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Saturday, January 1, 2011

Brighter Skies Ahead?

With passenger demand and profitability returning, airlines and avionics OEMs are optimistic about their business prospects in 2011 and beyond

By Emily Feliz

Despite the economic meltdown of 2009, the United States airline industry is gradually recovering, as passengers return to the skies and carriers’ balance sheets shift from red to black. Airlines including JetBlue, Southwest, United, Delta and US Airways announced third-quarter profits, with positive outlooks for the balance of last year and beyond.

Much of the industry’s profit has been gained by operational efficiencies, including capacity management, grounding less fuel-efficient aircraft, a focus on high-yield business and overseas travel, and more stable oil prices, according to the Air Transport Association (ATA), which represents U.S. airlines.

“Why are we able to slowly dig out of a very deep financial hole? The answer is self-help,” ATA President and CEO Jim May said in an address to the Air Traffic Control Association (ATCA) in October. “Even though things are looking better in 2010, they are a long way from good. It will take years of sustained earnings to repair our balance sheets.” (Nicholas E. Calio in November was named to succeed May as ATA head, effective Jan. 1.)

Offering his perspective on the state of the global airline industry, Giovanni Bisignani, director general and CEO of the International Air Transport Association (IATA), stated, “Together we have achieved a lot, but there is more to do. On revenues of $560 billion, this year’s $8.9 billion (in) profits represents a margin of 1.6 percent. That’s good for a charity association but not for a serious business.”

Wall Street is more optimistic about the airline industry’s fortunes in 2011, citing relative stability in oil prices, the return of passenger demand and carefully managed capacity.

“The steepest downturn in airline history failed to claim any victims, whereas even mild downturns have in the past. The industry is producing record profits at a time that broader economic output remains tepid, at best,” according to an October research report from J.P. Morgan. “It will be different this time. … We believe the seeds have been sown for another year of significant industry cash generation, balance sheet repair and earnings prosperity in 2011.”

Avionics manufacturers hope that optimistic outlook translates into renewed orders from carriers. Demand is particularly high in the retrofit market, according to avionics OEMs.

In a third-quarter earnings report Oct. 22, Honeywell said it is “seeing an uptick in the commercial aerospace aftermarket.” Aerospace segment sales increased 3 percent compared to the third quarter of 2009, “primarily due to higher commercial OEM and aftermarket volumes.”

Rockwell Collins said third-quarter sales related to aircraft OEMs increased five percent to $231 million, primarily due to product deliveries for the Boeing 787 and 747-8 and Cessna CJ4.

“Looking to 2011, we expect Commercial Systems to experience robust growth as this market continues to improve,” stated Clayton Jones, Rockwell Collins chairman, president and CEO.

France’s Thales also projects increased sales of its avionics equipment, particularly in-flight entertainment and connectivity (IFE&C) systems produced in Irvine, Calif.

Virtually all major airlines have announced plans to outfit their aircraft with equipment for in-flight Internet, e-mail and connectivity services. Airborne communications provider Aircell, of Itasca, Ill., reports outfitting more than 1,000 commercial aircraft with its Gogo Inflight Internet service. Gogo is now available on flights within the continental United States on Air Canada, AirTran, Alaska Airlines, American, Delta, United, US Airways and Virgin America.

Delta in November said it will add Gogo service to 223 regional jets operated by Delta Connection carriers, adding to 549 mainline fleet installations. Delta Connection Embraer 175 and Bombardier CRJ700 and CRJ900 aircraft will be equipped starting in January through 2011. Once they are outfitted, more than 80 percent of Delta’s domestic fleet will feature Gogo Inflight Internet.

Onboard Wi-Fi is part of the airline’s plan, unveiled in January 2010, to invest more than $2 billion in airport facilities, aircraft and onboard services through 2013. Also part of the investment are flat-bed seats in BusinessElite class on 90 transoceanic aircraft; in-seat audio and video-on-demand systems in Economy class on 16 Boeing 747-400s and 52 767-300ERs; the addition of first-class cabins for 66 CRJ700s; modification of 269 pre-merger Northwest aircraft; winglets and renovations to Delta’s Sky Club Lounge in Los Angeles.

In September, low-cost carrier JetBlue Airways and ViaSat Inc., Carlsbad, Calif., signed a memorandum of understanding to provide in-flight broadband on the airline’s 160 Embraer E190 and Airbus A320 aircraft, the first commercial aviation fleet using the ViaSat-1 broadband network.

