The aviation industry needs a new phrase. "Cautious optimism" has become shopworn. Yet, over the years, it has been apropos in describing the industry's economic outlook. This year is no exception.
There are reasons for optimism. Defense spending is on the rise, and many new and upgraded military aircraft are entering the field. The business aircraft market appears to have bottomed out (never really declining much), and is poised for solid growth. Regional jets still are in strong demand. And the air transport market reportedly has regained pre-9/11 passenger levels. A Boeing report attributes growth in passenger traffic to "the end of the SARS (severe acute respiratory syndrome) global epidemic scare, low fares and the return of skittish passengers after the September 2001 terrorists' attacks."
But there also are reasons for caution. Oil prices have been descending from last summer's alpine heights of more than $50 a barrel. However, the International Air Transport Association (IATA) has calculated that the cost of crude must remain below $33 a barrel for airlines to make a profit. Oil production is expected to increase but so, too, is the demand for crude, especially in China and India, which have rapidly growing--and thirsty--economies.
In addition, FAA's prediction of a healthy 5.7 percent increase in U.S. air carrier capacity (based on a robust recovery in the domestic economy) assumes that "there will not be a major contraction of the industry through bankruptcy or consolidation." This is a speculative assumption, considering three major carriers--US Air, United and ATA--have filed Chapter 11 bankruptcy, other U.S. airlines also struggle financially, and air fares have not kept up with inflation, thus adversely impacting airline revenues. Even the highly touted low-cost carriers (LCCs) are not immune to economic travail, as is evident in Dulles Airport-based Independence Air's stock price decline in autumn 2004 and its endeavor to avoid bankruptcy.
Other concerns exist, too. For example, will a prolonged Iraq war strain the U.S. economy and siphon funding from new and upgraded aircraft programs? Will the worldwide gross domestic product maintain at least 3 percent annual growth over the next two decades, as predicted by Boeing and other forecasters? And, perhaps most importantly, will another terrorist attack occur with near, or equal the devastation of the aerial assaults on the World Trade Center and Pentagon in September 2001? A worthwhile industry forecast demands caveats.
As in years past, Avionics Magazine offers its outlook for the aviation industry in general and the avionics field in particular. We gathered our data from various sources: the Aerospace Industries Association (AIA), Regional Airline Association (RAA), International Air Transport Association, and industry forecasts from companies such as Honeywell, Boeing, Airbus, Embraer and others. We also attained information from industry analysis and forecast organizations, most prominently Palo Alto, Calif.-based Frost & Sullivan.
Notwithstanding the caveats, we see plenty of reasons for optimism, particularly in the longer, five- to 20-year term. Job growth figures indicate that the aerospace industry as a whole is gearing up for growth. AIA reports that, after "hitting a 50-year employment low," U.S. aerospace companies added more than 16,000 new jobs in 2004, reaching a total of 587,600. And, says AIA, "indicators are strong for the trend to continue." No doubt similar employment trends exist in other parts of the world. A strong European aerospace industry is competing eyeball-to-eyeball with North American firms, according to Frost & Sullivan, which also notes the rise of other local industries in Israel, India and China.
In addition to acquiring and upgrading both transport and combat aircraft, the militaries around the world are seeking unmanned air vehicles (UAVs) and aircraft trainers with cockpits that closely match those of today's fourth- and fifth-generation combat aircraft, according to Frost & Sullivan.
In the combat aircraft arena, the analyst group predicts the delivery of 3,360 new airplanes--F-16s, F-15s, F-18s, F-22s, Typhoons, Mirage 2000s, Gripens, Sukois and others--during this decade, and some 4,600 upgraded fighters and trainers. This activity, in turn, is expected to generate some $22.4 billion and a 4.1 percent annual growth rate in military avionics business between 2001 and 2009. Although the North American and European military markets remain healthy, the Asian market is the fastest-growing and now equals the Western markets in size, with at least one-third of the total demand for new combat aircraft and trainers. India alone is to receive 321 new combat and training aircraft over the next 10 years.
