Chrysler Group LLC reported a quarterly net loss on Monday, underscoring the pressure on the smallest U.S. automaker from a slack economy and an aging product line-up.

The automaker, which plans an initial public offering next year, said U.S. sales grew 12 percent in the first half of the year, lagging the industry's slower-than-expected growth of nearly 17 percent.

Chief Executive Sergio Marchionne said Chrysler had an extraordinary amount of work remaining in its turnaround, but its restructuring was on track.

The automaker, which emerged from a U.S.-government supported bankruptcy in June 2009 under the management control of Italy's Fiat SpA , said it could raise its financial outlook later this year.

The real key to Chrysler's long-term viability remains growth in its retail sales, said Charles Moore, managing director at Conway MacKenzie, which provides crisis management and turnaround advice to companies. That's not going to be based on one quarter or two quarters.

Moore said it will take the next 24 months to see whether the Chrysler product plan is extensive enough to attract new customers.

Chrysler rival General Motors Co , which also restructured in a government-funded bankruptcy, is preparing for an IPO possibly later this year.

GM is due to report second-quarter results on Thursday and is expected to show a profit. Ford Motor Co posted a $2.6 billion second-quarter profit.

Chrysler said it still expects to at least break even on an operating basis in 2010. It said it was highly likely it would raise its profit and cash-flow projections when it announces third-quarter results.

Ron Bloom, the U.S. Treasury official overseeing the government's investment in the auto sector, said last week that Chrysler was ahead of what the White House-appointed autos task force had expected at this point.

Officials previously said the Obama administration was divided over whether Chrysler could be successfully turned around but gave it a bailout to save jobs and prevent a cascade of failures among auto parts suppliers.

The No. 3 U.S. automaker said its net loss narrowed to $172 million in the second quarter from $197 million in the first quarter. The year-earlier quarter included only a few weeks of the operations of the new Chrysler.

The net loss reflected the carrying costs of the government loans from the bailouts that averted Chrysler's liquidation. The federal government owns 8 percent of Chrysler, the UAW retiree healthcare trust 55 percent and Fiat 20 percent.

Revenue rose to $10.5 billion in the second quarter, up 8 percent from the first three months of 2010. Operating profit rose 28 percent to $183 million.


Marchionne declined to disclose the percentage of Chrysler's sales to fleets in the first half of 2010, a question that has arisen with the automaker's ambitious growth projections running into a modest industry sales recovery.

Chrysler has targeted sales of 1.6 million to 1.65 million vehicles in 2010 and more than 2 million in 2011. After selling 741,000 vehicles in the first half of 2010, it would need sales to increase by 16 percent in the second half and then 25 percent in 2011 to meet those targets.

Maybe I wasn't sufficiently rude when I opened my remarks about this fleet stuff, Marchionne said in response to a question about whether Chrysler would break out its fleet sales by the segments of the market.

He said he would not break with past practice of withholding the percentage of fleet sales.

Industry publication Automotive News has said fleets comprised about 39 percent of Chrysler's U.S. sales in 2010 through July, highest among the largest automakers in the market. Ford's sales were 35 percent to fleets, and GM's 31 percent. Lowest among Japanese brands was Toyota at 9 percent.

In the past, U.S. automakers relied on cut-rate sales to car rental agencies to absorb excess cars being turned out by unionized factories with contracts that made them too expensive to close.

The practice was blamed for undercutting resale values and hurting the image of U.S. brands like Chevrolet and Chrysler with consumers who drove their weakest vehicles at rental agencies.

More recently, Ford and GM have started to disclose the share of their sales to fleet operators, including corporations and governments that do not buy vehicles at as steep a discount as rental car agencies do.

What I do object to is the classification of those fleet sales as being dirty, Marchionne said. There is nothing dirty about them. These are good customers who pay cash for the products that they buy.

Conway MacKenzie's Moore said he was not as concerned about the mix of Chrysler's fleet and retail sales this year and would be more interested to see whether there is meaningful improvement when Fiat-based vehicles go on sale in North America.

The rise in Chrysler's operating profit for the second quarter came mainly from increased production and was partly offset by higher incentives and costs related to the roll-out of the new Jeep Grand Cherokee.

The Grand Cherokee is the first new product released by the new Chrysler, which had slashed investment in new products under former owners Daimler AG and investment fund Cerberus Capital Management .

That move, intended to save cash during the downturn in U.S. auto sales that began in 2008, left Chrysler in a weakened position against its competition in an industry that relies on refreshed and new models to drive showroom traffic.

The company said it had $7.8 billion of cash at the end of the second quarter, and total available liquidity of more than $10 billion when including an available $2.3 billion in government loans.

Chrysler's current financial forecast is for 2010 net revenue of $40 billion to $45 billion. It expects to burn about $1 billion in cash during the year.

(Additional reporting by Bernie Woodall and Kevin Krolicki; Editing by Maureen Bavdek, Steve Orlofsky and John Wallace)