Diamond: Doing the Right Thing?

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For owners of Diamond's innovative DA42 Twin Star, a summer of discontent is dragging into a winter of ... less discontent, if not a nesting of the Bluebird of Happiness. The 10-second history is that Thielert's bankruptcy and subsequent supply-chain cratering of last April defines the phrase hell of a mess. Under Germany's somewhat bizarre bankruptcy law, Thielert is again building engines and shipping parts, initially at prices that were multiples higher than owners of Twin Stars were led to expect. Lately, the pricing has reentered the atmosphere.

Still, some Twin Stars are beached, with timed out Centurion 1.7 engines or gearboxes and owners are awaiting further developments. Some owners have complained that Diamond has been slow to step up and resolve this unprecedented situation and a handful have already taken legal action against the company. Others are contemplating it. After all, some of these owners paid more than a half-million bucks for these airplanes and now can't use them through no fault of their own. That Diamond's sales agreements expressly state that it isn't responsible for the engines does nothing to blunt the fact that the Thielert engines simply didn't meet the test of basic merchantability, or so a worthy lawsuit would contend.

In a situation like this, my fundamental instinct is to chase the scoundrels naked through the streets. Diamond delivered airplanes whose service history didn't live up to the claims. So clearly, Diamond owes customers a solution. But are they stepping up? The short answer is yes, but the harsh reality is that Diamond can do only so much. It can't realistically replace the Thielert engines at its own expense, nor can it buy back the fleet of grounded Twin Stars. The business plan for either of these begins with massive debt and ends with bankruptcy, an end game that benefits no one, least of all owners.

So Diamond has come up with a three-tiered in-between solution. For new aircraft going forward, Diamond is offering the choice of either the Thielert 2.0 engines or, as an upgrade, the yet-to-be-certified Austro AE300. For existing DA42s with Thielert engines, Diamond is offering a conversion to the Austro engine for about 99,000 Euro or $139,800, variable with exchange rate. That's a good price, as these things go and likely close to Diamond's actual cost on the hardware.

The third choice is to replace the Thielerts with a pair of Lycoming IO-360s. Diamond is finishing the cert work on this project and may be ready to deliver new Twin Stars and/or conversions before mid year 2009.

There are two snags: One, the Austro AE300 is as yet uncertified and thus an unknown. Presumably, it will be more powerful, more reliable and more durable than the Thielert engines have been. Second, schedule. Austro is busily building its new factory next to the Diamond plant in Austria and given the hurdles of certification and production certificates, I would be surprised to see meaningful production output in 2009. The realistic expectation is 2010.

To its credit, Thielert has improved its service and pricing. The engines still require the 300-hour gearbox inspection, but it looks like that may actually increase to 600 hours sometime in 2009. (But we've heard this before.) Further, prices on the inspected gearboxes have come down to earth—2500 Euros, versus 13,000 during the spring. Still, it's hard to see how this is going to play in the market long term if the Austro proves less inspection hungry.

So, donning my hat as a consumer-oriented arbiter, has Diamond stepped up? I think it has. In the fantasy world where we all visit, we could have held Diamond's feet to the fire to make all of its DA42 (and DA40TDI) customers whole. But in the real world where we all live, that's just not economically feasible. Diamond has, in effect, split the difference with its customers. All of them would like something better. I would like something better for them, too. I'd also hope for a hangar full of new airplanes and a free fuel card. I'm learning to make do with something less. Diamond stepped out there with diesel project and both it and its customers got burned. No one ever said innovation was without risk.

Auto Recall

My blog of last week decrying the bad behavior of the Detroit Big 3 CEOs drew some harsh rebuke from a couple of readers in the auto industry. They wrote me directly, preferring not to post on the site.

"There is plenty of history to debate and a few things (such as Mulally's trips home) that I won't pretend to justify. It was the word incompetence that got me going," wrote one reader. His beef is that bashing the CEOs for their abuse of corporate aircraft misses the point. The auto giants have been dealt a tough hand—agreed—and now have to play it. The larger issue is the country's lack of cogent industrial policy that makes it possible for them to survive in the first place.

I concede the point. I further withdraw the comment that I'd like to see them all fail. As is the case with Diamond, this is in nobody's interest. But I'd sure like to see the bones of restructuring before my tax dollars go to GM and Chrysler.

Comments (5)

Paul -

Thank you for having the intellectual honesty to print the counterpoint to your original blog. Kind of seems a shame that we have to turn our opinion of the excess personal use of business aircraft from something enviable to the recognition of the abject waste of resources that it is...

Posted by: ANTHONY NASR | December 17, 2008 6:32 PM    Report this comment

I use my Bonanza often for business trips. Here is the formula: Up to 150 NM, I always drive. From 150 to 600 NM, I fly myself. From 600 NM on out, it is most cost effective to fly commercial. This works when I figure my per-hour operating cost at $150 and my time at $65 an hour. I don't see how you can justify expensing a $500+K airplane with this model, unless you value your time at $250+ an hour. Even then, I could buy an awful lot of 100LL or airline tickets for the $140K (recurring) cost of a gearbox change. Wonder if easy credit had anything to do with this mess?

Posted by: Steve Zeller | December 19, 2008 3:49 PM    Report this comment

20 million in salaries between GM's top two (guess) or 20k a day. Corporate flight round trip 1/2 day, 10K + 20k for flight = 30k. 4 days driving round trip = 80k. I am glad congress is making decisions now!

Posted by: Chad Landes | January 8, 2009 10:37 AM    Report this comment

Paul,

I do not have a problem with the loan to the auto industry in Detroit. They do have to pay it back someday. Unlike the Wall Street Bail Out!

Just like John Q Public, I lost 40% of my retiement plan in 2008. So any consideration of buying a new car or new home has fallen by the wayside.

The BIG 3 could be more competitive but when no body is buying cars from any auto maker they will need help.

Posted by: Doug Bell | January 8, 2009 1:33 PM    Report this comment

Re: Your comments on the auto industry.

There is a benefit in GM and Chrysler going bankrupt that there isn't in Diamond. For years GM and Chrysler have been run by incompetent / greedy executives, all paying themselves millions. This is while neither company is really producing competitive vehicles, staying afloat by the occasional hit. Their corporate jets weren't the problem, they were an effect of the real problem. There wasn't much of a reason for them to continually be bailed out - they couldn't turn a profit. And in response to Doug above, no they don't have to pay back the loans. All the money the government gave them is out of taxpayers hands in their pockets forever, thanks to their bankruptcy.

Diamond, on the other hand, suffered a simple misfortune. I don't suspect they were too privy to the details of fraud going on inside Thielert, or they might have taken action sooner. They're doing an otherwise great job producing airplanes. When Thielert went under, they jumped on it and made their own diesel. Nobody would benefit from them going into bankruptcy.

Posted by: B M | June 1, 2009 10:31 PM    Report this comment

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