July 24 (Bloomberg) -- Ford Motor Co., the world's third- biggest automaker, posted a record quarterly loss of $8.7 billion and accelerated a conversion to fuel-efficient vehicles to wean itself from money-losing trucks.

Ford shares fell the most in eight years after the company reported a second-quarter deficit of $3.88 a share compared with a profit of $750 million, or 31 cents, a year earlier. The figure included $8 billion in pretax writedowns for plant closings and the declining value of truck leases at Ford Motor Credit Co.

The automaker said it will double production of hybrid vehicles, sell more European autos such as the Fiesta in the U.S. and convert three North American truck factories to make a redesigned Focus and other small cars. The revamping is a response to record gasoline prices that have ravaged sales of large pickups and sport-utility vehicles and derailed Chief Executive Officer Alan Mulally's turnaround plan.

``They believe this is a permanent shift in buyer sentiment that they have to adjust to no matter how hard it will be,'' said Maryann Keller, an independent auto analyst and consultant based in Greenwich, Connecticut. `This is going to be expensive.''

The loss marks the sixth in eight quarters under Mulally, 62, recruited from Boeing Co. to revive the Dearborn, Michigan- based automaker. Gasoline approaching $4 a gallon and plunging sales of F-Series pickups forced the CEO in May to abandon his target of returning to profit in 2009.

Rising Competition

Ford's product thrust will face heightened competition from Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. The biggest Japanese automakers, the top sellers of small autos in the U.S., are also scaling back on trucks and bolstering their car lineups. Detroit-based General Motors Corp. in June said it will shutter four truck factories and build more small cars.

Ford makes ``a lot more money selling large pickup trucks, and they're not going to make as much selling small cars,'' Keller said.

Neither Ford nor GM has posted an annual profit since 2005. Their struggles prompted professor Edward Altman to project this week that each has about a 46 percent chance of default within five years.

`Very Serious Shape'

``Both are in very serious shape and the markets reflect that,'' Altman said in a July 22 interview with Bloomberg Television. He cited his Z-score mathematical formula that measures bankruptcy risk. The model shows Ford and GM are ``on the verge of bankruptcy,'' said Altman, who teaches finance at New York University's Stern School of Business.

Excluding costs Ford considers one-time expenses, the loss was $1.38 billion, or 62 cents a share. On that basis, Ford was expected to report a deficit of 28 cents, the average estimate of 12 analysts surveyed by Bloomberg.

Ford dropped 92 cents, or 15 percent, to $5.11 at 4 p.m. in New York Stock Exchange composite trading, for the biggest daily decline since Aug. 3, 2000. Ford's 7.45 percent bond due July 31 rose 2 cents to 59 cents on the dollar. The yield fell to 13.1 percent.

Credit-default swaps on Ford debt rose 16 basis points to 1,385 basis points, according to CMA Datavision in London. The contracts are designed to protect bondholders against default. A gain in the price indicates a decline in the perception of a company's credit quality.

Cash

Ford said it had $26.6 billion in automotive cash at the end of the quarter, down $10.8 billion from a year earlier. The company is ``confident'' it has enough liquidity, Chief Financial Officer Don LeClair told reporters.

Mulally declined to set a new target date for the automaker to return to profitability.

``It's just the uncertainty,'' he said in a Bloomberg Television, referring to the U.S. economy. ``It's so volatile right now. We figured the best thing was to focus on what we could do on the product side.''

The company also hasn't made an estimate for how much cash it will burn as it restructures. Ford borrowed $23.4 billion in late 2006 to overhaul operations.

``They've certainly got enough cash through the end of the year and into 2009,'' said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee. ``The question is: How severe and how long is the downturn?''

Ford had pretax writedowns of $5.3 billion for its North American auto operations and $2.1 billion for vehicle leases at Ford Credit. LeClair said 85 percent of the Ford Credit writedown was tied to falling values for pickup trucks and SUVs.

Ford Credit had a record loss of $1.4 billion, compared with a year-earlier profit of $62 million.

``Every number was close, but every number was on the wrong side, on the negative side,'' said Dan Poole, vice president of equity research at Cleveland-based National City Corp. ``The $8 billion charge was quite a bit of a surprise.''

Product, Plant Changes

Ford said its plant in Cuautitlan, Mexico, in 2010 will produce the new Fiesta small car to be sold worldwide. Ford disclosed that plan in May.

SUV factories in Wayne, Michigan, and Louisville, Kentucky, will be converted to small cars. The Michigan plant will make the switch in 2010 and Louisville in 2011.

Production of Expedition and Navigator large SUVs, now made at Wayne, will be shifted to another Louisville plant that now makes only Super Duty F-Series pickups.

Also, a St. Paul, Minnesota, plant that builds the Ranger small pickup was given a two-year reprieve to 2011 to meet renewed consumer demand for the vehicle.

Car-Based Explorer

The automaker said it would build a car-based Explorer to replace the current truck-based SUV in 2010 and a new seven- passenger Lincoln ``crossover'' vehicle in mid-2009. Ford showed prototypes of those models in January at the Detroit auto show.

North American production capacity for 4-cylinder engines will double to more than 1 million units by 2011. A redesigned Mustang sports car and Taurus sedan will arrive in 2009.

Output of gasoline-electric vehicles will double to about 50,000 vehicles next year, including the introduction of hybrid versions of the Ford Fusion and Mercury Milan sedans.

The pretax loss for Ford's North American auto operations widened almost five-fold to $1.3 billion. The figure exclude costs the company considers one-item items, such as job-cutting expenses.

Europe, South America

The company's European auto unit saw its profit more than double to $582 million. Net income at the South American unit increased 52 percent to $388 million.

Ford earnings from its one-third ownership of Japan's Mazda Motor Corp. increased 43 percent to $103 million. Ford's Sweden- based Volvo unit's loss widened 32 percent to $120 million.

The automaker lost $15.3 billion in the past two years, mostly because of deficits in North America. It hasn't boosted its U.S. market share since 1995.

Ford shares slid to a 23-year low of $4.36 on July 2, after reaching a high for 2008 of $8.48 on May 1. The shares had risen on a $100 million first-quarter profit that surprised analysts and disclosures by billionaire Kirk Kerkorian that he had acquired Ford shares. He holds a 6.5 percent stake.

So far, Mulally has the support of Kerkorian, whom he met with last month. Jerome York, an adviser to Kerkorian, said in an April 28 interview the automaker has ``really started moving the needle'' under its CEO.

To contact the reporter on this story: Bill Koenig in Dearborn, Michigan, at wkoenig@bloomberg.net

Last Updated: July 24, 2008 16:33 EDT