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Monday, January 1, 2001

Outlook: Air Transport Market: The Demand Continues

Frost & Sullivan has pegged a robust market outlook for air transport avionics, based on the need to replace aging equipment and meet new regulatory requirements.

Despite the delays and growing aggravation, people still desire and/or require more and more air travel. In business, despite advances in communications technology (e.g. teleconferencing), the perceived need for face-to-face interaction appears to be perpetual. Predictions have the current about 2 billion air passengers traveling annually more than tripling in number over the next two decades. That means more airplanes will be needed–and with them, more avionics.

The world air transport avionics market is expected to maintain a 7% to 10% growth rate annually over the forecast period to 2006, according to Frost & Sullivan, and it is expected to reach $5.52 billion by the end of the forecast period. In 2000, the air transport sector accounted for approximately 69% of the total commercial avionics market, amounting to $3.43 billion in revenue.

Air transport growth by product types varies. In 1999, navigation equipment accounted for about 41% of the avionics in air transport. Communications reached approximately 12% and surveillance leveled at about 37%. Integrated systems grew strongly, totaling 10% of the air transport avionics market.

The aviation sector has been experiencing a continuing period of growth since 1993. Traffic has been rising consistently not only in the United States, but also in Europe, where growth has brought us capacity issues and weather related delays, which have now reached an all-time high.

Air travel growth is only one factor impacting the avionics market in the air transport arena. Frost & Sullivan believes that the air transport industry will need to finance the replacement of aging platforms over the next three to five years in order to meet communication, navigation, surveillance/air traffic management (CNS/ATM) requirements and other noise regulations mandated by the end of 1999 or in early 2000.

Airbus Vs. Boeing

Airbus will continue gaining market shares over Boeing as airlines measure the benefits of an all-Airbus fleet, Frost & Sullivan predicts. Boeing, on the other hand, will continue to introduce new aircraft to compete more effectively against Airbus. The aviation analyst firm adds that Airbus will need to introduce its A3XX by the middle of the decade to meet the demand of Pacific zone carriers who will be looking for replacements for their Boeing 747 classics and DC-10s.

In the narrowbody aircraft arena, Airbus has consistently gained market share even among traditional Boeing customers such as United Airlines and British Airways. Both companies’ perception of the market differs significantly. For example, on the issue of the successor to the Boeing 747, Boeing foresees a market of only a few hundred of the big haulers, while Airbus anticipates a demand for more than a thousand A3XX-size aircraft.

Driving Air Transport

With U.S. and European economies still performing well and wages and disposable income rising, air travel has never been so popular in these regions. Economic conditions in Europe and the United States will continue to benefit air transport growth over the next five years, according to Frost & Sullivan.

Likewise, the Asian region has almost fully recovered from its recent economic downturn. Asia-based airlines should witness higher seat occupancy on their aircraft within the next two to three years as consumers regain confidence in the economy, says Frost & Sullivan. Boeing believes that orders should start picking up in 2001, particularly in Asia.

European air transport continues to grow, particularly in the regional and lower cost narrowbody segment. Indeed, regional airlines are booming in Europe, which is translated by their above-average passenger growth rates. While larger airlines grow at an average of about of about 6% a year, European regional airlines have been growing at an average 15% in recent years, according to industry sources.

A Lift from the Regionals

The U.S. regional airline industry, too, has continued its impressive record of growth. Some 78.1 million passengers boarded airplanes operated by regional airlines in 1999, according to a survey conducted by the Washington, D.C.-based Regional Airline Association (RAA). This represents an increase of 10% over the previous year. Revenue passenger miles in 1999 rose 19%, reaching 20.81 billion. And 2000 showed still more growth: Some 40.5 million passengers boarded regional airliners during the first six months of last year, compared to nearly 37 million passengers during the same period in 1999.

Regional carriers now serve 95% of all of the airports receiving commercial airlines in North America. This demand will continue to drive the avionics market, as more aircraft will be needed.

Demand for regional aircraft is on the rise, and regional jets (Canadair RJs and Embraer 135/145s) are penetrating most of the regional aircraft segments at the expense of turboprop manufacturers such as Saab or ATR.

Preparing for Free Flight

Preparation for Free Flight will impact future avionics for new transport aircraft, claims Frost & Sullivan. To a large extent, this concept in airspace use will also drive the retrofit market throughout the forecast period.