ViaSat will provide Ka-Band antenna components and SurfBeam2modens. Certification and installation of the new system by JetBlue subsidiary LiveTV is projected to begin in mid-2012. “Rather than invest in current technology designed to transmit broadcast video and audio, we elected to partner with ViaSat to create broadband functionality worthy of today’s interactive personal technology needs,” stated Dave Barger, JetBlue CEO.

Southwest Airlines is equipping its 737s with in-flight broadband service from Row 44, of Westlake Village, Calif. The airline planned to have 60 aircraft Wi-Fi enabled by the end of 2010, with its entire fleet of 346 737-700s equipped by the end of 2012.

Lufthansa, with equipment from Panasonic Avionics Corp., relaunched its in-flight broadband service, called FlyNet, in December. The service will be available on most Lufthansa intercontinental flights by the end of 2011. Lufthansa previously provided Internet access on its scheduled service from 2003 through 2006, when then-partner Connexion by Boeing discontinued the service.

NextGen Equipage

Airlines are keeping a close eye on cockpit systems, and in particular NextGen-capable avionics. Some airlines are choosing to equip for advanced capability such as GPS Wide Area Augmentation System (WAAS) and Required Navigation Performance (RNP); others are holding off, opting to wait for a mandate or until the return on investment can be proven.

“The airlines have already, and are willing to continue, investing in this air infrastructure, but the business case is missing unless and until the FAA can be accountable for real, measurable benefits, such as reduced separation standards,” May told the ATCA conference.

Southwest Airlines in 2008 announced plans to invest $175 million over six years to equip its fleet for RNP and train 6,000 pilots to fly the precision approaches.

The carrier’s NextGen equipage plans were recognized in a speech Nov. 30 by FAA Administrator Randy Babbitt to the Washington Airports Task Force Williams Trophy Luncheon.“Southwest Airlines and (CEO) Gary Kelly understand that the system of tomorrow is hinged on equipment,” Babbitt said. “... When they hear ‘best equipped, best served,’ they don’t want to be in that line, they want to be at the front of it.”

Early technology adopters do face risk, however. In a report issued Oct. 12, the U.S. Department of Transportation Office of Inspector General said FAA’s program to deploy Automatic Dependent Surveillance-Broadcast (ADS-B) throughout the National Airspace System “faces significant risks and challenges.” The risks include airspace users’ reluctance to purchase and install new avionics and FAA’s ability to define requirements for more advanced capabilities.

Last May, FAA issued a final rule establishing performance requirements for ADS-B Out capability by 2020. The agency estimates the industry’s cost to equip under the rule could range from $2.5 billion to $6.2 billion. An aviation rulemaking committee began meeting in July to consider further requirements for ADS-B In, enabling the display of air traffic in the cockpit.

“Until FAA effectively addresses these uncertainties associated with equipage and requirements for ADS-B’s advanced capabilities, progress with ADS-B will be limited and the potential for cost increases, delays and performance shortfalls will continue,” according to the IG report.

Airline executives, including US Airways CEO Doug Parker, have expressed skepticism of NextGen based on the cost.

“While air-traffic control has enormous benefits to consumers, it doesn’t get the kind of return that people think the industry is going to get out of it,” Parker was quoted as saying at the carrier’s Media Day in April.

Aviation industry stakeholders believe the government should play some role in providing incentives for airspace users to equip. According to the DoT IG report, those incentives, at least for ADS-B, could include purchasing equipment for operators, an investment tax credit, an adjustment to current excise taxes for ADS-B-approved aircraft, or research and development tax credits specifically for avionics manufacturers.

“FAA has never managed such a large effort to equip commercial aircraft,” the IG stated. “Therefore, the aviation community will need a clear understanding of what the incentives would be used for as well as their strengths and weaknesses, timing and potential impacts.”

With the business case conundrum as the backdrop, an investment group led by Nexa Capital Partners and ITT Corp., prime contractor in deploying the nationwide ADS-B ground infrastructure, has developed a novel funding mechanism aimed at supporting airlines in buying and installing NextGen avionics beginning in 2012 ( Avionics, November 2010, page 24). The funding mechanism, which involves a mix of commercial borrowing and private equity, would finance new avionics for the majority of the U.S. airline fleet. The equipment would be leased to air carriers, which would make repayments based on FAA reaching agreed milestones for supporting ground infrastructure.

Said Steven R. Loranger, ITT Corp. chairman, president and CEO, the “business case will close with the delivery of procedures that take advantage of NextGen technical capability and the development of viable options for cost effective financing of required equipage.”

