Vehicle leasing: plenty of options

Nation's Business, May, 1991 by Julie Candler

Vehicle Leasing: Plenty Of Options

Many business owners looking for ways to put the brakes on their ever-increasing costs of transportation, particularly during the recession, are deciding their companies no longer need to own the vehicles they use.

More and more companies are leasing the cars, vans, and trucks they need or are having employees drive their own cars and then reimbursing them for their expenses.

Either approach frees company funds for other purposes. Moreover, leasing offers certain tax advantages for companies, and it's tax advantages for companies, tailored to suit almost any business's needs.

The effectiveness of a leasing arrangement can depend in part on the company's own decisions about how and what to leae. For example, by choosing vehicles with an eye toward their resale value rather than just their price tag when new, a firm may save in the long run. A higher-priced car that retains much of its value after the year or two of a typical lease arrangement may cost a firm less than a car that has a lower sticker price but a far lower value at the end of the lease.

"The larges dollar loss [for companies] results from the holding cost--the cost of acquiring the vehicle and what is returned at disposal time; that cost is increasing," says Adlore Chaudier, director of consulting services for Runzheimer International, a Rochester, Minn., firm that tracks transportation costs.

Although some small cars don't hold their value, they generally are more economical to operate than larger ones. Fortunately for drivers of these vehicles, many of the smaller cars of the 1991 model year are quieter, more comfortable, and more powerful than the "econoboxes" of the 1970s. Late-model small cars have more passenger and luggage space than their predecessors, and they also have smoother powertrains, more accessory options, and more sophisticated suspension systems.

Another way to reduce holding costs is to purchase vehicles with a lot of options. In a survey by the National Association of Fleet Administrators (NAFA), based in Iselin, N.J., 70 percent of fleet managers said that this year they are ordering more options on their vehicles. The heavily loaded cars continue to bring the best resale values.

Minivans also bring more than passenger cars at resale, says Linda Martin, service support manager at Whittle Communications L.P., in Knoxville, Tenn. The firm, which publishes magazines and produces videos and other products for specific markets such as schools, has a nationwide fleet of 300 vehicles. "I have never had a car in my fleet," says Martin. Whittle's drivers prefer minivans for delivering materials, and most of the company's vehicles are Chevrolet Astrovans.

Martin contracts through Automotive Rentals, Inc., a major leasing firm based in Maple Shade, N.J., and prefers open-end deals. Under its contracts, Automotive Rentals sets a residual value for each vehicle when it is leased. If resale by the leasing company at the end of the lease brings less than the residual value, Whittle pays the difference. If the vehicle sells for more than the residual, however, Martin's firm pockets the profit.

Some leasing arrangements, on the other hand, are closed-end deals. In a closed-end lease, the lessor returns the vehicle and pays no additional charges at the end of the lease, but the monthly fee under such an arrangement is higher. "Closed-end leases ask the leasing firm assume the risk of depreciation," says Chaudier. "If anything, they will overcharge to cover themselves."

Some fleet managers say they have no problems with resale values of their cars because the leases come with excellent maintenance programs. ARI gives each driver of its cars at Whittle Communications a fleet charge card that can be used at national service outlets such as Goddyear, Firestone, or individual auto dealers' shops.

The driver also receives a book of coupons acceptable as payment for routine servicing every 6,000 miles. "If a driver misses a coupon interval, the company follows up," says Martin.

The cars then are returned to the leasing company at the end of a predetermined time or mileage. "When we turn in our cars," Martin says, "they are clean, with no body damage."

Another company that has found resale values of its leased vehicles holding up is Sunkist Growers, Inc., in sherman Oaks, Calif. Patricia Mueller, fleet and garage supervisor for the company, leases cars, vans, and trucks for Sunkist's 180-vehicle fleet through GE Capital Fleet Services, in Eden Prairie, Minn.

After Sunkist has used the vehicles, Mueller sells them to employees and returns an agreed-upon amount for each car to GE Capital Fleet Services. If the car sells for more than the agreed-upon amount, Sunkist keeps the difference. Mueller says the cars typically are sold for more than their wholesale value but less than their retail value.

"If the driver doesn't want to buy it," Mueller explains, "I post its availability in the office, and another employee will want it." Cars that are not sold are sent to automobile auctions. "Last year," she says, "I only had two cars go to auction, and they were cars I had problems with."