The Price of Fuel-Efficiency
April 25, 2007

Small and fuel-efficient vehicles are great for the environment, consuming less gas and emitting fewer pollutants. And they are terrific for consumers’ wallets, socked by increasing gas prices that are threatening to surge to $4 a gallon, according to some reports.

But small, fuel-efficient and usually inexpensive vehicles aren’t so good for the bottom lines of car companies and municipalities.

Today, Honda announced an unexpected 3 percent decline in profit this year, in part, due to the global shift toward small cars that are popular but deliver lower profits.

At the same time, state highway officials, who use gasoline taxes to build and maintain roads, are sounding the alarm that not enough money is coming in for roads due to the shift to smaller, fuel-efficient cars.

Lower Profits for Honda

Analysts were caught off guard with Honda’s results, which were also down because of the predicted rise in the Japanese yen, a soft Japanese market and high commodity prices.

Honda said its operating margin is at 6.6 percent from 7.7 percent in the 2006-2007 fiscal year because it is making less money on each car sold due to the popularity of cheaper, smaller cars such as the Fit/Jazz subcompact, the Civic compact and the CR-V compact SUV.

At the same time, Honda, like other manufacturers, has to offer expensive incentives to sell larger, less fuel-efficient vehicles. Honda said it was spending $2,000 in incentives on each Ridgeline pickup sold and more than $1,000 on the Pilot SUV.

Those trends are expected to continue this year. “The forecast for 2007/08 is extremely weak,"  Koji Endo, an auto analyst at Credit Suisse Securities, told Reuters news service.

Still, Honda is in a better position than other automakers because it at least has small cars to sell as the market shifts and gas prices rise.

In addition, Honda launches this fall the next-generation Accord, its bread-and-butter model that appears promising, based on the coupe concept unveiled at the Detroit auto show.

Honda Motor Co. President Takeo Fukui told Bloomberg he predicts the eighth version of the 31-year-old Accord, Honda's best-selling model, will boost sales and profits.

No Money for Roads

The Federal Highway Administration estimated this week that by 2009 the tax receipts that make up most of the federal highway trust fund will experience a $21 billion shortfall of what's needed to maintain existing roads, say nothing of building new ones.

Over the past two decades, average fuel economy has increased from 14 miles per gallon to 17 miles per gallon. That figure would have been higher were it not for the popularity of truck-type vehicles like SUVs. At the same time, drivers are traveling more miles per year, which, combined with increased congestion, leads to faster deterioration of roads.

The federal government is encouraging states to look at alternatives to gas taxes to fund road maintenance and construction. And some are exploring alternatives, including higher tolls, license and registration fees and fines for lawbreakers. Oregon did a pilot program charging user fees based on miles traveled.

Posted by Michelle Krebs at 11:30 AM under Commentary , Companies , News , Technology | Comments (2) | digg this | Seed Newsvine