-Pretty standard to use a square blank but yours are rectangular and are more difficult/expensive to buy. I see no reason to use a rectangular blank. You can either get a different fly cutter that accepts a more standard square bit or just simply put two 1/4" bits in the slot to take up the excess space. I'd have to see a photo of the fly cutter opening to advise but it's not complicated or difficult to change the tooling to suit your application.
Maybe you can give me some grinding guidance.
-Sure, wouldn't mind at all. Do you have a bench grinder? You'll need one but you can re-sharpen any of these without much trouble once you understand what clearance is. Have these worked well for you or do they go dull quickly? Are you just cutting a cast aluminum head? I'll need to see a photo or drawing of:
1) the fly cutter opening where the bits mount
2) the fly cutter mounted in the machine (with a cutting bit in it) and the cutting edge just barley touching a surface waiting to be cut
-I want the photo/drawing so I can mark up an explanation in photo editing of what you need to do. The photo/drawing of the machine mounted operation should show the front and then the side (2 photos/drawings) of the cutting action. Have I explained this clear enough?
These VW shops want $50 a blade.
-That price is insanely high for ordinary HSS. there are different flavors of HSS. You can pay a lot for T-15 or M-35 but I don't think you'll need either of those with aluminum since you're not doing factory level production, you're fly cutting, can re-sharpen your own bits, and you're just cutting cast aluminum. You have the best of all possible conditions for low cost machining.
Here’s a pic from a supplier.
-You can do a touch-up on the bench grinder for what you have and not buy new replacement bits for some time. What you absolutely need is a bench grinder, an aluminum oxide grinding wheel, and a way to dress the grinding wheel. I don't feel that a lot of cash needs to be spent on any of the above. Yes better equipment often means better results but the cutting edge of a fly cutter isn't terribly fussy so most any type of grinder/wheel can work. I need to know what equipment and experience you have in order to advise. When you understand how to create a cutting edge and proper clearance you'll be able to sharpen drill bits or just about any type of cutting tool.