Why Leasing May Cost You More This Year

Posted on May 1, 2001 by LCT Staff - Also by this author

The direst experts are calling it a recession. President Bush and his advisors are calling it a slowdown or a correction. The fact is that the nation’s economy has shown negative growth for three consecutive quarters. The NASDAQ has plunged 50 percent from March 2000 to March 2001. Ninety of Fortune Magazine’s top 100 tech stocks of 2000 lost more than 50 percent of their total value in the last year. Many went from yesterday’s darlings to today’s disasters. The Dow has fallen below 10,000 (in late March), and e-commerce powerhouses like Priceline.com, eToys and Pets.com are now virtually worthless. Despite the fact that the Department of Labor reports that new claims for state unemployment are down and new home sales are actually rising, investors as well as entrepreneurs are worried. As one may assume, the limousine industry tends to mirror the economy. The IPO craze and “bull market” of 1998 up to the first quarter of 2000 fueled the greatest business growth that the limousine industry has ever experienced. Consequently, the last three-quarters of economic “downturn” are frightening to even the most experienced, successful operators and vendors. Here is what some limousine-industry financiers are saying about the economy, and also some advice for positioning your company for the economic uncertainty of the future. Dan Dyson is the owner of Commercial Leasing Corporation (CLC) of Exton, Pa. Prior to starting CLC, he was employed as a manager for Ford Credit for more than a decade. Dyson now handles the financing for mostly B- and C- rated companies. He says that the biggest change that he has seen in this downturn is the fact that he is no longer able to secure funds for start-up companies. “I am getting rejections for solid people who are homeowners and have some credit history,” Dyson explains. “Lenders want to see a history in the limousine or transportation business. The banks that I deal with just don’t want to take a chance. It is very disappointing.” Dyson, whose company is in its second full year of operation, has had to repossess vehicles for the first time. “I just had to repossess a $280,000 bus, but fortunately I found another company to take it,” he says. “I find that we are making payment calls much closer to the due dates and that is definitely a result of the current economic climate. It is the least appealing part of the job, but I have been forced to do it.” As devastating as the downturn in the economy has been for the industry, so too has the failure of Auto Tek Leasing. The New York area leasing company, which specialized in offering credit to marginal operators, filed for bankruptcy last year. Small operators scrambled to untangle deals made with Auto Tek, and banks, such as European giant Bombardier, faced huge losses. Not only did coachbuilders and dealers face losses from Auto Tek, but also entrepreneurs with marginal credit. They were often being shut out completely. A salesman, whose company has not been mentioned in this story, referred to many of Auto Tek’s clients as “credit bandits.” What he meant was these clients would pay top dollar for vehicles plus a high interest rate. “These would be high-commission deals for everyone. You could afford to do very low profit deals when you had these type transactions in the mix. Those days are pretty much over now.” Mike Bedard, limousine/livery manager for Ford Motor Co., says that he has seen a downturn in his company’s sales figures for 2001 as well. “But in our case, we are coming off a record-breaking year in 2000. Yes, our sales are down, but I believe we will end up having our third highest sales year ever in 2001.” Bedard believes that a combination of factors, including uncertainty over the presidential election late in the year, hurt sales. A transfer of power from Clinton to Bush that included more than six weeks of “hanging chads” and Ryder moving trucks seemed to curtail spending on large items throughout the country. “It was a very strange time for everyone,” Bedard says. “But we believe that two factors are working in Ford’s favor that lessens the impact of a downturn in the economy. The first item is that our L-Series sedan (the factory-built, 6-inch stretch) has changed the market considerably. The second factor is that bringing SUVs into the limousine and livery market (Excursions and Navigators) will have a tremendous positive effect. We are very confident as to the long-term health of the industry.” Jim Smith, leasing manager at Brenner Leasing in Harrisburg, Pa., says that his company has not seen a downturn in the last year. “But we did not see growth as we had seen in previous years. We deal with clients that have A and B credit. These are limousine operators that are in a position to handle a downward turn or a few bad quarters. Those operators are being careful about expansion until they believe the turn of the economy is complete.” Smith believes that another segment of limousine operators has been more clearly affected. “The operator who is heavily leveraged is significantly impacted by the downturn in the economy,” he says. “He is the type of person who believes that in order to be competitive in his market, he must update his fleet regardless of cost. That type of individual does not even know or care about the interest rates or fees he is incurring. And when business is booming and the economy is strong he is okay. But he plays it so close on meeting his bills that any downturn in his economic situation can have devastating consequences.” Smith believes that the basic personality of this type of operator is a barrier for effectively preparing for tough times. “This guy has a tremendous belief in himself and his company. If he is having a good year, he believes every year will be good. This can be dangerous.” Smith explains that the most compelling issue facing many of Brenner Leasing’s customers is ... check out the MAY issue of LCT for more on this topic.

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