In computational fluid dynamics, non‐linear differential equations are essential to represent important effects such as shock waves in transonic flow. Discretized versions of these non‐linear equations are solved using iterative methods. In this paper an inexact Newton method using the GMRES algorithm of Saad and Schultz is examined in the context of the full potential equation of aerodynamics. In this setting, reliable and efficient convergence of Newton methods is difficult to achieve. A poor initial solution guess often leads to divergence or very slow convergence. This paper examines several possible solutions to these problems, including a standard local damping strategy for Newton's method and two continuation methods, one of which utilizes interpolation from a coarse grid solution to obtain the initial guess on a finer grid. It is shown that the continuation methods can be used to augment the local damping strategy to achieve convergence for difficult transonic flow problems. These include simple wings with shock waves as well as problems involving engine power effects. These latter cases are modelled using the assumption that each exhaust plume is isentropic but has a different total pressure and/or temperature than the freestream. Copyright © 1990 John Wiley & Sons, Ltd