Close to half of the $10.9-billion worldwide expenditure on combat aircraft avionics is dedicated to upgrade programs. (The total is forecast to grow at a 2.9 percent annual rate over the forecast period.) Combat aircraft in European and North American upgrade programs are being equipped with Link 16, the NATO standard data link, as well as with "glass" cockpits, advanced sensors, and other equipment that make them as much information platforms as fighters. Requiring ever higher data rates--for such features as real-time video, moving maps and software-defined tactical radios--the new systems in upgraded aircraft also demand data bus throughput faster than Mil-Std-1553's 1 Mbit/s (Dec. `04, page 46). New military aircraft are ushering in Fibre Channel to achieve higher data rates.
Europe is upgrading about 1,400 combat and training aircraft, while the United States is modernizing about 1,500 such aircraft. Adopting different upgrade policies, European militaries tend to install new avionics piece by piece, while the U.S. military applies more of a "tear-down" philosophy, says Frost & Sullivan. The latter approach is evident in the U.S. Air Force's Common Configuration Implementation Program (CCIP), in which Block 40 and Block 50 F-16s are being completely re-equipped, with new mission computers and software, color displays, digital terrain following, a multifunction information distribution system, and a helmet-mounted cueing system. Regardless of the methodology, the common goal is to equip aircraft for the network centric warfare environment, in which aircraft exchange mountains of data in real time with ground and space-based sources, as well as with other aircraft. To this end North American militaries will have spent an estimated $4.55 billion for avionics upgrades in combat and training aircraft during this decade, or close to 42 percent of the worldwide total. Europe will have spent close to $3 billion, or 27.5 percent, and the Asia Pacific region, $1 billion, or 9.5 percent.
New combat aircraft call for new airborne trainers, and Frost & Sullivan forecasts a $50-billion global market for training aircraft through 2025, with most spending ($42 billion) allocated for advanced/fighter lead-in trainers. The remaining acquisitions will cover basic trainers replacing aging aircraft. The lead-in trainers will need to be equipped with avionics and mission systems comparable to the new combat aircraft the student pilots eventually will fly. The emerging new air combat environment will introduce a "demand for specially designed net centric-enabled trainer aircraft," with sophisticated display graphics, mission radar and head-up displays (HUDs), says Frost & Sullivan. These systems will be installed in aircraft such as the BAE Systems Hawk, Aermacchi M-346, Boeing/Aero Vodochody-159, EADS Mako and Korea Aerospace Industries/Lockheed Martin T-50.
Frost & Sullivan foresees the delivery of 400 new and 1,100 upgraded transport aircraft between 2001 and 2009. These do not include the U.S. Navy's multimission maritime aircraft (MMA) and the Navy and Army's aerial common sensor (ACS) aircraft, which are not expected to enter service until late in this decade, at the earliest.
For those transport and multimission aircraft that will have been produced or upgraded between 2001 and 2009, Frost & Sullivan estimates a total of $4 billion will be spent on avionics, based on 9.9 percent compound annual growth. The biggest jump in avionics spending for these aircraft is expected in 2005--81 percent over 2004.
A growing number of new transport aircraft are expected to come from a greater variety of suppliers. The two leaders in the field, Boeing and Lockheed Martin, are expected to forfeit market share to European competitors such as Airbus Military, Alenia and EADS CASA, according to Frost & Sullivan. Fellow analyst organization Forecast International predicts that with new aircraft such as the A400M, C-295 and C-27J, the European firms will accrue nearly 12 percent of the military air transport market by 2008 and then climb to an impressive 40 percent share by 2013. That will occur, the firm believes, when the upcoming A400M, sized between the C-130 and C-17 models, enters the marketplace.
About half of the transport aircraft being upgraded (approximately 1,100) are C-130s, equipped with head-up displays, liquid crystal displays (LCDs), GPS, color radar with ground mapping mode, provisions for satellite communications (satcom) systems, traffic avoidance and terrain warning systems. Other upgrade programs include the C-5 Galaxy, C-17 Globemaster and the UK's Nimrod.
