Return to profit unlikely before 2010Credit unit to post loss this year as value of pickups, SUVs falls

Bryce G. Hoffman / The Detroit News

Ford Motor Co.’s plan to cut truck production a third time this year points to a growing financial crisis at a company long dependent on the revenue from its big pickups and SUVs.

On Friday, Ford warned that its financial results this year may be worse than in 2007, when it lost $2.7 billion. Ford also revealed that its Ford Credit financing arm — long a reliable source of revenue even when the rest of the automaker was hemorrhaging cash — will swing to a loss in 2008 as declining values for used pickups and SUVs undermine its lease business.

As record fuel prices force consumers to abandon these gas-guzzlers for more economical cars and crossovers, Ford has been forced to slash production at factories across the United States. The company outlined more cuts Friday and said it will delay by two months the launch of its redesigned F-150 pickup.

“It’s too early to say when we will” see the bottom, Ford CEO Alan Mulally told The Detroit News. “It’s the economy, it’s fuel prices, it’s consumer confidence — it’s everything.”

Along with production cuts, Ford is responding with a plan to retool American factories to produce smaller, more fuel-efficient European models. Mulally also confirmed that the company is reviewing every product in its pipeline, axing those that no longer make sense with gasoline at $4 a gallon and looking for ways to accelerate the introduction of more economical models.

But such changes are forcing Ford to completely re-evaluate the assumptions underlying its turnaround plan, which were based on selling vehicles that deliver higher profit margins.

Though growing demand for smaller vehicles should allow for higher prices in the future, Ford is still hard pressed to net $100 off each compact it sells in the United States, compared to more than $20,000 for its largest pickups.

“Things are going to get worse before they get better,” said Mark Oline, managing director of Fitch Ratings. “They’ve been aggressively restructuring, but the markets are moving even faster. They haven’t been able to keep pace with the decline.”

Retooling may be the only way to keep up with the dizzying change in consumer demand playing havoc with the entire U.S. auto industry, although it will be a costly gamble for a company that already has mortgaged all of its U.S. assets.

But analysts say Ford has the cash to risk it, namely $40.6 billion in cash and available credit lines, while General Motors Corp. and Chrysler LLC are struggling to respond to the same challenges with less access to capital.

“Ford clearly is in the strongest liquidity position,” said Bruce Clark, a senior vice president at Moody’s Investors Service Inc. “There’s certainly growing concern within the market about whether the liquidity of the Detroit Three is sufficient to get them through to 2010.”

Clark downgraded Ford’s outlook from “stable” to “negative” on Friday, citing concerns about the company’s accelerating cash burn rate.

Friday’s news also sent Ford shares tumbling from $6.24 to $5.81 in heavy trading, the lowest price in three months. During that time, Ford stock had been buoyed by interest from billionaire investor Kirk Kerkorian, who revealed on Thursday that he increased his stake from 5.5 percent to nearly 6.5 percent.

The Las Vegas casino mogul has offered to discuss “the possible infusion of additional capital” with Ford, a move the automaker is reluctant to contemplate given Kerkorian’s track record as an activist investor. Oline said Ford may no longer have that luxury.

“They need to take every opportunity to boost their liquidity and give themselves more time,” he said.

Ford continues to struggle as June is shaping up to be one of the worst months in recent memory for auto sales.

“The overall selling rate has really slowed,” Ford Chief Financial Officer Don Leclair said Friday. Many consumers are putting off big purchases, worried about the falling value of their homes or job security. Those who are buying cars are increasingly opting for smaller, more fuel-efficient models.

On Friday, Ford said it now expects 2008 U.S. auto sales — including medium and heavy vehicles — to be between 14.7 million and 15.2 million vehicles, compared with a previous assumption of 15 million to 15.4 million units.

In response, the automaker said it will cut its third-quarter U.S. factory output by another 50,000 units to 475,000 vehicles — 25 percent less than during the same period in 2007. Ford also plans to reduce fourth-quarter production by another 40,000 units to between 550,000 to 590,000 vehicles, a decline of 8 percent to 14 percent compared with the same period last year.

Additionally, Ford is delaying by two months the planned introduction of its new F-150 pickup, the biggest volume vehicle in its domestic lineup. The new pickup now will go on sale in late fall.

Product analyst Jim Hall of 2953 Analytics in Birmingham said Ford is taking appropriate actions to address a difficult situation.

“I have a feeling there is a lot of dealer input in this,” he said. “Trucks aren’t moving, and dealers are telling them that.” He said similar moves could come in the next couple of weeks from other automakers.

GM already has announced plans to idle four truck factories.

The dramatic shift in consumer demand is also behind the loss of profitability at Ford Credit, Leclair said. The auction market for vehicles such as the F-150 and Ford Explorer SUV has collapsed, undermining Ford’s once-lucrative lease business.

JPMorgan’s Himanshu Patel said Friday that the plunge in used truck values is likely to mean lease depreciation costs of $1 billion at Ford and $600 million at GM because of similar issues at GMAC LLC, which it partly owns.

Ford said its credit subsidiary is no longer planning a distribution payment to Ford in 2008, the latest in a long series of blows to Ford’s bottom line.

As a result of declining U.S. sales, Ford last month abandoned its long-stated goal of returning to profitability in 2009.

The automaker is still on track to reduce operating costs by about $5 billion by the end of 2008, but declining sales and higher commodity costs will offset gains from deep cuts, including a 15 percent reduction in salaried personnel costs, and lower labor costs won in a game-changing contract hammered out last year with the United Auto Workers.

“Unless the economy improves,” the automaker said Friday, “it will be difficult for Ford to break even companywide on a pretax basis in 2009.”