A New Lease On Life

IN THE PAST FEW YEARS, AS CAR BUYERS have switched from owning to leasing by the millions, analysts have warned that the automakers would hit the wall hard. When the first big wave of those contracts came due, they predicted, all those low-mileage Tauruses and Toyotas would crash into the sales and leases of new cars. All of a sudden, the automakers would be stuck in a Ponzi scheme of their own making.

That day of reckoning has finally come in Detroit: this year alone, 1 million leased cars will pour back into the marketplace, and automakers expect an additional 1.5 million in 1995. But put those predictions of Armageddon on hold-there's plenty of gold left in leasing. Analysts and even automakers still worry about the long run. "If leasing goes on at this rate, eventually someone has to pay the piper," says analyst Joseph Phillippi of Lehman Brothers. "That someone is the automakers." But for now, leasing has worked out better for everyone-consumers and carmakers alike-than doubters in the press and Wall Street ever imagined. And now that the economy is back on track and the public is clamoring for mint-condition used cars, manufacturers are hoping to lease those two-year-old cars all over again.

Although leasing has been around for decades, a combination of rising sticker prices and shrinking disposable incomes has fueled the recent boom. In 1993, the average price of a car was $18,100-up 70 percent from a decade ago. Because lease payments just buy the use of the car for the duration of the contract, the monthly cost for consumers is much less than with traditional financing. "People just don't feel they can afford the down payment and the big monthly bite of buying a new car," says consultant Chris Cedergren of the Auto Pacific Group in Santa Ana, Calif. This year 2.7 million people will lease cars and trucks, accounting for nearly 25 percent of all new vehicles, up from 13.5 percent in 1990. By the end of the decade, half of all vehicles are likely to be leased, estimates Art Spinella of Bandon, Ore.-based CNW Marketing/Research. The clear leader in the business is Ford Motor Co.; the No. 2 domestic automaker produces three of the country's top-five leased vehicles (chart). In the past year, companies ranging from Mitsubishi to General Motors have beefed up their leasing programs as well. More than half of the vehicles Lexus has sold this year were leased-up 10 to 15 percent from just two years ago.

Now the automakers are finding that even after two years, leased cars are still a hot commodity. Lately, 1992 models have been selling for more than the current value listed in the so-called Blue Book, the industry's used-car pricing bible, says Salomon Brothers analyst Jack Kirnan. Why is the demand so great? During the recession, consumers held on to old cars longer, so now there's a shortage of low-mileage used cars. The average car on the road is more than eight years old; it has never been older. And an estimated 11 million people are finally feeling flush enough to replace their clunkers, experts say. Today there are only about 2.8 million used cars available. Even with the 3 million leases expected to come due by 1997. the demand for topnotch used cars is not expected to be met for years. "It's certainly manageable," says Michael Jordan, Ford's director of rental distribution.

Yet to maintain the momentum, manufacturers must step up the pace in a complex pricing game. The problem: they want to keep offering cheap new-car leases and still get top dollar for the two-year-old models coming back into the market. That could mean charging consumers more for a 1992 vehicle than a lease on a spanking-new one. The solution? Instead of selling the cars at the end of their leases, manufacturers and dealers will try to release them, either to the previous customer or someone else. This year, 7 percent of previously leased cars were leased a second time, 4 percent of those to the same owners. Within the next couple of years, that total is expected to double.

In the near term, such schemes will help pave over the bumps for manufacturers. But the road ahead isn't so clear. The used-car market won't stay strong forever, and the industry is bound to face another economic downturn. Analysts project that by 1998, the average age of cars on the road will be six years, and the most beat-up vehicles will have been replaced. If leasing continues to accelerate, that means more low-mileage used cars will be dumped on a saturated market every year. "In the next couple of years, we may find that used-car values have softened and prices will drop," admits George Reganis, who directs leasing for GM.

By then, automakers may be fighting another chilling trend: demographics. There are now more than 178 million cars and trucks on the road. That's one for every American older than 15, a number that has held steady since 1991. The generation of American new-car buyers is also getting smaller. This year, for example, there are 2 million fewer 19-year-olds than there were a decade ago.

Manufacturers hope they can swerve around those problems by re-leasing each car several times, but there are holes in that scenario. While continued re-leasing might work with luxury cars, it is less viable with economy cars. Ford is promoting leases on the Escort, which costs $12,000 with all its options, but how many customers will want to re-lease an Escort a third or fourth time around, even if it's dirt-cheap? "The automakers say they're not worried about the low end of the market, and I think they better start worrying," says Cedergren of AutoPacific.

The future is much less cloudy for consumers. High used-car prices mean there won't be a bonanza just yet. But the influx of previously leased cars promises better variety, especially in luxury models. Nearly 15 percent of all cars leased today are in that class (compared with only 5 percent of those sold), so buyers who've had their eye on, say, a bottle-green Lexus will have plenty to choose from. And quality is rising as well. Leased cars are often kept in better condition than cars that are owned; lease holders are penalized for excess wear and for driving much more than 15,000 miles a year. And re-leasing a previously leased car will still be cheaper than buying it. Now, for example, you can re-lease a 1992 Ford Taurus for $250 a month, with no down payment. It would take $270 a month for four years to buy the same used car. And then you'd be stuck with a six-year-old car worth very little.

Consumers looking to lease new cars will also continue to find good deals. Automakers are still working to convince average Americans that it makes more sense to lease than to buy, and they'll continue to offer terrific incentives to entice them to switch. Experts say this is the time to get rid of that six-year-old economy model and lease a Buick Century or a Honda Accord, fully loaded, for less than $300 a month. Even rising interest rates aren't likely to dim the picture. With millions of used cars coming to market, new-car dealers will be forced to cut into profits to keep monthly lease prices low. In the end, whether consumers choose to lease a new car, re-lease one a couple of years old or buy that used beauty for cash, there are deals to be driven. As for the automakers, leasing is still a ticket to ride. The trip will give them time to plot the next move.

In 1993, leases accounted for nearly 28 percent of all new cars. The following are the most popular vehicles; leases are for two years and prices are estimates.

Ford Taurus Price: $17,150 Monthly lease: $251 ($1,993 down) Ford F-Series Pickup Price: $18,375 Monthly lease: $223 ($1,846 down) Ford Explorer Price: $24,090 Monthly lease; $311 ($2,448 down) Honda Accord Price: $16,870 Monthly lease: $239 ($1,500 down) Cadillac DeVille Price: $34,810 Monthly lease: $399 ($2,431 down)