All told, in the United States 70 percent of the military avionics systems purchased over the forecast period will be acquired for aircraft upgrades, says Michel Merluzeau, global director for airborne system, with Frost & Sullivan. Transport aircraft, particularly, are being outfitted to adapt to the civil airspace environment, with new radios and traffic alert collision avoidance systems (TCAS), GPS/inertial navigation systems, VHF radios, multimode receivers and Future Air Navigation System (FANS) data links. Military aircraft also are being updated to improve dispatch reliability, simplify logistics, remedy systems aging, and reduce MTBF (mean time between failures).
Forecast International predicts a healthy military rotorcraft market, as well, with 5,448 new and upgraded helicopters entering the field between 2004 and 2013. Estimated value of these aircraft is $84 billion.
Military upgrade programs, which are expected to generate peak revenues for the avionics industry in 2007, "have consecrated Boeing, Honeywell and Rockwell Collins as the current superpowers in military transport aircraft avionics integration and production," says Frost & Sullivan. However, some countries--including ones operating the venerable F-5 or Mig 21--have found upgrade-provider alternatives in Israel (with Elbit and Israel Aircraft Industries) and in China.
UAVs, Civil and Military
Unmanned air vehicles, from miniature drones to the B737-sized Global Hawk, have proven their worth in surveillance missions both over battle zones in Iraq and along the Mexico-Arizona border, monitoring illegal immigration. In addition to the military orders for UAVs around the world, the U.S. Coast Guard plans to employ Northrop Grumman's Global Hawk as part of its Deepwater modernization program, and the U.S. Border Patrol intends to acquire Hunter UAVs to monitor the U.S.-Mexican border.
Frost & Sullivan estimates a $23.7-billion market for UAVs and unmanned combat air vehicles (UCAVs) between 2001 and 2010, with revenues for these craft more than doubling between now and the end of the decade. Most of the growth and a preponderance of the market (up to 70 percent by 2010) will be in the United States, according to the firm. Asia is expected to grab 12 percent of the market by then, and Europe, 11 percent. The big U.S. winners in terms of UAV funding will be Global Hawk ($4.85 billion through 2010), the Air Force's and Navy's UCAV ($4.13 billion), and the RQ-1/MQ-9 Predator ($2.15 billion).
UAVs require a host of electronic systems and plenty of bandwidth to transmit imagery and data between the vehicle and its operator in real time. Autonomous control of UAVs will be a technology driver, as well, according to Frost & Sullivan. So, too, will systems that allow the use of these vehicles in civil airspace--the requirements for which remain in the incubator stage. UAVs are expected to assume a growing number of missions, including homeland security, commercial applications, first-response, combat and, increasingly, the "dull, dirty and dangerous reconnaissance/surveillance missions," says the analyst group, which also envisions the establishment of UAV charter services within this decade.
Although major carriers in the United States struggle to either avoid or emerge from bankruptcy (causing delays in new aircraft deliveries), Boeing believes the "long-term market outlook remains positive" for air transport. It projects a $5.4-trillion market for new airplanes over the next 20 years. This would about double the current worldwide fleet to almost 35,000 airplanes in 2023. Such growth is predicated on a forecasted 5.2 percent annual increase in world air travel. Recent statistics indicate such growth is viable. Air passenger traffic increased by 20 percent in the first half of 2004, compared with that period in 2003, and cargo traffic was up by 13 percent, according to IATA.
"People are traveling again," says Giovanni Bisignani, IATA's director general and chief executive officer. "Every region is reporting double-digit growth. Traffic clearly is rebounding from 2003, which was an exceptionally bad year."
Bisignani hastens to add that "unfortunately traffic growth and profitability do not always walk hand-in-hand." He reports that while international passenger traffic among IATA member airlines rose significantly during the first 10 months of 2004 over the same period in 2003, the industry's losses were still expected to exceed $4 billion in `04.
Neverthless, increased traffic volume is expected to boost new airplane deliveries. Boeing plans to deliver 315 to 320 aircraft in 2005--better than the about 285 delivered in 2004--and foresees a further increase in deliveries in 2006. Airbus, which was expected to have delivered 315 jets in 2004, also optimistically predicts strong growth.
