The Prodigal Leased Vehicle - Automakers Face Wave Of 3-Year-Old SUVs No One Wants

[hatrack]

Auto executives just can't catch a break. Add to slumping sales and lofty gasoline prices a ticking time bomb in their auto leasing operations. During the past several years automakers from General Motors (GM) to Nissan Motor (NSANY) to BMW leased millions of cars and trucks. As those leases end, the companies have to take back the vehicles—many of them the gas-guzzling SUVs, pickups, and luxury models people don't want anymore. You know what that means: more pain as the automakers offload those vehicles at a loss.

Art Spinella, president of CNW Marketing Research, estimates that this year alone the industry will lose $4.7 billion on sales of previously leased SUVs. "This caught everyone by surprise," he says. And it's a problem that will keep on giving because many automakers only recently started to write fewer leases. So there are plenty of newly leased gas-guzzlers out there, some with terms as long as 39 months. Spinella sees $10 billion more in lost value as thousands more SUVs come off lease in 2009 and 2010.

When automakers calculated lease terms three years ago, they assumed the cars and SUVs would be worth much more once the lease ended than they are. But resale values on large SUVs have fallen 13% from March through May, with some pickups dropping more than 20%, according to Manheim, the nation's largest used-vehicle wholesaler. Knowing the value has plunged, consumers aren't extending leases on many SUVS and aren't keen to buy the vehicles outright.

That harsh reality is already showing up in carmakers' financial results. In the first quarter, BMW took nearly a $400 million charge for losses on off-lease cars, mostly SUVs in the U.S. GM and Ford (F) have warned that losses from their leasing portfolios will cost them. Ford has said that its usually profitable lending division will lose money this year; GM has hinted that it faces the same issue. Over the next 18 months, GM will incur $600 million in lease-related costs and Ford $1 billion, predicts JPMorgan Chase (JPM)analyst Himanshu Patel. Lehman Brothers (LEH) analyst Brian Johnson thinks their lending arms will write down $1.1 billion and $1.5 billion, respectively. (GM's corporate profits are less exposed than Ford's because its GMAC lending arm, which is 51% owned by Cerberus Capital Management, shares some of the car lease risk.)

EDIT

http://www.businessweek.com/magazine/content/08_31/b4094064675897.htm

[Muttocracy]

1. "This caught everyone by surprise"

Good grief.

[SteveM]

6. Just as surprised in 1973, I imagine (nt)

[AndyTiedye]

7. "Nobody Could Have Anticipated That People Would Not Want to Keep their SUVs With Gas almost $5/gal"

[Muttocracy]

8. I guess SUVs must have gotten better gas mileage back when it was cheaper!!!111 nt

[n2doc]

2. Chrysler just said they would no longer offer leases

For these reasons. It is now cheaper to buy outright than to lease. Who is going to buy these things? There's only so big a market for hauling boats and farm equipment....

I can see a good market as cars for teens though... the gas is so expensive they can't get themselves in too much trouble!

[OwnedByFerrets]

3. If you admit that this "caught you by surprise" you are

admitting you are an IDIOT. The only thing that caught them by surprise is that ALL amerikans arent idiots....only about 29% of them.

[Tandalayo_Scheisskopf]

4. I have an idea:

Chrysler donates one of these leased vehicle returns to every Municipal Police Department, volunteer first aid and fire company and Sheriff's Department in the nation. Takes the tax loss and calls it a wash.

Anything left over, the can donate to social service agencies, both governmental and non-profits like Easter Seals.

Everyone wins.

[Mabus]

5. So much for their "market projections" and trends departments

Looks like their market projects and trends departments were outside having a smoke and drinking kool-aid instead of at their desks checking in with reality.