Even before the market tanked this week—taking Asian and Euro stocks with it briefly—I held out only lukewarm hope that Thielert Aircraft Engines will right itself and recover to survival, never mind profitability. The company convened a press conference via phone from Europe on Tuesday to discuss the latest develops.
Far be it from me to shutter the windows against the gathering sunshine, but I didn't hear much that makes me confident that Thielert can devise an economically viable model for the four-cylinder diesels that once seemed so promising. Although the company reports that it has ramped up operations and is now running two shifts to deliver parts and completed engines and it contends no one should be AOG on Thielert's account, the economics continue to be unappealing.
When pressed on the issue, Bruno Kubler, the outside insolvency master brought in to tidy up Thielert for sale falls back on a stock answer: German law prohibits any insolvent company from running at a loss. What follows is the rather simple math of adding up the total costs and dividing it by units sold to set parts prices. As a result, a Diamond DA42 Twin Star owner can expect to pay about $21,000 for gearbox and clutch inspections every 300 hours, or about $70 just for that maintenance, never mind fuel and other routine costs.
In Tuesday's press conference, Kubler and Thielert's Gunter Kappler said increasing these inspection intervals to 600 hours is a high priority, but neither gave a timeline for this. It may very well happen under the watch of the new investors, a deal which may be completed by the end of year. Kubler says he's pleased with the number of suitors interested in Thielert and is confident the offer will get the company back on its feet.
As Kubler sees it, the inherent value of company is in the installed base of engines—primarily in Diamond aircraft—the type certificates and parts manufacturing authority. But even a casual observer will note that this is likely to be a wasting asset for the simple reason that Diamond is furiously developing its own diesel—the Austro line—to replace the Thielert 1.7 and 2.0 powerplants. It therefore stands to reason that the new engine and parts orders Thielert sees as having value won't grow, but will in fact erode. The installed base will erode even further given Diamond's stated intention to offer sweetheart deals on converting Thielert diesels to Austro installations.
Kubler assured us Tuesday that all of this will be made abundantly clear to the new investors. He said they'll also be told that the pro-rated economic model that Frank Thielert originally launched the company with was a disaster and that customers will expect clarification on how things are going to be in the future. Any investor who comes into this deal thinking that owners will continue to sit still for paying $21,000 every 300 hours for gearbox inspections will be in for a rude surprise. Job one will be to devise more realistic economics so the whole thing doesn't devolve into 50 owners paying a half-million each for engines because the market is too shallow to support rational numbers.
What I predict will happen here is a bleeding war. As Austro comes online, it will necessarily run at a loss as it essentially pays to acquire the market that Thielert now owns. It has the advantage of being able to yank the rug out from under Thielert through the simple decision of not buying Thielert engines in favor of Austro engines. For its existing customers, it can further hurt Thielert by converting existing airframes to Austros.
Other customers? Sure, there are a few. Cessna nibbled, but Thielert says that deal is on ice while it sorts through its insolvency. General Atomics uses the Thielert engines in the Army's Sky Warrior UAV, but how much volume is that? The federal government may stupidly pay five times as much for an engine as the private sector can afford, but sooner or later, the GAO will come knocking and, in fact, it already is.
I dunno. Maybe the investors Thielert has lined up are way smarter than I am and they see something I don't. I wish them, and Thielert, the best. I'm just not seeing how, in the current capital markets, that this engine maker is a good buy.
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