However, the European manufacturer differs with Boeing on how the market will expand. Airbus, whose major development program is the 550-passenger A380, forecasts a 1,600-plus airplane market for the superjumbo aircraft over the next 20 years, while Boeing sees a market for large airplanes that is about one-third that size. Both manufacturers, however, predict a large demand (more than 4,700 aircraft) for intermediate, A330/A340/B777-sized aircraft, which is why Boeing is developing the B7E7 and Airbus plans to launch a competitor: the A350, an adaptation of its A330.
By the end of 2004, Boeing had hoped to gain 200 firm orders for its new 7E7 aircraft, most coming from Asia. The manufacturer projects a requirement for some 2,300 7E7-sized aircraft, worth approximately $183 billion, over the next 20 years in China, alone. This would quadruple that country's current air transport fleet.
Serving secondary markets and picking up routes discarded by the major carriers, the commuter/regional airlines are growing in strength. This particularly benefits the regional jet (RJ) market, which now accounts for 53 percent of the commuter/regional fleet in the United States. Turboprop sales have been yielding to the growing RJ market, though rising oil prices could have commuter/regional operators looking anew at propeller-driven airplanes.
Forecast International lowered slightly its 10-year projection of the commuter/regional market, from 4,112 new aircraft worth $88.2 billion in its 2003 survey to 3,728 new regional airplanes worth $84.4 billion in its 2004 report. Nevertheless, the company claims that "the number of delivered seats will rise significantly over the course of the next 10 years." Frost & Sullivan believes that the 50-to-70-passenger market remains strong and sees considerable promise in the emerging 70-to120-passenger market, though acquisition of the larger aircraft is being somewhat delayed until commuter/regional airlines feel confident in the economy's growth and customer demand.
RJ manufacturer Embraer, too, sees increased momentum in the commuter/re-gional airline market, though not as much as Forecast International does. It predicts the delivery of 3,200 30-to-120-seat aircraft between 2005 and 2014 and another 4,600 between 2015 and 2024. The total value is estimated at $170 billion. The Brazilian company foresees a "more moderate" market for 30-to-60-seat aircraft and "more growth" for 70-to-110-seat jets.
The regional jet market bodes well for both Honeywell and Rockwell Collins, which supply avionics to the two main airframe manufacturers. Honeywell's Primus 1000/Epic avionics suite is standard in Embraer aircraft, while Rockwell Collins supplies its Pro Line 4 to Bombardier for its CRJs. Some commuter/regional operators are opting for HUDs, aircraft communications addressing and reporting systems (ACARS), electronic flight bags (EFBs), and equipment for reduced vertical separation minimum (RVSM). To assure aircraft "resalability" in the international maketplace, some operators also have ordered dual flight management systems and radios with 8.33-KHz channel spacing for their regional jets.
Boeing also predicts a healthy air cargo market, with the worldwide fleet near doubling to 3,456 aircraft over the next 20 years. Of the 2,950 new freighters projected for delivery, more than half (1,690 aircraft) represent industry growth, while the remaining are replacement aircraft. Greatest demand will be for widebody aircraft, says Boeing. And, according to Fed Ex's senior vice president of air operations, Don Barber, many more will be used, and must be equipped for international transport, to account for the increasing amount of manufacturing outsourcing.
For the avionics industry, air transport growth most benefits the producers of digital integrated systems--the fastest-growing avionics market, according to Frost & Sullivan. The second-largest market, the firm predicts, will be for surveillance systems: TCAS and terrain avoidance warning systems (TAWS). Automatic dependent surveillance-broadcast (ADS-B) will emerge "in regional pockets, such as Australia, the eastern United States, and Alaska," says Merluzeau. He doesn't anticipate wide use of ADS-B in the U.S. before 2012, when a national infrastructure might be established.
Navigation products--including flight management systems, autopilots and landing systems--remain a fairly strong market, according to Frost & Sullivan, and could become stronger when the 70-to-120-passenger regional jet market gains footing. Although the $370-million expenditure on navigation equipment in 2004 is about half that spent in 1999 (a peak year), it is "significantly above" the 2003 figure, thus showing a positive trend, says Merluzeau.
