Continental Diesels: Crunching the Numbers
Continentalís purchase this week of the assets of Thielert Aircraft Engine GmbH didnít exactly come out of left field. Continental already declared its interest in diesel in 2010, when it announced the TD300 diesel. And that was before China-based AVIC International came into the picture with a necessarily global view, but not one that Continental hadnít already adopted.
The question is, does the purchase make sense? Is it a natural fit? Itís hard to argue otherwise if you believe diesel propulsion is the coming thing in light general aviation. Itís delusional to look out toward the marketing horizon and conclude that 100-octane avgas is going to spontaneously come roaring back into the market as a forceful player or that mogas will suddenly bloom as a major factor. So that leaves Jet A, the world fuel of choice, some form of which is available everywhere.
Both Lycoming and Continental became vocal about this three years ago and in return, the FAA and industry gave us a plodding, cumbersome regulatory framework to certify a new aviation gasoline to a timeline thatís uncertain enough to barely sustain itself, much less ignite growth. Faced with this, Continental voted with its dollars and started the investment in diesel. I suspect weíll see something from Lycoming before long; the trend is just unavoidable.
In my view, Continentalís Thielert purchase is about as vivid an example of a company making its own reality as Iíve seen in awhile. Overnight, Continental has a market-dominating product line in the traditional three power rangesóabout 150-hp, 230-hp and 350-hp. Despite Thielertís stumbles, the lower horsepower variants are largely proven, with some 1800 or so flying. There are some issues with them, which Continental knows it has to fix. Specifically, the TBRs are too short and owners are still stuck with the nuisance of replacing a gearbox every 300 hours.
The 230-hp TD300, which Continental developed from the SMA SR305 base, hasnít been fielded in large numbers. From what Iíve seen of its performance and durability, it looks promising. The 350-hp Centurion 4.0 that Thielert developed and certified is an unknown and it may take some millions to find out what it has. STCs exist for the Cirrus SR22 and Cessna 206, so there may be a nascent retrofit market. But Continental has no small risk in proving that engine realistically marketable.
With avgas at $6 to $7 in the U.S., youíd think that diesel would have flowered more than it has. But Diamond never pushed its diesel aircraft in the U.S. because it felt the service network wasnít in placeóthey were rightóand Thielertís flawed business plan caused the diesel revolution Diamond started to fizzle even before the world economic downturn damaged it more. Further, in the U.S., we donít resonate with diesel the way buyers do in Europe.
My gut feel is that the world pendulum is swinging back and Continentalís timing may be perfect, if not a little early. Uncertainty over avgas may push things along toward diesel faster than some of us think.†We have no idea what Continental paid for the Thielert assets so a value assessment on the purchase is difficult to make. But itís fair to say that in Thielert, Continental will have a sound technical foundation upon which to build potential diesel market dominance.
Thielert tanked because it got the engine economics wrong. It assumed the engines would need longer to prove than they did and its cradle-to-grave warranty coverage was unsustainable. It probably underestimated production costs, too. You can readily see how some tweaking turns the whole thing around.
For six years, Iíve been following Stan Fetterís diesel conversions in a pair of Cessna 172s, which he uses in a traffic reporting business in the Washington, D.C. area. Heís been through all the typical Thielert travails and then some. His conversions cost about $50,000 for the engines and $60,000, all in. Initial TBRs on those engines was 1200 hours or so for the engine alone. Thatís $42 an hour. Fuel, at 4 GPH, was another $23 or so. But the engine required a $3250 gearbox every 300 hours, so that brought the total hourly on paper closer to $75. (This doesnít include the one-time conversion cost.) Although he couldnít dodge the gearbox requirement, Fetter did extend past the stated TBR, knocking that $42 back some.
Compare that to the Lycoming the Thielert replaced. With new cylinders, overhauls on the O-320 cost about $20,000 or $10 per hour for the engine and another $48 for fuel. But Fetter found that magneto maintenance and cylinder replacements nudged the Lycomingís hourly a bit higher and the diesels had better dispatch reliability. But at the stated TBR, the diesels still had higher operating cost or, at best, parity with the Lycomings. (There are other replaceables on the way to TBR, but I'm brushing past them here.)
But look what happens when the gearbox inspection is eliminated and the engineís TBR is increased to 2400 hours, which Fetter thinks is doable because he ran one to 2600 hours. Continental hasnít given us engine prices yet, so Iím using about $50,000; what Fetter paid. Then the hourly for the base engine drops to $21 and with fuel, the total engine operating costs are something like $45, exclusive of airframe maintenance. It looks better yet if the engine can reach a 3000-hour TBR and/or Continental can reduce the cost of the TBR, say by developing a less expensive overhaul program.†
But to be blunt about it, U.S. economics donít matter much here: global ones do. If you plug European fuel prices into the cost model, the numbers show a larger Delta. Even using mogas in Europe, fuel costs for a 172 are $68 to $75 an hour, versus $41 for the diesel. Thatís real money and over the life of an engine, it will pay for the diesel with a nice surplus to defray other costs.
By the way, Continentalís estimate for a Cessna 172 conversion is about $56,000 for the engine and hardware and another 160 to 180 hours of labor. Call that around $70,000 all in, 16 percent more than Stan Fetter paid six years ago. Those initial numbers might shift some.
While these developments wonít usher in the age of dirt cheap flying, if Continental sweetens up TBR and eliminates the gearbox replacements, it at least takes operational costs in a positive directionódownward--which can only encourage market expansion, or whatever passes for that these days. Moreover, Continental is injecting a pulse of energy into the moribund state of Thielertócapital, engineering focus, developmental determination, customer service and market sense. The more of that these engines get and the more they fly, the better they are likely to get.
My numbers are based on historical data, but if the company stays in range of those numbers, the economics work but, more important, the directionality is encouraging. And thatís why Continentalís big initial push will be longer TBRs and life-of-engine gearboxes. Even so, itís important to understand that diesels are not going to suddenly show us half-price flying. What they will do is reduce costs measurably and reduce worries about fuel availability; more on the global field, less in the U.S.†
While Iím convinced that weíre on the cusp of wider diesel acceptance, I think Continental is gearing up for what will be a long game on a global pitch. My guess is weíll see a steady, robust ramp up in diesel and if thatís true, Continental will be well positioned to profit from it.