Fitch Ratings on Wednesday pushed GM further down into junk territory by downgrading its debt to ‘B+’ from ‘BB’. The GM downgrade primarily reflects Fitch’s concerns potential liabilities with supplier Delphi, and worries over the potential of non-operating items to further degrade GM’s cash flow.

Fitch projects that GM will remain cash flow negative at least through 2006, and in the event of a weaker economic environment, sees the company struggling to stop losses from accelerating.

The company’s operating profile has become increasingly vulnerable to volume declines that could arise as a result of a decline in macroeconomic conditions, consumer purchasing power, or an extended payback period from recent incentive-driven sales spikes.

In addition, the migration to lower-priced vehicles has a particularly adverse impact on GM’s revenue and profitability, and the company’s inflexible cost structure will make it difficult to ratchet down their cost structure in parallel in order to stabilize cash losses.

Fitch believes that this will necessitate further agreements with the UAW on facility closures, headcount reductions and other issues, prior to the 2007 contract re-opening, in order to accelerate the company’s restructuring.

The company has been in hot water before. In 1992, facing possible bankruptcy, the GM board seized control of the company from Chief Executive Officer Robert Stempel and put Jack Smith in charge.

But in the 90s, the SUV phenomenon came to the rescue. The financial reliance on the full-size vehicles that provided the lifering in the 90s is becoming one of the weights now dragging the company down.

The Detroit Free Press is naturally and parochially concerned about GM’s future:

Lower wages, less generous benefits and fewer jobs would not only be devastating for the automaker’s 142,000 U.S. employees. It would hurt everyone who makes parts for GM cars and trucks, sells furniture and homes to GM workers, or treats their children for the flu. Almost everyone in Michigan has a stake in GM’s future.

Given the financial realities of its manufacturing operation in the US, it seems likely that GM will continue to work to find ways to maintain the larger, higher margin vehicles by incrementally improving fuel economy, and working very hard on positioning.

(The Free Press notes with hope that “Falling gas prices could help sales of the [new] trucks, which are crucial”.)

Some of those efforts are already evident in the company’s deployment of cylinder deactivation (earlier post) and its focus on deploying the upcoming two-mode hybrid first on its revamped full-size SUV line. E85 flex-fuel versions of its full-size lineup will also gain more prominence.

GM has already floated the argument that a 15 mpg E85 Tahoe SUV is actually equivalent to a 100 miles per gasoline gallon vehicle. (While arithmetically true, that still leaves the driver filling up a fuel guzzler.)

Elizabeth Lowery, GM Vice President, Environment and Energy, positions it this way:

E85 can cost less than gasoline; it’s clean-burning, reducing sulfur and aromatic hydrocarbons; and it’s domestically sourced and renewable, since it’s typically corn and sugar cane-based. If you compare a vehicle using E85 to a typical hybrid vehicle, the hybrid may get better gas mileage but the E85-powered vehicle saves hundreds more gallons of petroleum per vehicle per year, because only 15 percent of what you put in the tank is petroleum-based, compared with 100 percent in the hybrid’s tank.

Which of course begs the question of building a flex-fuel hybrid.

There was some good news for the company this week, as the UAW agreed to a proposal that would increase the amount retirees and active workers pay for their health care. GM says the new agreement will cut its annual health care expenses by $1 billion after taxes and would lower its retiree health care liabilities by 25 percent.

More cuts and reductions will be necessary, but ultimately, the company has to build and to sell great cars that people want, not cars that the company needs to sell to make its numbers. More than any other automaker now, GM’s future is bound to the public acceptance of its full-size line. It’s not that GM doesn’t produce anything else—they do, of course, and some of the smaller, more efficient models are doing well. But in the aggregate, the company needs that financial contribution from its full-size line to keep it aloft.