BIRMINGHAM, MI – New-vehicle incentives are rising rapidly, but unlike cut-throat markets of the past, sales remain tepid, and the combination is cutting more deeply than ever into manufacturers’ revenue – especially among the Detroit Three auto makers.

In the year’s first nine months, the average vehicle price in the U.S. fell 2.3% to $27,721 from $28,371 in like-2007, according to sales forecasting and analysis group J.D. Power and Associates. At the same time, average incentive spending per unit grew 10.1% to $2,810 from $2,553.

That combination has driven net pricing down $900 per unit to $24,911 from $25,818, J.D. Power says. And with retail volume trailing last year’s pace by 1.2 million units, the market’s collective revenue has been trimmed 15.3% to $214.1 billion from $252.6 billion.

“That’s a huge reduction in revenue for the OEMs,” says Tom Libby, senior director-industry analysis at J.D. Power. “That partially explains the sort of trauma they are going through.”

And the situation is getting worse, Libby says. In the third quarter, the market’s collective revenue plunged 23.4% to $67.1 billion from $87.6 billion in like-2007.

“This really reflects the challenging situation the OEMs are in,” he says during a forecasting conference here.

Typically, when auto makers turn on the incentives spigot, sales respond. In August, for example, incentives pushed light-vehicle deliveries to a seasonally adjusted annual rate of 13.7 million units, according to Ward’s data. That was the industry’s best performance since November 2007 and 1.2 million units ahead of July’s dismal SAAR, but still 15.3% off August 2007 on a daily selling rate basis.

Consumers appeared to grow numb to the scheme quickly, as September’s SAAR slipped back to 12.64 million units.

The culprits are many, but Libby points particularly to tighter lending practices as the nation’s financial industry wrestles through the credit crisis. With financial institutions failing, banks have refused to lend to one another, which leaves very little money available for consumer loans.

A $700 billion government bailout package of Wall Street investment firms seeks to remedy the credit crisis but is not expected to take hold anytime soon.

As evidence, GMAC LLC told its dealers this week it no longer will accept applicants with a credit score below 700, which would prevent even some of the market’s most credit-worthy buyers from getting a loan.

As a result, down payments on vehicles have increased and the percentage financed has declined. Through the year’s first seven months, the average down payment for a non-luxury vehicle stood at $4,952, according to J.D. Power. By Aug. 10, down payments had grown 9.1% to $5,402. They peaked at $6,230 for the week ended Aug. 31 and stood at $5,590 for the week ended Oct. 5.

Monthly vehicle payments have risen from an average of $438 through July to $452 for the week ended Oct. 5. The average age of a vehicle traded in also has gone up: from 5.7 years in the first seven months to 6.2 years in the week ended Oct. 5. Between the weeks ending Aug. 31 and Sept. 7, the average vehicle age increased from 5.6 years to 6.4 years.

“Very unusual to see that sort of jump in such a short period of time,” Libby says. “That is a reflection of the slowing down in the retail market.”

Retail turn rates, or the average number of days vehicles sit on dealers’ lots, are up, as well. Vehicles typically sit 55 to 65 days, Libby says, but in September, that number rose to 71.

On average, auto makers in the third quarter saw turn rates jump to 70 days from 61 year-ago.

Among individual auto makers, Volkswagen of America Inc. represented the one bright spot in the most recent quarter, as it trimmed its turn rate from 63 days to 50. Libby credits the new-for- ’09 Tiguan cross/utility vehicle and a successful launch of the ’09 Jetta sedan as the main contributors to the decrease.

General Motors Corp.’s turn rate remained flat at 84 days, while Ford Motor Co. and Chrysler LLC saw the largest jumps in the period. Ford increased to 93 days from 61 and Chrysler grew to 118 days from 83.

“At Chrysler, the average new vehicle sold in September had been sitting for almost four months,” Libby says. “You cannot argue that is sustainable long term. (Chrysler) will either cut production or increase incentives, because that has got to come down. That means some vehicles are sitting 150, 160 days.”

Meanwhile, early results show the Detroit Three trailing the industry in ’09-model vehicle sales. While more than half of VW models sold last month were ’09 models, only 26.0% of Ford’s deliveries were ’09s, J.D. Power says.

In contrast, 73.5% of Ford’s deliveries in September 2007 were ’08 models. At GM, 24.2% of all vehicles sold last month were ’09 models, compared with 75.0% in like-2007. At Chrysler, 12.4% of its sales in September were ’09s, compared with 85.6% year-ago.

Industry-wide, ’09 models accounted for 34.5% of September sales vs. 64.8% in like-2007, J.D. Power says.

Libby predicts the basic compact-car segment – J.D. Power places cars such as the Toyota Yaris and Chevy Aveo in the class – will grow as large as the midsize-car sector by 2012. He cites greater product activity among auto makers as they strive to meet stricter corporate average fuel economy standards.

“If you have a model in this segment, you are benefitting in two ways – one, you have volume, but also you have a feeder into the next segment up,” Libby says. “So a Hyundai Accent owner has a strong propensity to trade up to a Hyundai Elantra.”

The large-truck segment will retreat to 10% or 11% of the market in the next five years from the 15% it previously enjoyed, Libby says, while segments defined by J.D. Power as compact CUV and midsize CUV will see tremendous growth.

Midsize SUVs appear to be “endangered species,” Libby adds, with their share of the market predicted to plunge to 2.2% in 2012. That would represent 250,000 units, or fewer sales than the Ford Explorer, alone, in 2001.

The J.D. Power analyst forecasts future volume growth in midsize cars, such as the Toyota Camry and Honda Accord, and explosive growth in the compact conventional segment, which includes the Toyota Corolla and Honda Civic, on the strength of new entries, redesigns and hybrids.

Nearer-term, Bob Schnorbus, director-economic analysis and chief economist at J.D. Power, predicts more pain for auto makers. “Things are going to get worse before they get better,” he says.

October sales could reach a SAAR below 12 million units, and the market will hit bottom in either the fourth quarter or first-quarter 2009, Schnorbus says, noting he does not anticipate a return to previous sales trends until the 2012 timeframe.