Future of the Piston Aircraft Engine: An Interview with Lycoming’s CEO

During one of our three visits to Lycoming, we spent a couple of hours with Phil Boob, the company's chief executive. We found him disarmingly frank in discussing a variety of issues from competition to Cessna's chances. Boob has been at Lycoming since 1985, having spent 17 years in sales at Piper Aircraft before that. He worked in sales and marketing before being appointed CEO in 1986.

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

Because as long as we return to the shareholder the profits theyexpect, we’ll be in the engine business. And we have been ableto 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’vegot 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 wouldthey go out and invest in it. In that case, you might look atthe shrinking market and the liability costs and say, gee, I don’tknow if I could get into this or not.

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

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

Our business is not declining. Our business in total and our dollarsin total have been stable and in fact, slightly better this yearthan last, even not counting our windfall from Chevron. Our realgrowth opportunity is in the aftermarket business, in parts andin overall engines. We did $20 million in that segment last yearand 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 obviously100 percent of the new engines for replacement, because you can’tget them anywhere else.: In parts, we’ve got the competition fromthe PMA guys. But the real growth opportunity is in the overhaulbusiness 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 finallyrecognized that for years, we were trying to sell a cylinder,what we call a stud assembly, which was just the cylinder. Wewouldn’t sell the rest of the stuff to go along with it. Thenwe had the PMA guys; coming in with their valves and rings andpistons and so forth. We realized they were just going to keeppicking away at our business.

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

You haven’t mentioned Continental as a competitor. Do you considerthem competition?

No. You have to remember that 75 percent of our business is aftermarketand the parts aren’t interchangeable with Continental engines.When I look at the OEMs (original equipment manufacturer) we havea 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 buythousands of engines, Lycoming took a different approach, particularlyin the international market. I think we’re benefiting from thattoday.

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

Are Cessna’s plans to make 2000 airplanes a year by 1997 or1998 sustainable?

No, I don’t see it as sustainable. At the outside, probably halfof the two thousand.

Can they be profitable at that volume?

Cessna has run the economics on this thing. Somebody had to makea decision to go back into business. So I can only assume thateither they believe they know how to make the 2000 work and theeconomics are driven on that, or, they’ve got to factor down tosome 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’snot Like you can’t today go buy a new airplane comparable to thenew 172 for a comparable amount of money. Now if you said theyfigured out some magic way to come to the market with a $70,000Cessna 172, I’d change my answer real quick. They haven’t donethat.

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 finaldays of the Cheyenne program when he challenged the whole salesforce sitting around the table and said, ” Are you guys tellingme, that in the whole damn world we couldn’t sell one Cheyennein 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 airplanestoday and I consider that the prices aren’t going to be that muchdifferent and I look at the lack of student starts, I get a knotin my stomach.

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

You mentioned student starts and the lack of new pilots. Whatdo 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 tomeasure their success and I don’t think anybody else knows whatthe impact of programs like these could be. But it’s the rightkind of thing to do. If they don’t work, then I don’t know. Idon’t care if you’re selling automobiles, furniture, houses, airplanesor cars, if you can’t get the younger people interested, you don’thave an industry.

Do you think the lack of interest in flying or ownership iscost 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 thebedroom window and it’s a foggy day, before you can back yourcar out to go to work, you gotta get on the phone, check the weather,file a flight plans get a clearance, go whatever direction orwhatever route somebody tells you to as opposed to the route thatyou’d really like to go.

When you start thinking about cost you gotta say, look, how manyLexus’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 toknow a damn thing about a yacht to impress you with it. All Ineed to do is buy it, tie it up to the dock, take you down andthrow my cocktail party on Saturday night and I’ve impressed allmy friends. Now, it’s not very impressive to buy an airplane andgo down and sit in it Friday night and have drinks. Somebody hasto know how to use that airplane-I didn’t say how to fly it, Isaid how to use it-because it’s not very impressive sitting onthe ramp.

I’m inclined to believe that what’s missing is disposable timeas opposed to disposable income.

At Oshkosh this year, there seemed to be a general euphoricfeeling that the industry is on the comeback. Some people arguethat the statute of repose is responsible for this. What’s Lycoming’sview?

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

Then it really won’t make the difference some people thinkit 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 basicallydidn’t see any change in our costs in 1995 as a result of that.But the engine manufacturers and the component manufacturers aregoing to be the ones to see the direct benefit last.

The airframe manufacturers should see it earlier. On the engineside of it, there’s constant replacement going on. How many enginesare 18 years old that don’t have some parts replaced? And a goodtrial lawyer is just going to zero right in on those replacedparts.

We’ve already had it happen to us. You may win the suit, but youspend about the same amount for defense costs to win as to lose.Our average defense cost, by the way, is $300,000 per suit, winor 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 decliningcost for product liability, is it realistic to expect engine pricesto actually decrease?

I can say almost with certainty what we’re doing here will causethe price to not increase at the rate that it has over the last10 years.

And probably it’s going to allow us to make increases below theinflation rate. For the last 10 years or so, it’s been just theopposite. Now, if somebody says when you’re done with this, you’regonna 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 overallbusiness and make a profit that makes sense, I will.