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New Business November 5, 2009, 5:00PM EST

The Engine Finally Turns Over at Ford

It has posted its first profit in three years, and the company's brands are showing surprising strength

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Under Mulally, the company is bringing out stylish, fuel-sipping models Andrew Harrer/Bloomberg

By David Welch

For years it has been fashionable to dump on Detroit's cars as lacking in style, quality, and fuel-efficiency. But if Ford Motor's (F) third-quarter results—the first profit since 2005—are any indication, there may be life in American car brands after all.

Of course, CEO Alan Mulally made clear that one good quarter does not a turnaround make. The economy remains anemic, and millions of people are more concerned with finding or keeping their jobs than buying a new vehicle. It is also true that Ford's $1 billion in profit rests in part on Mulally's skillful use of his cost-cutting scalpel.

All the same, there is growing evidence that Ford's vehicles are starting to resonate with buyers in ways that didn't seem possible even a year ago. If Ford can maintain the momentum, it could get off the Detroit treadmill—restructuring from one crisis to the next—and eventually achieve sustained profitability. "Alan," says Edmunds.com CEO Jeremy Anwyl, "is getting the company on the right track."

Staying out of bankruptcy court and off the government dole has helped Ford steal customers from Chrysler and General Motors. And like most automakers, Ford benefited from the U.S. government's cash-for-clunkers program. But consumers have shown a willingness to pay up for Ford vehicles. In the most recent quarter, Ford attributed $1.9 billion of revenue to fatter prices. Yes, cash-for-clunkers helped. But Ford also fetched more per vehicle in the spring, long before the government program went into effect.

In another sign of strength, Ford has pulled back on discounts, even as GM continues to offer hefty deals. Last month, Ford spent an average $2,909 per car in incentives, according to Edmunds.com, about 25% less than it did a year ago and almost $1,400 per vehicle less than GM.

What's behind the increasing luster of Ford's brands? In the past two years the automaker has released a bevy of new models, including a refreshed Fusion, Taurus, new F-150 pickup, and Lincoln MKS sedan. Many of these vehicles are winning kudos for style and fuel economy and rank right up there in the quality stakes with Toyota Motor (TM) and Honda Motor (HMC). The Taurus, brought back from the dead at Mulally's insistence and once considered a risky bet, starts at $26,000. That is pricer than the sedan it replaced. Even better, 20% of buyers opt for the high-performance Taurus, which starts at a BMW-like price of $37,000.

Ford still has a ways to go. While more consumers are looking at its cars, Edmunds.com reports that the percentage of buyers kicking the tires of Ford's models on its car-shopping site fell in September after the government's clunker program ended. What's more, Ford is still having trouble getting traction on the U.S. coasts, where the Japanese and Europeans have long held sway. Plus, many shoppers are more likely to compare Ford models with vehicles from GM than from Toyota or Honda, another sign it needs to do a better job wooing import lovers.

But with Ford gaining market share and pricing power in a lousy economy, Mulally & Co. have much to show for their efforts. "Sometimes in the past our brand was viewed as downscale," says Mark Fields, who runs Ford's Americas operations. "But it is improving. It's not smoke and mirrors."

Welch is BusinessWeek's Detroit bureau chief.

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