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Sunday, January 1, 2006

Avionics Outlook 2006: Rising Expectations

With rapid economic growth in Asia, increased air passenger traffic, and the effects of 9/11 slowly fading into history, the civil aviation market appears to be gaining vigor, and its optimism is becoming less tempered.

David Jensen

Optimism--ranging from cautious to near euphoric, depending on the market sector--is blossoming in the civil aviation marketplace. Despite escalating oil prices, ongoing instability in the Middle East, and a slight slowdown in growth predicted for the U.S. economy, there remain reasons to believe in a financially healthier civil aviation industry. The dark cloud of 9/11 is dispersing, and the world economy has demonstrated that, so far, it can withstand large oil price hikes. These amounted to a 20.4 percent increase in 2003, 38 percent in 2004, and 56 percent in 2005. These and other factors denote a mood that is perhaps even more welcome than optimism: a bit of long-awaited stability.

In a more stable environment (who can say when stability really exists?), airlines have been able to inch up ticket prices and not enter into a fare war. One North American carrier, Air Canada, emerged from bankruptcy protection in 2004, and United Airlines is expected to do the same early this year. "The [North American] airlines seem to have a hold on capacity without much consolidation," says Frank Daly, Honeywell's executive vice president, marketing and product management, suggesting another indication of stability.

The world's steady economic growth provides an impression of stability, as well. Boeing forecasts that the world gross domestic product will grow by a steady 2.9 percent over the next 20 years. The most dramatic growth will be in China (6 percent). Growth in North America and Europe will be, quite naturally, more modest. Economic expansion within the European Union is projected to accelerate, however, to 2.1 percent in 2006 and 2.4 percent in 2007, due to greater domestic demand, a more favorable exchange rate, and the benefit of a hearty global economy. Meanwhile, the impressive, 3.5 percent growth rate in the United States, fed largely by consumer buying, probably will not be sustained, primarily because of record levels of national and personal debt.

Aerospace employment in North America is on the rise, however. The Aerospace Industries Association (AIA) reported that 11,100 new jobs were added in the U.S. aerospace industry during the first six months of 2005. This represents a turnaround after a steady decline in aerospace employment that began in the early 1990s.

Worldwide, the aerospace industry has plenty of reason for optimism. The major commercial airframe manufacturers saw, when this was written in early December, the possibility of record-breaking sales for 2005. The number of business aircraft sales is expected to escalate dramatically in coming years. And defense budgets continue to grow, while new aircraft programs such as the F/A-22 enter production. All of this bodes well for the avionics industry, which anticipates increasing demand for new, digital technologies.

Of course, reasons for concern never go away, and new obstacles--such as the emerging shortage of raw materials--invariably arise. Also, the threat of sky-high fuel prices persists. Nevertheless, the outlook for aviation seems good--and more stable.

Air Transport

The level of optimism in the air transport market varies by region. The U.S. commercial air travel industry continues to struggle, while the industry in Europe is showing strength, and the one in Asia holds enormous potential. Overall, the air transport industry in North America still is in a hole, but it may be seeing daylight. True, North American airlines were projected to lose $8 billion in 2005, $1 billion less than was lost in 2004. But they have adjusted capacity by decreasing the number of domestic flights (down 19,000 in 2005) and increasing the number of international flights by 4 percent.

The low cost carriers in North America are gaining market share, even though they, too, have reduced capacity. A study by Euler Hermes, provider of trade credit insurance and risk management information, reveals that discount carriers' market share rose from 4 percent in 1990 to 18 percent in 2003 and is expected to reach 40 percent by 2014.

Likewise FAA sees the U.S. regional/commuter airlines experiencing the greatest increase in passenger volume among commercial air carriers, up 15.4 percent from last year. The agency expects regional jet sales to "undergo the largest increase, from 1,630 aircraft in 2004 to 2,960 by 2016." However, because of their "dependence on U.S. hub-fed networks," according to the Rolls-Royce industry forecast, the U.S. regionals need to see economic recovery among the major carriers.

