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After Years of Decline, Leasing Regains Favor With Car Buyers

August 02, 2004|From Reuters

DETROIT — Auto leasing is gaining popularity again after four years of decline as higher prices for used vehicles prompt U.S. automakers to offer attractive deals, analysts said.

Leased vehicles accounted for nearly 14% of new-vehicle sales by Detroit automakers in the second quarter, up from about 8% a year ago.

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

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

Vehicles coming off leases at the end of contracts are usually 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% in June from year-ago levels, automakers are expanding their lease offers, said Paul Taylor, chief economist with the National Automobile Dealers Assn.

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 Motor Corp. and Honda Motor Co., which typically do not offer aggressive consumer incentives, have some of the most lucrative lease programs, said Art Spinella, president of CNW Market Research.

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 bought it.

Automakers, who 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-car business, Spinella said.

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.

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