Revitalization at Lycoming

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I was at Lycoming for three days last week, shooting a video on how the company has invested in new CNC equipment to improve its competitive edge on parts and engines. While I was waiting in the security office to have my visitor badge arranged, I did a quick scan of my e-mail. Coincidentally, there was a press release from Austro Engines announcing the company had just passed the 1000-engine mark.

Austro, you’ll recall, stepped quickly into the breech even before Thielert went south in 2008, embarking on a crash 42-month cert program to build diesel engines for Diamond Aircraft. (Austro is attached to the Diamond factory in Austria and Diamond CEO Christian Dries was the driving force behind Austro.)

“Not bad,” I thought. One thousand engines in five years. Five seconds later, I had a forehead slapping moment, asking myself what the hell was I thinking. A thousand engines over five years is actually pretty terrible when you take a moment to run the most basic numbers. Dredging my memory, I was thinking the Austro certification project and factory cost about $48 million, but when I looked it up, it was 48 million Euros, or about $62 million. This is not atypical of what it costs to bring a new engine to market, at least a clean-sheet design. (And Austro had a lot of technical help from Mercedes Benz.)

Carry the calcs through and assume that Austro engines sell for a WAG price of $90,000 and 1000 engines represents about $90 million in business. Most aviation businesses would like to earn a 30 percent margin and most aviation businesses have to settle for less than that. But even if you use the illusory 30 percent, that’s $30 million in gross profit in five years on a $62 million investment. Why would anyone do that? Because we’re all inmates in the asylum we call general aviation. I have no other explanation. (By the way, the sweetheart Austro relationship with Diamond probably complicates my back-of-the-envelope numbers, but the concept is clear enough. Also, the money isn’t free to fund such a thing.)

Obviously, to make these investments appear at all palatable, the payback timeline has to be long. Very long. Like decades. This came up during discussions I had over three days with Michael Kraft, Lycoming’s general manager. He told me he was at an aerospace propulsion conference recently when one of the attendees politely asked why Lycoming persists in manufacturing stone-age piston engines with no electronic controls, no variable valve timing and many of these engines still use-gasp-carburetors!

Where to begin? By now, Kraft has heard “Lycosaurus” often enough to at least appreciate its humor on a higher level, one that marvels at the undiluted ignorance behind the belief that somewhere out there, perhaps lurking in the fertile mind of an unknown entrepreneur, is the Jesus solution. You know, the shimmery, clever idea that will awaken GA from its slumber. The fantasy usually involves some technologically sophisticated product.

In actual fact, there have been innovative ideas, both from established companies and from upstarts. The aforementioned Austro is certainly one, so are the diesel engines from Thielert and now Continental. Lycoming has its own-the IE2 FADEC project. It has a diesel, too. Going back even further, Continental had its FADEC, the Powerlink system. As for airframers, Cirrus surely deserves a nod.

Despite the roaming bands of Lycosaurus hunters, the market has not been kind to all of these initiatives. Pilots and owners often talk the talk on the desire for new products, but balk the walk. The IE2 is on a slow perk toward final certification and has two OEMs in Lancair and Tecnam, plus a military customer in Northrop Grumman’s Firebird. These are likely to be small volume and even if a Cessna, Piper or Cirrus signed on, engines sales would hardly be transformational and would more likely be cannibalistic against existing models.

As I recently reported, in the context of pathetic sales, diesels have actually been a smash success, achieving about 7 percent of marketshare of new airplanes since 2002. Raw numbers? About 1700 diesel airplanes flying. In that sense, Austro could similarly be seen as a success if you don’t count up the Euros it took to get a kilo of diesels into the field. The financials always seem to temper the joy.

In commenting on the passing parade of aviation, I never forget I have this wonderful, continuous opportunity to thunder from the pulpit about the industry’s lack of innovation and steadfast stodginess. Isn’t the Lycosaurus its own worst enemy? Perhaps. But when I spend time at these companies, touring the production lines and seeing how things are made, sensing what the difficulties and costs are and hearing how customers respond to-or fail to respond to-what innovation has come along, I realize that this is the real story. Many buyers-certainly not all-are profoundly uninformed about the fundamental economics of an industry confronting graceful decline, with any potential growth over the horizon.

The story at Lycoming-and why I went there-is more granular than that. Lycoming had several times invited me to tour the plant and I finally caved some time last September. But I only had an afternoon and I realized what I saw there would take far longer than that to report. Basically, the company is transforming itself thanks to advances in computer numerical machines that allow it to make parts faster, more accurately and at less cost than was possible a decade ago.

Such things are routine and hardly worthy of comment were we involved in any of a dozen other industries in which we still make stuff in this country. Ah, but we’re in GA and investing by companies riding that downward slide requires a deft touch. But it can yield definite positive results which, as best I can tell, is about where Lycoming is these days. Kraft told me that gains the company has made in lowering production costs have and will allow new product development. The IE2 is an example of that, but there are less visible projects, too, such as tappets with improved coatings to reduce spalling. But even if the money were there for swing-for-the-fences new products, I remain unconvinced a long-term business case can be made for some of these. The game is a marathon, not a series of sprints. In aviation, a sprint is 10 years.

And anyway, the concept of Lycosaurus is about as real as Bigfoot.

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