The strength of the low cost and regional carriers indicates that the U.S. commercial fleet will encompass smaller aircraft. Boeing sees a large demand for new single-aisle aircraft in North America, as well as in Europe, to accommodate the growing number of short-haul routes. This demand for smaller aircraft, in part, accounts for the original equipment manufacturer's prediction that the North American carriers' worldwide share of air traffic will drop over the next 20 years from about 25 percent to below 20 percent.

Much of that share will cross the Pacific, where Boeing projects a hunger for new aircraft rivaling that of North America's, with the delivery of about 2,800 new aircraft by 2024. But, unlike North America, the Asia-Pacific region has a notable requirement for large B747/A380-size aircraft, making it the most important market in value.

According to a Chinese news agency, the People's Republic of China is expected to take delivery of 100 to 150 airline-sized aircraft a year between 2006 and 2010. That could increase the nation's fleet from about 900 aircraft to as many as 1,600. China plans to keep pace with such growth in fleet size by increasing the number of airports in country from 133 to 190 by 2010, and to more than 225 by 2020.

India's market is equally dynamic. Olivier Achard, Thales Canada's vice president of sales, describes it as "explosive," probably because Indian carriers have ordered more than 100 Airbus aircraft. They placed more than $12 billion in new aircraft orders during the 2005 Paris air show, alone. The number of state-owned carriers has increased in India from two in 1991 to 11 today, and four more carriers are planned, according to Giovanni Bisignani, director general and chief operating officer of the International Air Transport Association (IATA).

In response to such growth, Achard says "Thales will open a facility in India in 2006." The potential for air travel growth in India is understandable, considering that the number of Indians who ride the train in a day matches the number who fly in a year.

Europe maintains a healthy air transport market, in part because of the eastern countries entering the European Union. Poland's 11.2 percent projected growth in air traffic over the next 10 years is expected to top even China's 9.6 percent traffic growth rate, according to IATA projections.

The stronger market in Europe has prompted Tucson-based Universal Avionics Systems Corp., to expand its sales office in Basel, Switzerland. "We've set up shop in Europe because of PRNAV [precision area navigation--a Eurocontrol program]," says Paul DeHerrera, Universal's vice president of marketing and support. "There is a lot of old equipment in Europe and a lot of interest in FMS [flight management systems] there." There's no requirement to equip for PRNAV yet but, says DeHerrera, with proper equipage, aircraft will get preferential routing.

Overall, with the annual growth rate of passenger traffic averaging 2.9 percent and cargo traffic averaging 6.2 percent, the commercial aircraft fleet is expected to more than double over the next 20 years. Airbus predicts a three-fold growth in passenger traffic through 2023, and even greater growth in the air freighter market. Both Boeing and Airbus have new aircraft in development, another indication of market strength. The OEMs are all bullish, though the numerical support of their optimism varies, as shown in this chart.

Projected Deliveries Through 2023/24

OEM Aircraft Value ($bil)
Airbus 17,300 1,900
Rolls-Royce 20,361 1,752
Boeing 25,700 2,100

Airbus' aircraft/value ratio differs from Boeing's and Rolls-Royce's in apparent anticipation of more sales of larger, A380-sized aircraft, which bring in a majority of the delivery dollars. Boeing, on the other hand, foresees greatest strength in the short-haul, single-aisle aircraft market, with 19,000 deliveries by 2024. Reinforcing Boeing's view, Alex Hendricks, Eurocontrol's head of airspace, flow management and navigation, observes that "aircraft numbers [have tended] to grow faster than passenger numbers." The distinction in aircraft size is significant to the avionics industry, which would prefer outfitting and supporting 25,000+ aircraft rather than 17,300, regardless of their sizes.

Undoubtedly stoking OEM bullishness is the fact that aircraft orders in 2005 exceeded the expectations of both Airbus and Boeing. Boeing had close to 800 aircraft orders by October, and more orders by both Airbus and Boeing were expected from at least three airlines. The final tally may show the number of airliner orders close to, if not exceeding, the record 1,859 orders in 2000.