Regional Carrier Horizon Air Fleshes Out 2011 Avionics Investments

Regional airline Horizon Air has avionics on the agenda for 2011. The Alaska Air Group subsidiary was mulling new technology acquisitions, as well as upgrades to existing equipment on its 40 Bombardier Q400 turboprops.

Safety, regulatory compliance and a solid business case are among the factors driving the airline’s purchasing decisions. “Are you moving the needle in a good way?” asked Perry Solmonson, Horizon Air director of flight standards and training. “Are you being more safe?”

With those factors in mind, Seattle-based Horizon was reviewing the case for outfitting 30 Q400s with dual Universal Avionics UNS-1Ew Wide Area Augmentation System (WAAS) Flight Management Systems. While not definitive at this writing, the plan would be to complete installations by July, Solmonson said.

Seven Horizon Q400s already are equipped with WAAS through a three-year data collection arrangement with FAA. The agency supported WAAS upgrades in these aircraft in exchange for operational data on 300 flying legs to help FAA determine the economic and operational advantages of WAAS equipage for regional carriers.

It “looks like the FAA is going to commit some additional dollars” to equip three more aircraft with WAAS, Solmonson said. Should more FAA funding materialize, Solmonson said he would expect Horizon Air to operate a total of 10 WAAS-equipped turboprops by the end of the first quarter of 2011.

Any investment Horizon makes on WAAS this year comes after the regional airline became the first Part 121 carrier to utilize WAAS approach procedures in scheduled revenue service in December 2009. Since then, the technology has increased the number of alternate approaches and alternate airports that Horizon can use, which is especially helpful in the mountainous Pacific Northwest, Solmonson said. WAAS has also saved the airline from canceling or diverting some flights, though exact figures were not available.

WAAS also appeals to Horizon because equipped aircraft do not have to carry as much fuel, which translates into financial savings, Solmonson said. “WAAS is a tremendous game changer,” he said.

Solmonson said he is also interested in acquiring avionics that provide performance improvements to electronic flight bags (EFB). Horizon Air is in the midst of upgrading its Q400 EFBs, an effort that began in 2010 with the airline retrofitting its SkyTab 1100 from The IMS Company, of Brea, Calif., with the SkyTab 4201 Class 2 EFB. More than half of the carrier’s aircraft have been retrofitted, and the transition should be complete by summer 2011, Solmonson said.

The airline is evaluating the purchase of the Jeppesen Airport Moving Map (AMM) application for EFBs, an anti-runway incursion tool. The AMM application renders maps of airport structures, runways and taxiways, and uses GPS to show pilots their position at the airport. The technology provides more awareness and easier maneuverability at complex airport surfaces, Solmonson said. He added that Continental Airlines has reported slightly reduced taxi times for AMM-equipped aircraft.

“Without the AMM, you’re just going along, looking for the next tiny sign sitting on the surface of the taxiway,” he said. With AMM, “you can look at the EFB and see three taxiways from now is (your) left turn.”

Horizon Air was contemplating changes to its data transfer units (DTU) used for loading and downloading of FMS and other system data. The carrier uses the Universal Avionics’ DTU-101 but has found it increasingly difficult to find zip disks. “The technology has moved on. At some point we’ll run out of zip disks,” Solmonson said. Horizon is interested in Universal’s Solid-State Data Transfer Unit, he said, but added, “We’re not sure if we’re going to make that commitment in 2011 or not.”

Solmonson would also like to invest in a solution that eliminates communications radio bleed-over. With certain frequency pairs, one conversation can sometimes interrupt another, and pilots cannot turn off the outside conversation, he said.

Solmonson said he is not certain if replacing the comm radio would fix the problem or if the solution involves the control head in the carrier’s Thales aircraft radio communication data unit. “It is a very strange development for the flight crew,” he said. “It is a very awkward problem. It causes significant disruption to our schedule. In some cases, we cancel flights.”

Beyond 2011, Horizon Air will look at buying an enhanced vision system (EVS) to improve visibility during taxiing. With FAA, the airline conducted simulator testing of the Kollsman EVS II All Weather Window Enhanced Flight Vision System in December 2009.

“We can take off and land in low visibility, but from the runway to the terminal is sometimes problematic,” Solmonson said.

While business aircraft have realized some benefits from EVS, for now it is an expensive technology for which the airline has not yet been able to make a business case, Solmonson said.

Also, in the coming years the carrier will consider how to meet FAA requirements for ADS-B equipage. “There is no immediate plan to do anything with ADS-B until we understand better what’s the path to get there,” Solmonson said. ––Megan Kuhn

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