November 9, 1995 Future of the Piston Aircraft Engine: An Interview with Lycoming's CEO

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by	Paul Bertorelli
	This article originally appeared in THE AVIATION CONSUMER and is reprinted here by permission.

About the Author ... Paul Bertorelli is a professional aviation journalist and editor. He's Editor-in-Chief of The Aviation Consumer and editorial director of AVweb and Belvoir Publications' Aviation Division. He's a 4,500-hour ATP and CFIA/CFII/CFIME. He owns a Mooney 231. Articles in This Series Future of the Piston Aircraft Engine, Part 1: A Visit to TCM (Teledyne Continental Motors) Future of the Piston Aircraft Engine, Part 2: A Visit to Lycoming Supplemental Feature: Future of the Piston Aircraft Engine: An Interview with Lycoming's CEO

AVweb's comments are in red.

Why would a sane and profitable multi-national conglomerate like Textron want to mess around with engines for little airplanes?

Because as long as we return to the shareholder the profits they expect, we'll be in the engine business. And we have been able to do that. If it gets to the point that an investor could say "Textron, the reason I don't own your stock is that you've got too many of these divisions that aren't returning a profit," Textron would look at it differently.

That's different than saying if they didn't own it already would they go out and invest in it. In that case, you might look at the shrinking market and the liability costs and say, gee, I don't know if I could get into this or not.

Even so, our engine business is good. We're measured by Textron as a stand-alone business. And I can tell you that as a stand-alone business, there's no problem with this division.

Still, it's obvious from our tour that the factory is a shadow of its former self. Do you see any way to eke some growth out of a market that's declining at a percent or more a year?

Our business is not declining. Our business in total and our dollars in total have been stable and in fact, slightly better this year than last, even not counting our windfall from Chevron. Our real growth opportunity is in the aftermarket business, in parts and in overall engines. We did $20 million in that segment last year and we only have about a third of the market.

That includes overhaul, parts and entire engines?

Yes. We're 30 percent of the overhaul market now and obviously 100 percent of the new engines for replacement, because you can't get them anywhere else.: In parts, we've got the competition from the PMA guys. But the real growth opportunity is in the overhaul business and if you get that, you automatically get the spares, too. More parts go into overhauls than into repairs.

That was our whole thrust on the cylinder-kit program. We finally recognized that for years, we were trying to sell a cylinder, what we call a stud assembly, which was just the cylinder. We wouldn't sell the rest of the stuff to go along with it. Then we had the PMA guys; coming in with their valves and rings and pistons and so forth. We realized they were just going to keep picking away at our business.

So we just said, what would the price to the consumer be if he bought a cylinder from us and went to Superior and bought all the valves and rings and so on? What would it cost? We got that number and decided we had to sell our cylinder kit at X dollars. We had been selling about a thousand stud assemblies a year. We put this program into place and we haven't sold less than a thousand a month since we started.

You haven't mentioned Continental as a competitor. Do you consider them competition?

No. You have to remember that 75 percent of our business is aftermarket and the parts aren't interchangeable with Continental engines. When I look at the OEMs (original equipment manufacturer) we have a list of 40 customers all over the world. None of them are big, so we'll sell 50 engines here and 50 engines there.

I give my predecessors the credit for this. Back in the 1970s, when Continental didn't want you as a customer unless you'd buy thousands of engines, Lycoming took a different approach, particularly in the international market. I think we're benefiting from that today.

Other than new OEM, it's difficult to make financial sense out of changing from one manufacturer's engine to another, unless you're having significant product problems or customer acceptance problems. Say you want to put a Continental engine in a Saratoga. You're looking at in excess of a million-and-a-half dollars to do that. Why would you do it? How much better do these things have to be before the consumer is willing to pay the additional rnoney?

Are Cessna's plans to make 2000 airplanes a year by 1997 or 1998 sustainable?

No, I don't see it as sustainable. At the outside, probably half of the two thousand.

Can they be profitable at that volume?

Cessna has run the economics on this thing. Somebody had to make a decision to go back into business. So I can only assume that either they believe they know how to make the 2000 work and the economics are driven on that, or, they've got to factor down to some level and still have it make sense.

