Volkswagen profits soar. Will 'Dieselgate' woes be short-lived?

The automaker's profits are up, but legals fines and fees are cutting into them, for now. However, many car makers, including General Motors and Toyota, have recovered from even more serious scandals, some of which involved threats to driver safety.

Lucas Jackson/Reuters
New York Attorney General Eric Schneiderman arrives to speak about New York State's participation in Volkswagen AG's more than $15.3 billion settlement with US regulators over pollution caused by its diesel vehicles, in New York, June 28, 2016.

Despite an emissions-cheating scandal that threatened Volkswagen’s iconic brand last year, the automaker reported better-than-expected half-year profits on Wednesday. For the first half of 2016, thanks to cost-cutting measures and strengthening sales in Europe, VW's operating profit was €7.5 billion, or $8.3 billion, which is more than 10 percent higher than the same time last year.

This would be impressive if it weren’t for the billions that the German automaker has to pay to federal regulators and some of the nearly 600,000 VW diesel car owners in the US as a result of software it installed in its diesel cars to cheat on the US Environmental Protection Agency’s air quality tests for nearly a decade.

To cover its fines, VW already had put aside €16.2 billion, or $17.9 billion. But on Wednesday, the company warned that its cheating scheme, which allowed the vehicles it advertised as “clean” diesel to release up to 40 times the amount of pollution allowed by regulators, will likely cost more than anticipated.

As lawsuits loom in Maryland, Massachusetts and New York, VW said legal problems will eat into its operating earnings by an additional €2.2 billion, which is about $2.4 billion. This means its earnings for the first half of 2016 will amount to €5.3 billion, down from €6.8 billion for the same period last year.

But despite the lawsuits, fines, and a $15 billion settlement between VW and US regulators and consumers (the auto industry's biggest ever), recent history suggests that VW’s woes could be short-lived.

In recent years, major car makers including General Motors and Toyota have faced even more serious scandals, some of which involved threats to driver safety. Those companies spent billions of dollars on recalls, settlements and other legal issues. After an initial dip, though, their sales rebounded.

“Consumer have short memories when it comes to this,” says Jack R. Nerad, executive editorial director and executive market analyst at Kelley Blue Book, in an interview with The Christian Science Monitor. “They really don’t connect their own search for a vehicle with a scandal.”

VW has a strong brand, he adds, and a majority of car buyers don’t make purchasing decisions based on a car’s polluting emissions.

“Vehicle emissions seems pretty esoteric,” says Mr. Nerad.

Some car buyers think that the upheaval makes for a good time to buy VW cars, likely because the company has been “aggressive about incentivizing vehicles,” he says, instead of rebuilding its brand in the United States. The American market makes up a small percentage of VW’s global sales.

Sales of Volkswagen vehicles in the US were down 13 percent from 2015 as of June. In Europe, its car sales grew in April for the first time since the emissions scandal went public in September 2015, reports The Guardian, though for the first quarter of the year its sales were slightly down. Most carmakers have seen sales increases in Europe recently.

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