Is leased-car era coming to a close?

Now that Big Three automakers are scaling back their leasing business, they may have a harder time getting some customers into the kinds of vehicles they've become accustomed to driving. "To totally withdraw from leasing, this is going to cost some people some business," said Earl Hesterberg, chief executive of Group 1 Automotive, a large dealership chain.

Both the Detroit automakers and their foreign rivals are suffering this year from a steep decline in auto sales amid the sluggish U.S. economy. At the same time, they've been whipsawed as high gasoline prices spurred buyers to suddenly shift toward cars and away from trucks -- which had been much more profitable for automakers.

Those trends are combining with Wall Street's jittery credit markets to turn the economics of auto leasing upside down.

• Readers talk: Lame excuses for buying a new car

The main problem stems from the declining resale values of trucks and SUVs that were leased two to three years ago, before gasoline prices shot to $4 a gallon. When leases expire, the automakers' finance units must sell the vehicles and recoup some of their costs. But with today's fuel prices, used trucks and SUVs are selling for far less than the Big Three had anticipated. So they're losing money when they sell those vehicles.

Ford last week wrote down $2.1 billion in pretax profits as a result of unprofitable leases. GM and Chrysler are likely to suffer big lease-related losses through their own lending units.

As of March 31, GMAC held $33 billion in lease assets on the books. Of that, about $14 billion is at risk of being written down as financial losses.

Tom Webb, chief economist at Mainheim Consulting, which tracks used-vehicle prices in auctions run by its parent company, said the declines in recent months are unprecedented. In June, the average sale price of full-size SUVs was 27% lower than a year ago, he said. Pickup-truck prices were down 25%.

The overall decline for all cars and trucks was just 6.2%. Only compact cars saw an increase, of 12.7%, for the month.

The increasing risk of losing money on auto leases has made banks skittish about lending money to automakers' finance units. Chrysler Financial is trying to renew a $30 billion credit facility with 22 banks. But amid concerns about Chrysler's declining sales and lower used-vehicle values, only about half the banks have renewed their commitments so far, people familiar with the matter said.

Chrysler Financial's talks with the banks have involved Stephen Feinberg, founder of Cerberus Capital Management, the private-equity firm that acquired Chrysler and its finance unit last year, along with Chrysler Chief Executive Robert Nardelli and Vice Chairman Jim Press. It's an unusual showing from top brass; traditionally, heads of the finance company would attend such talks, people familiar with the matter said.

Ford isn't going as far as Chrysler, although its move amounts to a way of getting out of the riskiest part of the business without saying it is abandoning it entirely. Ford aims to make vehicles like the F-Series trucks and Explorer SUVs "lease proof" by making terms on leases so tight that the monthly payments are too high to justify.

"The world is changing" in the leasing business, GMAC spokeswoman Toni Simonetti said, "and obviously we have to pay closer attention to it and adjust." She said the firm, which is owned by GM and Cerberus Capital Management, is "working with (GM) on a daily basis."

In Southern California, Ron Fodrey, general sales manager at Santa Monica Ford, said his dealership depends on leases for more than half of its new-vehicle business. Though the dealership doesn't rely on pickup-truck leasing, SUVs remain a big part of the business. But declines in the values of SUVs at the end of the lease period have meant that Ford Credit is taking huge losses, he said.

< previous |  1 | 2 |