You're not a proponent of the pent-up demand theory, then?

Well, one of the reasons I flinch so much on that is because it's not Like you can't today go buy a new airplane comparable to the new 172 for a comparable amount of money. Now if you said they figured out some magic way to come to the market with a $70,000 Cessna 172, I'd change my answer real quick. They haven't done that.

I think some people are saying that i n the entire world today, it's impossible that you couldn't sell an additional 2000 airplanes. I remember sitting with Tom Gillespie at Piper towards the final days of the Cheyenne program when he challenged the whole sales force sitting around the table and said, " Are you guys telling me, that in the whole damn world we couldn't sell one Cheyenne in the last three months?" And the answer was "you bet."

When I sit back and look at the fact that you can go buy new airplanes today and I consider that the prices aren't going to be that much different and I look at the lack of student starts, I get a knot in my stomach.

But I hope Cessna is right. I hope I'm so wrong that they rub my nose in it forever. Put money in the bank and they can rub my nose in anything they want to.

You mentioned student starts and the lack of new pilots. What do you think of the AOPA Mentor Program and EAA's Young Eagles. Don't these generate interest and demand among young people?

Certainly those are excellent programs. But I don't know how to measure their success and I don't think anybody else knows what the impact of programs like these could be. But it's the right kind of thing to do. If they don't work, then I don't know. I don't care if you're selling automobiles, furniture, houses, airplanes or cars, if you can't get the younger people interested, you don't have an industry.

Do you think the lack of interest in flying or ownership is cost driven or is it some other factor?

It's maybe not so much cost as much as the hassle with the activity. Meaning that if you wake up tomorrow morning and look out the bedroom window and it's a foggy day, before you can back your car out to go to work, you gotta get on the phone, check the weather, file a flight plans get a clearance, go whatever direction or whatever route somebody tells you to as opposed to the route that you'd really like to go.

When you start thinking about cost you gotta say, look, how many Lexus's were sold last year, how many Cadillacs, how many yachts, how many skiing packages? People are spending money.

Use the yacht and the airplane as a comparison. I don't need to know a damn thing about a yacht to impress you with it. All I need to do is buy it, tie it up to the dock, take you down and throw my cocktail party on Saturday night and I've impressed all my friends. Now, it's not very impressive to buy an airplane and go down and sit in it Friday night and have drinks. Somebody has to know how to use that airplane-I didn't say how to fly it, I said how to use it-because it's not very impressive sitting on the ramp.

I'm inclined to believe that what's missing is disposable time as opposed to disposable income.

At Oshkosh this year, there seemed to be a general euphoric feeling that the industry is on the comeback. Some people argue that the statute of repose is responsible for this. What's Lycoming's view?

I think that's an exaggeration. I think it's just a piece of the solution that may eventually revitalize the industry.

Then it really won't make the difference some people think it will?

No, it'll make a difference. And it will be a financial benefit, but it'll be several years before that manifests itself . We basically didn't see any change in our costs in 1995 as a result of that. But the engine manufacturers and the component manufacturers are going to be the ones to see the direct benefit last.

The airframe manufacturers should see it earlier. On the engine side of it, there's constant replacement going on. How many engines are 18 years old that don't have some parts replaced? And a good trial lawyer is just going to zero right in on those replaced parts.

We've already had it happen to us. You may win the suit, but you spend about the same amount for defense costs to win as to lose. Our average defense cost, by the way, is $300,000 per suit, win or lose. At any given time we've got about 175 suits working.

Given what appears to be fierce competition from engine shops, your avowed promise to improve efficiency and perhaps with a declining cost for product liability, is it realistic to expect engine prices to actually decrease?

I can say almost with certainty what we're doing here will cause the price to not increase at the rate that it has over the last 10 years.

And probably it's going to allow us to make increases below the inflation rate. For the last 10 years or so, it's been just the opposite. Now, if somebody says when you're done with this, you're gonna take that $16,000 engine and be able to sell it for $14,000, I don't know yet.

But if I can do that and at the same time increase the overall business and make a profit that makes sense, I will.