May 5, 2009 / 5:26 AM / 9 years ago

Chrysler bankruptcy has dealers on "razor's edge"

NEW YORK (Reuters) - Chrysler’s car dealership network is on the verge of collapse, a U.S. bankruptcy court heard on Monday, as hundreds of dealerships have closed their doors this year and uncertainty about the company’s future is driving consumers away.

“A lot of these guys right now are just trying to survive,” James Arrigo, the co-chairman of Chrysler’s National Dealer Counsel said of the company’s dealers at a hearing on Monday in U.S. bankruptcy court in Manhattan.

Arrigo, who is one of the company’s top-ten selling dealers, according to court papers, says that even he has seen a drop off of about 50 percent in car sales this year.

“People are walking in front of the door, saying ‘I would be interested, but I have no idea if you’re going to be here in two to three years,” Arrigo told the packed Manhattan courtroom on Monday.

Almost 3,200 Chrysler dealerships around the country are on the edge of their seats watching the outcome of Chrysler’s bankruptcy proceedings in Manhattan.

Chrysler filed for bankruptcy on Thursday, with a plan to sell its best assets to a new company managed by Italy’s Fiat SPA and planning an emergence from court protection in as little as 30 days under the guidance of Obama administration officials.

Arrigo, who owns two Chrysler dealerships in Florida and said his dealership which used to average 450 cars a month sold just 130 cars in April -- its worst April since 1993.

“Our dealership costs $2 million to run, we’ve cut costs to $1.4 million, but with sales where they are we can’t sustain the store at those numbers,” he continued.

RAZOR‘S EDGE

Dealers have seen not only a drop in sales, but also a drop in customer traffic over the last few months, Chrysler executive Peter Grady said in court on Monday.

“They’ve got some significant issues with capital and liquidity right now, many of them are on the razor’s edge,” Grady said, noting that Chrysler has shut down production and filed for bankruptcy protection just as the dealers are beginning their typically strongest summer selling season.

Dodge pickup trucks sit on the lot at Clark Chrysler Jeep Dodge dealership in Methuen, Massachusetts April 30, 2009. REUTERS/Brian Snyder

Grady said about 400 dealerships, that sell Jeep, Dodge or Chrysler cars, have closed or filed for bankruptcy since January, and the figures have “accelerated on a monthly basis.” While the company used to see 15 or so dealerships close a month, it now sees about 35 to 40 shut their doors, Grady said.

“More than anything the consumers are very hesitant to do business with a manufacturer in bankruptcy,” Grady said.

But business is also tougher for the dealers.

According to Arrigo, most dealers finance 100 percent of their wholesale purchases and use the profit from each sale to operate the dealership. About 70 percent of Chryslers’ dealers’ financing was provided by Chrysler Financial Corp until Chrysler Financial terminated its auto leasing programs in August 2008. Arrigo said in court documents that this change affected about 20 percent of his dealerships’ sales.

PROFIT IN 2012

And Chrysler’s dealer troubles can also be trouble for the company.

“The dealers are nearly the only source for revenue that Chrysler has,” Michael Bernstein, an attorney at Arnold & Porter LLC, representing Chrysler dealerships told the court.

Dealerships are also the public face of Chrysler, and continued failures may make it even more difficult to regain consumer confidence as customers are left behind with nowhere to service their cars, Bernstein said.

In an analysis from Chrysler’s financial advisors filed with the court, Chrysler predicts, even with the sale it won’t turn a profit until 2012. According to the documents from Capstone Advisory Group, a turnaround firm that works with distressed companies, Chrysler lost $16.8 billion in 2008, and expects to lose $4.7 billion in 2009. It expects to earn a profit of $100 million in 2012, and grow that to $1.6 billion by 2013, according to the document.

But that is all dependent on the company’s ability to sell itself quickly in bankruptcy court.

“The quicker it happens the better off we’re going to be,” John Schenden, a Chrysler-Jeep dealer from Denver, Colorado said in court on Monday.

Reporting by Emily Chasan and Chelsea Emery; editing by Mike Nesbit

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