The volume of communications equipment will remain no better than stable in the near term, says Frost & Sullivan, because FAA's controller pilot data link communication (CPDLC) program has been postponed and data link technology remains experimental. However, with the anticipated success of Eurocontrol's Link 2000+ program and the resurrection of the CPDLC program following FAA's installation of En Route Automation Modernization, a boom in the communications market is expected by the end of this decade.
In air transport cabins, Frost & Sullivan sees "a convergence in the domains of in-flight entertainment and communications (IFE&C) and Internet, telecommunications and communications (ITC)." The firm states that "innovation in ITC is instrumental in influencing consumer (hence passenger) behavior and preferences, and subsequently shaping future IFE systems."
In the near term, passenger expectations for entertainment and connectivity could put airlines in a bind. This may be particularly true in the United States, where airlines still struggle economically, yet expectations for cabin conveniences are, arguably, highest. Frost & Sullivan notes that the global airline industry "recorded net losses of over $30 billion from 2001 to 2003, and revenues per passenger are falling." U.S. airlines are suffering most of that loss.
But in a deregulated environment, competition becomes greater, and airlines can't ignore passenger desires. This no doubt contributes to the IFE&C industry's steady climb from a dismal $1.39 billion in airline expenditures in 2002 to $1.78 billion in 2004, according to the World Airline Entertainment Association (WAEA). Frost & Sullivan believes this escalation will continue and forecasts a 19 percent compound annual growth rate for IFE&C over the next five years. That would boost total revenues for the industry to at least $2.2 billion this year (about 17 percent over 2004 revenues) and to about $4 billion in 2010.
Connectivity is "viewed by many as the next killer app in the IFE&C domain," says Frost & Sullivan. Lufthansa German Airlines offers its passengers perhaps the ultimate in connectivity, providing real-time, wireless, high-speed Internet and e-mail access through the Connexion by Boeing service on certain long-haul flights. Emphasis on in-flight connectivity calls for terrestrial broadband access, Wi-Fi-enabled devices, in-seat power supply systems and airborne servers. Frost & Sullivan sees "the terrestrial players--for example, Horizon in the United States, BT Telecom in Europe, and PCCW in Hong Kong--as being very active in airborne connectivity. Their participation provides a more seamless offering to passengers, who then can sign up for a single service (thus receiving a single bill) that provides connectivity both at home and while traveling by air.
The WAEA lists other trends in the IFE&C industry, in addition to connectivity. They include:
--Personal distributed video, offering 24 or more video channels and 72 or more audio channels to each seat.
-- Audio/video on demand (AVOD), particularly on long-haul flights.
-- Hand-held AVOD units, which are offered to passengers and include content on a hard drive.
--And in-flight satellite TV, offered by JetBlue, Frontier Airlines, Canada's WestJet and Delta Air Line's Song. LiveTV has built most satellite television systems in the field. Rockwell Collins is testing its Tailwind 500 multi-regional system.
The most advanced IFE&C systems are entering the business aircraft market, which is poised for strong growth, according to a Honeywell forecast. Following 2003--a "trough year," with 506 business jet deliveries--the market saw a significant improvement, with more than 525 deliveries estimated in 2004 and 650 predicted in 2005, according to the avionics company.
To further indicate "bullish" expectations in the business aircraft community, two entities, Aerion Corp. and Supersonic Aerospace International, announced their intent at the National Business Aviation Association conference and exhibition in Las Vegas to develop business jets that fly at the supersonic speeds of Mach 1.6 and Mach 1.8, respectively. Both entities claim they could have about 12-passenger supersonic business jets (SSBJs) available for customers in the 2011/2012 timeframe.
Honeywell attributes growth in the business jet market to a surging economy, backlogs of aircraft (about 1,500 total) being built, and the fact that only 5.7 percent of current production aircraft fleets are up for sale. Forecast International lists additional factors:
--Evaporating corporate guilt, as high-profile corporate scandals in the United States--Adelphi, Enron, etc.--fade into the past;
--A U.S. tax law extending through next year the ability to claim depreciation of business jets;
--Airport hassles from boosted security since 9/11; and
--The fact that there are more aircraft choices, from small, personal jets to air carrier-sized Boeing and Airbus aircraft. Some 25 new business jet models are expected to enter service in the next 10 to 12 years. Some are derivatives of older models, but many--particularly the personal jets, or very light jets (VLJs)--are fresh off the drawing board. (According to the Washington Post, entrepreneurs already are considering fleets of VLJs to offer airborne taxi services.)
