A comeback in leasing isn’t thriving yet, but leasing did show a stronger heartbeat in recent earnings reports. New lease originations, and lease returns from older leases, both grew in the second quarter, according to some major auto retailers and auto lenders.
That’s good news for new- and used-vehicle sales, especially for luxury brands, which typically are leased new at a much higher rate, and re-sold used, as certified pre-owned.
Leasing appears to be enjoying an uptick overall.
Captive finance company Ford Credit, for example, reports lease share of new-vehicle retail sales was an estimated 20% in the second quarter for the industry, up from 17% a year ago. Before the pandemic, industry lease share was around 30%.
Ford Credit lease share is typically below average, partly because it limits lease incentives, and because it has such a high share of pickup sales. Pickup buyers usually are not lease buyers, especially those who use their pickups as work trucks. Ford Credit says its lease share in the second quarter is roughly equal to a year ago, at just 12%.
For the industry, the bottom fell out of leasing when new-vehicle production fell, starting in the first quarter of 2020. At first that was due to COVID-19 quarantines. Since then, it’s due to supply-chain problems, especially the ongoing computer-chip shortage.
With new vehicles in short supply, manufacturers have cut incentives, including lease incentives. That could be starting to turn.
But as new-vehicle inventories grow, interest rates rise, and worries about the economy persist, AutoNation CEO Mike Manley says manufacturers need to provide affordable alternatives to high prices.
That implies bigger lease incentives, Manley says, in a recent earnings conference call.
“Industry incentives and lease penetration, even though they both have been increasing of late, they’re still significantly below pre-pandemic levels,” Manley says. “OEMs still have a lot of additional tools to help spur demand if it’s needed in the marketplace, such as incentives.”
Leasing should also rise as electric vehicle sales rise, he says.
Analysts say electric vehicles are especially likely to be leased because today many are from luxury brands. Even non-luxury EVs typically are more expensive than comparable vehicles with internal-combustion engines. In addition, leasing qualifies some EVs for the maximum $7,500 federal tax credit, a credit most EVs don’t qualify for via purchase. EVs sold in the U.S. that are not assembled in North America aren’t eligible for the credit when bought. But when dealers, considered a commercial buyer, purchase a foreign-built EV they can pass on the discount from the credit to lessees.
“Leasing continues to recover, but still only reached about 20% of volume versus 30% pre-pandemic. And I think this channel will further grow, particularly with EVs. And as we close out the year, I think we'll see that come through,” Manley says.
Roger Penske, chair and CEO of Penske Automotive Group, says his dealership group would love more three-year-old, off-lease vehicles to sell, but in the recent environment of sky-high used-car prices, the smart move for most returning lease customers has been to buy their own vehicle, instead of handing it in.
Before the pandemic, Penske says the group’s lease share was around 55% of new-vehicle volume, because Penske Automotive has a heavy mix of luxury brands. Not only that, but a high percentage of those customers turned in their cars at lease end, he says.
Without citing specific numbers and compared with those days, the group says its lease share is down for new vehicles, and lease returns are way down, too, as a source of used vehicles to sell. That could change if a recent trend toward lower used-car prices continues.
In addition, many lease customers had extended their leases, because they couldn’t get the replacement vehicles they wanted. That’s less of a motivation, as new-vehicle supply has improved.
Ford Credit reports its lease returns increased in the second quarter, but from a very low year-ago number. Ford Credit says 19% of its lease terminations in the second quarter were turn-ins to Ford Credit, rather than being purchased by the customer or a dealer. That represents about 14,000 units. A year ago, it was only 9% turn-ins, and 9,000 units, Ford Credit says. To put that in perspective, in the second quarter of 2020, it was 76% returns, and 58,000 units.
Separately, GM Financial says 5% of its lease terminations were turn-ins in the second quarter, up from only 1% a year ago.
“There’s really no lease returns coming in,” says Jeff Dyke, president of Sonic Automotive, Charlotte, N.C. “We could sell more cars, no question.”
