Honda recalls to squeeze profit, cloud guidance as cheap fuel poses new threat

Thu Jan 29, 2015 4:08pm EST
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By Chang-Ran Kim

TOKYO (Reuters) - As Japan's Honda Motor Co (7267.T: Quote) pays hundreds of millions of dollars to replace potentially deadly air bags, hitting earnings, a new headache lies around the bend - cheaper U.S. petrol could lure buyers away from its fuel-efficient cars.

The country's third-largest automaker reports income for the October-December quarter later on Friday that analysts see falling 17 percent from a year earlier, squeezed by the cost of voluntary recalls involving air bag inflators made by top supplier Takata Corp (7312.T: Quote). The hit may be enough to trigger a full-year profit warning.

Still, Honda, like other affected automakers, expects to get those costs back eventually if investigations find Takata at fault. And many analysts say reputational damage seems minimal, including in the United States, Honda's most important market.

Potentially a bigger near-term concern is cheaper fuel as global oil prices slide, with U.S. sales of light trucks up 10 percent in 2014 against a 1.8 percent rise for passenger cars. That's a red flag for Honda, which excels in cars that have attracted buyers concerned about fuel economy.

"The fall in fuel prices represents a body blow to Japanese automakers," said Merrill Lynch analyst Kei Nihonyanagi.

Whatever the current quarter has in store for Honda, the earnings it reports for the third quarter of its fiscal year, due at 0600 GMT, will be hit by the Takata-related recalls. The United States accounts for most of Honda's 13 million-vehicle air bag recalls and four of the five deaths - all on Honda's cars - linked to Takata's inflators, which can explode too forcefully and send metal shards into the car.

Analysts estimate quality-related costs, including a $70 million fine by the U.S. government, will drag Honda's profit down by hundreds of millions of dollars in the latest quarter.

A poll of 10 analysts put October-December operating profit at 189.11 billion yen ($1.61 billion), down 17 percent from the year before according to Thomson Reuters SmartEstimate.   Continued...

A woman using her mobile phone walks past a Honda Motor Co. logo outside the company's dealership in Tokyo, in this October 28, 2014 file photo.  REUTERS/Yuya Shino/Files