Optimistic forecasts came from multiple sources at last year's NBAA show. Noting that almost 40 percent of the business jet fleet is at least 20 years old, engine maker Rolls-Royce predicted a need for 23,000 new business jets (including VLJs), valued at $284 billion, through 2023. Honeywell forecasts the acquisition of 8,300 business jets, valued at $131 billion, through 2014. Forecast International expects a 157 percent increase in delivered bizjets through 2011. Virtually all of the forecasting entities attribute some 40 percent of the aircraft orders to the fractional ownership market.
Such growth couldn't help but benefit the manufacturers of electronics for both the cockpit and the cabin. Even the VLJs are equipped with integrated glass cockpits, autopilots, flight management systems (FMS), Mode S transponders and color weather radars. Honeywell and Rockwell Collins are obvious beneficiaries, with products for installation throughout the aircraft, as is Universal Avionics, with its FMS, TAWS and radio equipment. However, avionics producers such as Garmin, Avidyne and Chelton are expected to advance in the market, too, by taking advantage of growth in entry-level aircraft sales and in the new VLJ market.
The producers of head-up displays with enhanced vision systems (HUD/EVS) will benefit from manufacturers of high-end bizjets, which have decided to make these systems standard equipment, and from operators who choose to install HUD/EVS in order to gain approval for lower approach minimums. Increased interest within the business aircraft market is expected, as well, in flight management systems that can achieve required navigation performance (RNP).
Frost & Sullivan predicts that only 65 percent of the aircraft capable of flying above 29,000 feet are equipped for reduced vertical separation minimum (RVSM). And most are bizjets. This means upgrades will continue beyond FAA's Jan. 20 deadline to be RVSM-compliant.
Other mandates may have created some stragglers, as well. By this month, European aircraft weighing 12,000 pounds (5,443 kg) or more must be TAWS-equipped and commercial aircraft making over-water flights must be fitted with 406-MHz emergency locator transmitters. Operators no doubt are scrambling to meet March 2005 deadlines, too: Europe's mandate to have Mode S transponders on all aircraft flying under instrument flight rules and FAA's mandate to have TAWS installed on all Part 135 (air charter) aircraft.
Though they may not be mandated, some technologies nevertheless provide strong incentives for purchase. In Europe, for example, air traffic controllers will give aircraft equipped for precision area navigation (P-RNAV) priority for landings.
What mandates could bring still more business to the avionics industry? One activity to watch is a standard being considered by the International Civil Aviation Organization (ICAO) to have data link communications--CPDLC, ADS and digital Flight Information Service (FIS) communications--transmitted to and from the aircraft recorded, along with voice and flight data. The proposed standard, included in ICAO Annex 6, would have new aircraft fitted for such a capability by 2007 and fielded aircraft by 2009. It would require that aircraft be equipped with a high-speed data bus between the communications management unit and a crash-proof recorder that has sufficient memory to store two hours of data.
However, at least one question must be answered before the standard's adoption: Will the recorded data include transmissions made through the aircraft communications addressing and reporting system? FAA believes upgrading every ACARS-equipped aircraft would be too costly. It wants to "narrow the scope" of recorded data messaging and store little more than CPDLC and ADS, according to an agency official. The standard's deadline also has not been fully resolved. Nevertheless, such a standard, coupled with emergence of CPDLC and the expansion of the Future Air Navigation System (FANS), could well make communications gear the fastest-growing of all avionics systems.
|Aircraft on Order (Top 10, as of October 2004)|
|Airline Orders for New Aircraft (Top 20 as of October 2004)|
|Delta Air Lines||66|
|American Eagle Airlines||58|
|United Parcel Service||53|
|China Southern Airlines||39|