Lease-Return Surge Cuts Auto Profits

Lease-Return Surge Cuts Auto Profits

Many automakers are being forced to shift their business model in 2017. This is mainly a direct cause of the high number of vehicles with expired leases being returned to dealerships in 2016. Currently about 20% of the cars for sale on the market are pre-owned and that number is expected to climb throughout the year. Overall, lease returns are up 33% over 2015 numbers.

How does this impact profits? Manufacturers like Ford, Chevrolet, and Chrysler bring in a decent amount of revenue through lease payments. The program was originally conceived to help car buyers get into more expensive vehicles they wouldn't otherwise be able to afford. Automakers make money every month off the payments, which profit them based on the difference between the vehicle value at the time of sale and the expected value upon return. Leases have helped drive the auto industry forward by raising the average auto transaction by 13%, up to over $34,000.

Automakers have prepared for this shift and are compensating by reducing the number of sales driven through leases. Ford started cutting back on leases in 2016 and saw the channel decline from 26% in Q1 to 18% by Q3. Other manufacturers are expected to follow suit to help level out sales in 2017. This will be particularly difficult for luxury lines as about 70% of their sales rely on leases. The auto market as a whole has been growing at a fast clip globally, keeping well ahead of all other growth. A slow down in 2017 will most likely be a good move for the industry and help stabilize prices and new technology development.

Another trend to work around are new models of driving taking root in the U.S. On-demand rides from companies like Uber and Lyft have become a mainstay among consumers. Monthly rental programs are also growing in popularity with manufacturers hopping on the bandwagon. General Motors has introduced the Book by Cadillac model, a rental program, which promises up to 18 vehicle exchanges per year. These creative new approaches to driving will definitely be something to keep an eye on throughout the new year.

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