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ALG Revises Vehicle Residual Values to Reflect High Fuel Costs

July 29, 2008

SANTA BARBARA, Calif. - Automotive Lease Guide Inc., a provider of residual value forecasts and consulting services to the automotive industry, announced a significant repositioning of its residual value forecasts.

The repositioning is in response to the sharp increase in fuel costs over the past five months, which has spurred consumers to flee vehicle segments with poor fuel economy, such as SUVs and full-size pickups, and to seek more fuel-efficient options.

ALG has been gradually lowering residual values on pickups and SUVs for several years, as more alternatives such as crossovers have entered the market and as gasoline prices have increased. However, ALG believes that the rise in gas prices from approximately $3 per gallon to over $4 per gallon between February and June of this year, amplified by the challenging economic conditions and credit crisis, has caused a structural break in consumer demand for vehicles with low fuel economy.

"The new demand dynamics in the industry have had a dramatic effect on vehicle sales and prices, and ALG has repositioned its residual values to reflect this new paradigm," John Blair, chief executive officer of ALG, said. "The auto industry has experienced a shift that will have a significant impact on long-term used vehicle price trends. We are confident that implementing this residual value adjustment better reflects the future demand conditions in the used car market."

ALG has increased residual values on compact cars, including hybrids, with high fuel economy an average of five percentage points compared to forecasts made during 2007. Conversely, residual values for full-size pickup trucks, full-size SUVs and mid-size SUVs have all been shifted downward an average of eight percentage points versus last year.

The residual repositioning will have a significant impact on the cost of leasing. In the compact segment, for example, if a $15,000 vehicle that had a 36-month residual value of 45 percent a year ago is now expected to retain 50 percent of its value after three years, monthly lease payments would be approximately $20 lower, all else being equal.

For a full-size SUV with a $42,000 sticker price and an 8.5 percentage point decline in its residual value, monthly lease payments would rise approximately $100, all else being equal. Changes in manufacturer cash incentives and/or finance support often materially affect actual lease terms.

Although automakers are adjusting their production to reflect the changes in demand, ALG believes it will be a challenging transition to this new environment, especially if gas prices continue to rise.

Blair said, "The sea change in consumer sentiment away from gas-guzzling vehicles will continue to drive down used vehicle prices in the truck and SUV segments. When economic conditions improve, we expect a more stable environment, but we would not expect used vehicle prices to return to 2007 levels unless gas prices drop to sub-$3.00 levels for at least a year."

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