Why Blue Oval lease pullback is likely industry outlier

CINCINNATI - 

Even with about two weeks to consider it, Swapalease.com executive vice president Scot Hall still couldn’t remember when an automaker and its captive finance company decided to cut back on new-model leasing activity without dramatic conditions being in place.

“I’m not saying it’s never happened, but I don’t recall this ever being announced by a major automotive manufacturer where there wasn’t some sort of significant outlying factor such as the recession back in ’08 or ’09. I just don’t recall it ever happening,” Hall shared with Auto Remarketing during a recent phone conversation.

“There may be some extenuating circumstances where the whole industry has cut back, but I don’t recall just a single manufacturer making this sort of announcement ever,” continued Hall, who has spent nearly 17 years of his more than two decades in the industry with Swapalease.

What triggered Hall’s reaction — and perhaps similar ones by other observers who watch leasing closely — was the strategy acknowledgement made by Bob Shanks, who is Ford’s executive vice president and chief financial officer. During the Blue Oval’s conference call back on Jan. 26 to announce its fourth-quarter and full-year results, Shanks mentioned during the automaker’s prepared presentation that the OEM through Ford Motor Credit would take its foot off the leasing accelerator so to speak.

“I just want to highlight that you can see the industry continued to lease at a pretty healthy rate if you will,” Shanks said when referencing a chart containing data from the J.D. Power PIN Network along with Ford Motor Credit information. That chart noted the industry rolled new metal over the curb attached to a lease at a 29-percent clip during Q4. Meanwhile, the Blue Oval’s captive posted a 19-percent lease penetration rate in connection with the new vehicles Ford retailed in the closing quarter of 2016.

“We actually have had a strategy to take down our lease penetration at Ford Credit,” Shanks said during the OEM’s conference call. “This is in response to higher incentives, which is making leasing very expensive as well as lower auction values and recognition of all the units coming back to markets.

“So you can see that we’re starting to separate a bit from the overall industry. And in fact, on a full-year basis, which you don’t see here, we leased at (a rate of) 22 percent, which is actually unchanged from 2015. The industry was at 30 percent,” he continued.

Without credit availability evaporating as it did during the Great Recession nor vehicle production being disrupted worldwide as what happened following the tsunami striking Japan almost six years ago, leasing industry participants such as Hall and Swapalease are left puzzled by Ford’s choice.

“My initial reaction that it just seemed to be a little short-sighted in nature to do that kind of a cutback,” Hall said.

“I can understand being a little bit anxious about having a lot of leases out there and making sure that when those are returned at the end of the lease that there’s not a significant amount of money lost or whatever anxiety might be caused involving the individuals responsible for getting those vehicles remarketed,” he continued.

Rising new-model prices

Hall acknowledged the figures involving new-vehicle leasing certainly are getting larger.

Kelley Blue Book estimated average transaction price (ATP) for light vehicles in the United States was $34,968 in January, increasing by $1,123 or 3.3 percent year-over-year.

ALG’s estimate of average transaction prices in January came in slightly lower at $33,127, but it still represented 1.4 percent gain versus a year earlier. And the average incentive spending that concerned Ford’s leadership, ALG said it climbed by $645 to $3,635 per unit last month.

ALG analysts added the ratio of incentive spending to ATP was 11 percent, up from 9.2 percent a year ago.

With those figures all on the rise, should the industry be more concerned whether or not consumers can afford vehicle leases? Or perhaps only the individuals with super-prime credit and six-figure incomes?

“We may already be at the point where people either have the choice to do a lease or what I would call an extended term installment loan, something above and beyond five years. We may already be reaching the point where we’re starting to see the two realistic choices for your average household being do a lease or do a loan that you’re going to be in for quite some time, something in that six-, seven-, I’ve even seen some eight-year terms being advertised,” Hall said.

Which brings us back to what Hall said is one of the most important aspects of leasing — term length. And he reiterated his pitch that the industry should not only be participating in new-vehicle leasing, but used-car leasing, too.

“We remain very bullish on the fact that used-car or CPO leasing would be a very good thing for these manufacturers as well as dealers for that matter,” he said.

More applicants, but lower approvals

From another consumer standpoint, leasing remains popular as Swapalease’s site activity is indicating. Hall explained that more consumers than ever are completing applications on Swapalease.com, and as a result it’s impacting approval metrics.

Swapalease.com reported lease credit applicants registered only a 50.0 percent approval rate for January, down slightly from December’s level of 54.2 percent. A year earlier, the approvals rate came in at 63.6 percent.

The site noticed January’s approval rate was the lowest lease credit approval rate in the past three years. In 2016, the lowest lease credit approval rate was 54.2 percent in December. In 2015 and 2014 the lowest rates were 54.5 percent and 56.5 percent respectively.

Hall explained the lease credit approvals rate is often similar to the rise in credit card accounts in the U.S. As more applicants file, the higher the chance for applicants to be denied. According to the American Bankers Association, credit card delinquencies increased to 2.74 percent of all accounts in the third quarter of last year.

“By no means do I think leasing is trouble or even more specially the lease transfer business. In fact, I think the opportunity quite large,” Hall said. “One of the biggest hurdles we’ve had as a business is just getting the word out about the fact that you can actually transfer leases.

“Now that we’ve been at this for 18-odd years, we’re starting to reach that tipping point finally,” he added.

Closing sentiment

Bottom line: While Ford decided to pull back on leasing activity, Hall maintained that the industry should consider an overall penetration rate at or even above the 30-percent mark to be good for consumers, dealers, automakers and finance companies.

“When you have 31 out of every 100 vehicles leased, approximately three years down the road you’re going to have a whole of people out in the market who are looking more than likely to get another lease,” Hall said.

“Granted maybe not all of those people will stay in a leasing cycle the next time around. But if history is any indication, there is a good chunk of them who will,” he continued. “We believe that’s great for dealers because they’re seeing those customers again in essentially half the time they might see them in a traditional auto loan. And it’s also good for the manufacturers in planning production and what have you to make sure dealers have the right inventory in stock at the right time.

“We expect even more growth in leasing,” Hall added.

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