New Technologies

New aircraft will usher in new technologies, many of which will be standard in the highly integrated, fully digital aircraft rolling out of factories today. Both Boeing and Airbus plan to have electronic flight bags standard in their new models.

"We see more of a reception to head-up display technology," adds Honeywell's Daly, "for better safety and to achieve lower minimums." Perhaps most of all, operators seek "integration but in a modular way and with a high level of partitioning, to easily accommodate new technologies down the road."

In the cabin, Daly sees "less pressure to improve IFE [in-flight entertainment] because the systems have proven to be highly reliable and with an acceptable data rate." He recognizes the desire for broadband connectivity but believes "it will not come as fast as some manufacturers are saying," mainly because satellite broadband doesn't match the high-speed connectivity people enjoy in their homes. With instant access to the Internet and graphical weather on both the TV and computer, the home has become the technology benchmark. "It used to be that the cockpit was more sophisticated [technologically] than the home," observes Gerry Block, president of Sandel Avionics. "Now it's the other way around. There are more sophisticated systems in the home."

Corporate Market

Business aircraft sales remain strong, and it isn't just because of the expanding fractional ownership market. Independent companies still dominate bizjet sales.

While the United States still clearly dominates the business aircraft market, its share of demand may be slowly declining. According to Jack Pelton, Cessna Aircraft's president, chief executive officer and chairman, "Traditionally our Citation sales have been two-thirds in the U.S., but this year [2005] it's closer to 50-50, U.S. vs. non-U.S." The Honeywell forecast projects a "softening" in business aircraft purchase expectations in North America and growth in Europe, Latin America and the Asia/Africa/Middle East region.

Europe is gaining strength, according to Tim Rahl, Rockwell Collins' senior director, marketing for business and regional systems. "As Europe harmonizes its airspace system, it makes [flying] easier for business jet operators," he explains.

Near euphoric optimism pervaded the Orlando Convention Center last November, during the 2005 NBAA show. The business aviation market is growing dramatically, not only in the number of aircraft types but in the variety of aircraft sizes--from very light jets (VLJs) to the Airbus A380.

Yes, the A380. Lufthansa Technik, premier provider of completed VVIP aircraft, has developed an executive cabin layout for the jumbo airliner, complete with a boardroom and sleeping quarters. Airbus reports interest in an executive A380. It announced at the NBAA show that it gained 11 orders in 2005 for the ACJ business jet and plans to partner with Lufthansa Technik in introducing a new bizjet, the A318 Elite. Meanwhile, Boeing reported a program total of 102 BBJs, surpassing its goal of reaching 100 orders before the end of 2005.

Probably no manufacturer has capitalized on today's upbeat bizjet market more than Cessna, which is set to deliver its 5,000th Citation jet. Cessna enjoys a backlog of 1,200 orders worth some $6 billion, Pelton reports. "We sold production well into 2007 and are even entering into 2008." He adds, "We're increasing production from 245 aircraft in 2005 to 290 in 2006."

Cessna also has introduced a new model, the Encore+, which joins the CJ1+ and CJ2+ in sporting Rockwell Collins' Pro Line 21 avionics suite. Indeed, an array of new aircraft models has just been announced, and more are being developed or are about to enter the business aircraft market. They include the Raytheon Hawker 850XP and Premier 1A; Bombardier Challenger 605 and Learjet 60XR; Piaggio Avanti II; Embraer VLJ and LJ; Dassault Falcon 7X, 900DX, 2000DX and 2000EX; Sino Swearingen SJ30-2; and Gulfstream's G150, to name just a few.

Beyond these familiar manufacturer names are new companies that plan to capitalize on this booming market. More than 50 new aircraft--ranging from tilt-rotors to supersonic jets--are somewhere between the drawing board and initial delivery. Many may never reach the delivery stage; an industry consensus holds that the market can bear no more than three VLJ manufacturers. Still, Honeywell's annual outlook defines a business aircraft industry with a very strong pulse, as indicated by the following:

  • By September 2005, an 11 percent increase in bizjet orders over 2004;

  • A projected five-year demand for 3,000 to 3,400 new business jets;

  • A projected 10-year demand for 4,500 to 5,500 ultra light jets;

  • An estimated 9,900 new aircraft deliveries (not counting the ultra light jets) valued at $156 billion over the next 10 years; and

  • Strong backlogs and a new product pipeline.

