Conventional wisdom in Detroit has generally said that, as the Big Three auto makers headed into pivotal labor talks with the United Auto Workers union this summer, it would be preferable if they came floating on a sea of red ink.

In the past week, Detroit's major players - General Motors Corp. (GM) and Ford Motor Co. (F) - bucked conventional wisdom, posting combined quarterly net earnings of $1.65 billion. The auto makers relied on strong international growth and an improved performance in their core North American operations, prompting one analyst to publish a report Tuesday with the title, "Has Motown found its groove again?"

Positive earnings reports may have put Wall Street on notice that restructuring plans for domestic auto makers are gaining traction, but executives at the companies aren't swayed by seasonal earnings fluctuations and warned that a number of challenges loom in the second half of the year. The top two U.S. auto makers expect the UAW to understand that as negotiations hit full steam.

During an interview Tuesday after GM reported an $891 million profit for the second quarter, Chief Financial Officer Fritz Henderson said "by no means can you consider these happy days." He said the company will push for health-care cost relief within the workforce so it can reach its goal of sustained earnings growth and positive cash flow in North America. Health care is at the center of union negotiations, which began July 23 and are slated to wrap up in September.

GM has been in fund-raising mode since 2005 and now has considerable liquidity with which it can attack an estimated $50 billion price tag it faces related to long-term health-care liabilities. Henderson noted GM has $19 billion already set aside in company-managed trusts that could potentially be used to lower the burden. In an effort to save more cash, GM has cut capital spending on non- product priorities - such as new roofs for facilities - and as a result shaved its capital-expenditure forecast for the year to $8 billion from a range of $8.5 billion to $9 billion.

"We'd rather have the cash than a new roof," Henderson said. "We have a lot of new roofs in this company."

When it comes to profitability in the U.S. market, GM is miles behind Toyota Motor Co. ™ and showing few signs of catching up. Toyota made nearly $4 billion in fiscal 2007 in North America, while GM is essentially a break-even company in the region, despite owning nearly 25% of the market and demanding more revenue on a per-vehicle in the U.S. basis than it ever has before. GM made a slim $78 million profit in North America in the second quarter, or $65 per car sold in the region.

Toyota and Honda Motor Co. (HMC) earned about $1,200 on each car sold in North America last year, according to external estimates.

David Cole, head of the Center for Automotive Research in Ann Arbor, Mich., said GM's second-quarter results are a step in the right direction, but not indicative of health in the region.

"The North American profit, compared to the size of the business in the rest of the world, should be much greater than it is," he said. "It's not a level where it really needs to be to be sustainable over the longer term...the real challenge is not just one quarter, it's sustainable profitability on an annual basis."

When it comes to sustainable profits, pressure is mounting on GM as high- profit vehicles - full-size trucks and SUVs - post unexpectedly deep sales declines, forcing GM to boost incentives and potentially cut production of the vehicles in the third quarter. The combination of high incentives and lower truck output would throw a wrench in GM's momentum, almost certainly leading GM's core unit back into negative territory.

GM's Henderson declined to comment on third-quarter earnings prospects, but said the company will do what it takes to stay competitive. The company doesn't furnish formal guidance.

During a conference call with analysts, the executive said the market for raw materials - particularly for the steel it needs to build its cars - promises to be "inhospitable." In addition, "concerns remain regarding housing-market weakness and volatile fuel prices in the U.S," he said.

Last week, Ford voiced similar caution when it reported a $750 million profit, its first profit in two years. Chief Executive Alan Mulally said the second half will be "difficult" as Ford faces cash outflows and races to reduce capacity to match falling sales in the U.S. Ford also sees a tough pricing environment in the second half in the U.S.