAmerica. PHH FleetAmerica also acquired the domestic operation of Avis Car Leasing, Inc. in 1986. In 1972, PHH offered vehicle managing and leasing operations in the United Kingdom, expanded to Germany in 1987, and extended service to clients in France, Italy, and Belgium in the mid-1990s. In 1988, PHH Group became the PHH Corporation. In addition to vehicle leasing and fleet management, the PHH Corporation provided international relocation, real estate, and mortgage banking services. In 1997, PHH was acquired by HFS, Inc. (predecessor to Cendant Corp.), and in 1999 was sold to Avis Rent A Car. In 2001, Cendant bought Avis and reacquired PHH in the process, making it one of many subsidiaries.
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Association of Consumer Vehicle Lessors. "Consumer Vehicle Lease Volume Down 14.5 percent in 2002—Down 50 percent Since 2000!" 23 December 2002. Available from http://www.acvl.com .
——. "Lease Volume Down 40 percent in 2001." 26 September 2002. Available from http://www.acvl.com .
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Hoover's Company Capsules. 2003. Hoover's Inc. Available from http://www.hoovers.com .
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Levin, Doron. "Auto Leasing Has Declined in Popularity." Pittsburgh Post-Gazette, 23 August 2002.
U.S. Census Bureau. 2001 Service Annual Survey: Rental and Leasing Services. 15 January 2003. Washington, D.C.: U.S. Department of Commerce, Economics and Statistics Administration, U.S. Census Bureau. Available from http://www.census.gov .
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