Chrysler Not Out of the Woods Yet, But Fiat Deal Helps

(MoneyWatch)  The proposed deal between Fiat and Chrysler is the best news Chrysler has had since it won an emergency government loan of $4 billion last month, but keep in mind Chrysler came within an ace of going bankrupt in December, and the company is hardly out of the woods yet.

"This agreement does not address Chrysler's short-term (2009) issues," said research and consulting firm IHS Global Insight, in a Jan. 20 note. "But the automaker could get a positive bounce if consumer confidence in its long-term viability improves."

Former Chrysler boss Bob Lutz, now vice chairman at GM, has often said jokingly, but only half-jokingly, that Chrysler seems to suffer recurring disasters in "years ending in one."

For example, there's 1981, when Chrysler was operating on government loans; 1991, when there was a U.S. recession; and 2001, when Chrysler was part of DaimlerChrysler. Chrysler was supposed to be a cash cow when it merged with Daimler in 1998, but in less than three years, Chrysler went from solid profits to an operating loss in 2001 of about $1.9 billion.

By Lutz's rule of thumb, Chrysler's next big crisis is due in 2011. Analysts said that the Fiat deal improves Chrysler's chances of surviving that long.

IHS Global Insight said that even though the short-term benefits to Chrysler from Fiat are slight, the longer-term benefits are substantial, like access to Fiat's fuel-efficient, small-car platforms, and a bigger global footprint. Better long-term prospects are a key factor in Chrysler winning additional U.S. government loans, in a "viability" plan to be submitted next month.

Analysts for Edmunds.com reached a similar conclusion, in a Jan. 20 note. "Something needed to change, to improve Chrysler's chance for survival, and to prove the company's viability to Congress," the group said.

Brian Johnson, auto industry analyst for Barclays Capital, said that the Fiat alliance, "removes the biggest political stumbling blocks to government aid: Chrysler's (prior) lack of global scale and small cars." He said Chrysler and Fiat combined would be the world's sixth-largest automaker. Nevertheless, he warned that Chrysler's mid-term earnings power is still uncertain.

Maybe another crisis really will land in 2011.