The Tyranny of Low Volume
In casual conversation, some people tell me that they think the best part of an aviation journalist’s job is getting to fly lots of different kinds of airplanes. Maybe. On the other hand, it should be no surprise that most new airplanes these days fly about the same, given that most were certified years ago or at least certified to standards that have been around that long.
So I tend to view airplane reviews not so much as discussions about how an airplane flies or what gadgets it has, but as economic stories that explain what the thing costs to buy, own and operate and how the company thinks it will stay in business selling in what has become the new tyranny—low volume. Although many of us in aviation have a notion of the difficulty manufacturers face in building airplanes in an environment of higher costs and low volume, some would-be buyers have unrealistic expectations about the relationship of volume and cost.
I thought about this two weeks ago when I was being shown around Continental’s diesel engine factory in St. Egidien, Germany, the former Thielert works. The plant is currently building 1.5 to two engines a day, plus spares, but it has the capacity—and the overhead costs—to build as many as 2000 engines a year in a single shift. How can they possibly make this work? The plant is clearly efficient, with state-of-the-art digital machine tooling and an impressive assembly line based on the same kind of technology Mercedes Benz uses in its AMG plant. Specifically, it’s a sophisticated computerized oversight system that keeps track of everything from parts inventories to fastener torques and is designed to yield high quality in low volumes. Those engines are probably built to the highest quality standard acheivable in aviation, something that's very difficult to reverse engineer into traditional aircraft engines.
But high quality in low volume doesn’t solve the relentless difficulty of profitability in low or declining volume. Ken Suda, who oversees the plant, told me that they buy a lot of their inventory on the automotive market, where prices can be attractive at certain high volumes. “In order to be visible to automotive suppliers as a potential customer, you need to order a certain volume. Once you can order that volume, you can make use of the benefits and that means you can have a very high-quality product at a relatively low price,” he said. The problem? Ordering parts that you don’t need for many months runs counter to the just-in-time inventory practices that most manufacturers follow today. Stored parts are stored money with no accumulating interest. So Continental has to strike a balance between volume buys and a just-in-time supply chain. I think it’s a difficult one.
In talking to Continental CEO Rhett Ross, I get the feeling that the company is sober about potential market growth and making all that factory floorspace pay for itself. “We are facing a reality, which is we have more engine capacity than the entire current and projected global market could ever command,” Ross said. “So we have to actively modify our business model from being active manufactures of piston aviation engines to manufacturers of piston aviation engines and other common products.”
That means the St. Egidien plant will take on other work not specifically related to general aviation aircraft or engines and perhaps not aviation related at all. It has already been doing that, building crankshafts and machined parts for the automotive racing industry. I won’t be surprised to see much more this, meaning Continental is aggressively building a hybrid business in which expensive, low-volume aviation products are sustained by higher volume products of some kind. I’m sure we would all wish this not to be necessary and that Continental could focus just on aviation. Those days may be gone forever and the hybrid approach may be the new normal.
Even so, Continental doesn’t appear shy about investing more money in new diesel projects, despite the anemic market. We reported last week on a new 300-hp diesel in the works and I’m sure other projects are on the table. If this sounds like an enormous risk, it is. Future uptake of diesel engines is a huge unknown. About 80 percent of Diamond's sales are diesel, but that's only about 100 airplanes. Cessna seems in no hurry to market its JT-A 182. Piper's out with the Archer DX, but at $400,000, how much volume is likely?
On the other hand, if the market does turn lively again—or even shows a strong pulse—Continental will be well positioned to serve it and with a business model designed to sustain on low volumes, but one which can ramp up rapidly, if necessary.
Buyers say they want new technology, not the same old stuff from traditional engine manufacturers. If nothing else, Continental is responding to that voice. But if buyers continue to complain about high prices—and, understandably, they will—they should at least understand that stuff made in onesies and twosies is never going to be as cheap as they might wish. Regulatory reform is not going to substantially change that, either.
Sometimes I’m a little baffled that companies are able to develop business cases for major new products at all. We can at least be glad that some companies still are.