Free Flight will enable the sharing of decision-making information between pilots, ground controllers and the airlines’ operating centers. CNS/ATM is expected to improve airline operations, reduce delays and improve air transport safety.

If governments and regulators can come to agreements and soon finalize standards, then avionics manufacturers will be able to introduce products to the market that specifically meet the requirements of CNS/ATM, comments Frost & Sullivan. Since airlines are driven by regulatory requirements, any newly mandated products will find large numbers of buyers, particularly in North America and Europe.

The air transport sector is finding it increasingly difficult to maintain and find parts for existing analog avionics products. Component obsolescence and cost will accelerate the needs for avionics upgrades. Airlines have to decide and calculate at what point it becomes necessary to invest in a new aircraft or upgrade avionics systems. The cost of maintenance will, at some point, exceed the cost of upgrades over time.

Retrofit and Cargo Markets

Retrofit remains a contributing driver of avionics sales in the air transport category, particularly in the cargo sector. Some over-capacity in the airline medium- to narrowbody segments will set in motion the transfer of these aircraft to the cargo market, says Frost & Sullivan. An example is the transfer of British Airways Boeing 757s to DHL and that of MD-11s to UPS and Lufthansa Cargo. In the cargo sector, a suitable replacement for aging 747s and DC-10s is needed, says the analyst firm.

Older airframes used by cargo and charter operators, and in parts of the world outside the U.S. and Europe will require upgrades within the next five years to meet the CNS/ATM requirements.

Though Europe will impose noise restrictions on older generation aircraft, such as the venerable Boeing 727, and force out aircraft that could otherwise be refurbished, the U.S. market for cargo retrofit will present more opportunities for avionics suppliers. A predicted shortage of aircraft also will prompt cargo carriers to upgrade their aging fleets.


Restraints on Growth

Constraints exist, however, on the avionics market in commercial air transport. For example, Frost & Sullivan reports, delays in the development of global standards will postpone the introduction of new avionics products. The U.S. Federal Aviation Administration (FAA), European Joint Aviation Authorities (JAA), UK Civil Aviation Authority (CAA), France’s Direction Générale de l’Aviation Civile (DGAC), and other countries’ civil aviation authorities set standards for their national airspace. However, their standards differ to varying degrees, complicating international air communications, navigation and surveillance. When worldwide standards for CNS/ATM are agreed upon, says Frost & Sullivan, and technical issues resolved, government agencies will be able to define compatible regulations for commercial and civil airspace across borders. But until those standards are set in stone, airlines will be reluctant to invest in new avionics.

Additionally, according to the analyst firm, many delays experienced with Free Flight’s implementation are due to the FAA’s decision to make changes to the program’s first phase, called Flight 2000. FAA decided to scale back Flight 2000 because of criticism over its original complexity, the analyst firm adds. Decisions about the avionics required for CNS/ATM also contribute to delays.

Airlines have indicated that, despite the advantages offered by the latest integrated systems, the medium to low end of the industry cannot currently afford systems upgrades. Airlines have indicated that the preferred solution is to lease aircraft rather than endure the high cost of grounding their own aircraft and spending millions bringing it up to the CNS/ATM standards.

WAAS and Other Navaids

In the U.S., integral to the CNS/ATM system and the Flight 2000 project is the government-sponsored Wide Area Augmentation System (WAAS). WAAS is a national air traffic management system built under contract by Raytheon. It enhances the accuracy of the Global Positioning System (GPS) signal for improved navigation and runway approach.

The project has met delays–mostly attributed to a lack of additional geostationary Earth orbit (GEO) satellites–setting back the system’s introduction. GPS/WAAS will most likely not be operational until 2005, at best, which means VOR/DME decommissioning will most likely not start until 2008.

Some airlines have expressed frustration over such delays. But they also realize that they must prepare for Free Flight regardless. A greater demand for air travel and cargo transfer propels the carriers to modernize. The alternative is to be swallowed up by the growing problems of delays and air traffic congestion.

How the Major Airframers See the Future

How do the two major airframe manufacturers see the future? Both Boeing Commercial Airplanes Group and Airbus Industrie have conducted 20-year forecasts ending 2019. Broadly speaking, both project similar outlooks, however, Boeing appears somewhat more bullish in terms of new aircraft sold and revenues generated. This variance is due in part to the fact that Boeing factored in all regional jets, while Airbus counted only regional jets with 70 passengers or more.

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