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Car leasing runs out of ($4-a-gallon) gas

Chrysler's finance unit is dropping the plans as truck, SUV values fall.

July 26, 2008|Ken Bensinger | Times Staff Writer

High gas prices are stalling the once-popular car leasing business.

Chrysler, the nation's third-largest automaker, said Friday that it would stop offering leases on its vehicles through its in-house financing arm beginning late next week.

The surprise move, the first by a car company, is an alarming indicator of how the downward spiral in truck and SUV resale values is pummeling the auto industry, especially American makers such as Chrysler, whose product mix is heavy on gas-guzzlers.

On Thursday, Ford Motor Co. said it was taking a $2.1-billion write-down on its financing unit, largely because of losses on its lease portfolio.

And Wells Fargo & Co., a leading provider of outside auto lease financing, confirmed Friday that it would leave the auto lease business this month.

In explaining Chrysler's decision, Co-President James Press said, "We've reached a point, in this environment, where the economic advantages of leasing have really disappeared." He said the company would focus instead on offering attractive financing and incentives to vehicle buyers.

Leases from outside lenders, such as US Bank, still will be available, Press said.

For years, leasing has been a popular alternative to buying vehicles, one that was hugely profitable for the automakers. Today, about 20% of new cars are leased, compared with about 30% in the late 1990s, when the practice peaked.

In a lease arrangement, consumers make a monthly payment and at the end of a set period, typically 24 to 48 months, the car is returned to the leasing agency. The agency then sells the car on the secondary market.

The great majority of leases are done through carmakers' own finance companies, which frequently offer discounted terms.

Monthly lease payments are based on the difference between the sales price of the new car and the predicted used-car price at the end of the lease. The used price is known as the residual value.

Historically, that spread has been relatively small, with residual value often as high as 80% of the new-car price on a two-year lease. As a result, payments have been far less than they would be on a loan to buy the same car.

Enter $4 gasoline.

In the last six months or so, a lightning-fast consumer shift away from SUVs and trucks to fuel-efficient cars has slashed the residual values of large vehicles, from more than 50% of new-car value on three-year leases to the low-30% range in the last year.

That's hitting carmakers weighted with SUVs and trucks -- Chrysler, Ford and General Motors Corp. -- doubly hard.

First, the vehicles returned to them after leases expire end up being worth a lot less than anticipated.

Ford, for example, said Thursday that the average auction values on vehicles returned after 24-month leases were $2,700 lower per car in the second quarter than in the year-earlier period, a yawning gap that can add up to hundreds of millions of dollars.

Meanwhile, with residuals declining, the spread on new leases is much larger than before. That jacks up the monthly payment on leases and makes them less attractive to consumers. For many Chrysler vehicles, the lease payment is now nearly on par with the monthly payment on a loan, Press said.

John Blair, chief executive of the Automotive Lease Guide, which publishes the most respected list of residual values in the industry, said he expected to reduce resale values on trucks and SUVs sharply come Sept. 1. On a typical 36-month SUV lease, for example, he expects the value to fall 8 percentage points from the July 1 valuation.

"Gas prices are making anything that's not fuel-efficient difficult to sell right now," Blair said. "Chrysler and the other American carmakers are feeling the brunt of it because most of what they have sold and continue to sell is not appealing to consumers right now."

By getting out of leases, Chrysler said, it hopes to avoid the risk associated with declining residual values while focusing on purchase financing. To that end, it will immediately expand the number of models eligible for 0% financing for 72 months.

Some Chrysler dealers seemed dumbstruck by the news.

"It's a huge deal," said Said Akhtari, sales manager at Tuttle-Click Chrysler-Jeep-Dodge in Irvine. He worried that payment-conscious shoppers, as well as those accustomed to leasing, would head to other carmakers' lots. "I haven't had time to absorb this yet."

Others, however, said they saw the writing on the wall. Salem Arnaout, owner of Simi Valley Chrysler Jeep Dodge, said only about 3% of the cars he moves are leased, compared with more than 30% a few years ago. "It's not just Chrysler, it's everybody with the big trucks and sport utility vehicles," Arnaout said.

Chrysler said Friday that, nationwide, about 20% of its cars were leased.

Chrysler's vehicle mix is more than 70% trucks and SUVs, even higher than those at Ford and GM, which are about 60%.

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