The new bizjet models will undoubtedly boost the demand for Honeywell's Primus Epic and Collins' Pro Line 21 avionics suites, as well as Garmin International's G1000 suite and Avidyne's Entegra system.

In terms of new technologies for the business aircraft market, digital flat panel displays are becoming fundamental to operators of aircraft, even down to the single-engine models. "It's essential for all other new technologies," says Mike Anderson, director of avionics at Landmark Aviation. The flat panel, liquid crystal display (LCD) is "a basic building block that allows future technologies to be incorporated when appropriate," he adds.

Head-up displays with enhanced, infrared vision systems (HUD/EV) are growing in acceptance--and are becoming more affordable, as well. For example, Kollsman and Sandel have joined to develop a package for small plane operators. It includes Sandel's integrated panel displays and Kollsman's MicroHUD. A follow-on program will add Kollsman's new GAViS (general aviation vision system) HUD with infrared capability, says Bill Wood, Sandel's vice president-sales.

Thales' director of marketing and business development, Francis Archambault, sees an "evolving" retrofit market for HUD/EV. "Once you've used HUD/EV, it becomes a must-have product." Kollsman officials cite the technology's benefits, including more precise, on-glideslope landings and less wear on aircraft tires and brakes.

The next step to improving situational awareness, synthetic vision (SV), also is making headway in the business jet market. "Synthetic vision is underrated," states Randy Shimon, Chelton Flight Systems' vice president-sales, who believes these systems are poised for greater demand. "The technology could wipe out CFIT [controlled flight into terrain]." Shimon also believes the highway-in-the-sky technology "shows much promise" and can "change the way you fly."

Chelton provides synthetic vision systems, as does Universal Avionics Systems. Honeywell and Collins are working on the technology, too. Kollsman has developed synthetic vision imagery, which aligns with an EV image on the primary flight display.

Collins' Rahl believes the big demand for new technologies will be "in the cabin" of business jets, calling for broadband connectivity and information management. "It's not enough to bring more data to the cabin," he states. "There must be value added...for example, the capability of watching TV while surfing the Internet."

Universal's DeHerrera envisions more broadband in the cockpit, too, providing uplinked graphical weather and downlinked maintenance alerts. "Once you have a high-speed pipe, then so many things are possible," he says. Stimulating the enthusiasm for broadband communications is Inmarsat's plan to have its SwiftBroadband service available by the second quarter of this year. In addition, Collins is flight testing its eXchange Ku-Band system, based on the Connexion by Boeing system. And AirCell recently announced that its new Axxcess multichannel, wireless satcom system will be available this month and certified for broadband communications by mid-2007.

The challenge for the service centers and avionics dealers will be to market new technologies to the general aviation market. Retrofit work to satisfy mandates, such as for terrain awareness warning systems (TAWS) and equipment for reduced vertical separation minimum (RVSM), is generally behind us. Exceptions include stragglers pursuing RVSM equipment and, in Europe, the implementation of Mode S elementary surveillance, which has transponders transmitting the unique ICAO 24-bit aircraft address for interrogation.

Dealers therefore must adjust their marketing efforts and attempt to sell "want to buy" items instead of "need to buy" items. This adjustment, in turn, is altering the relationship between avionics manufacturers and avionics dealers. "We have to work together to sell these products," says Larry Riddle, vice president-business development at L-3 Communications. "We have to help the dealers as they change their marketing strategies."

Duncan Aviation has taken advantage of OEM assistance and been proactive in the post-mandate period by establishing an aggressive marketing program to encourage the retrofit of integrated liquid crystal display systems. "We saw the next big demand would be for displays," says Ron Hall, in Duncan's avionics sales department. Duncan personnel established a marketing program that involves visiting operators and making a "Future of Avionics" presentation to explain the advantage of new displays and the availability of other new technologies.

The company also has been working with Honeywell to develop retrofit programs with the Primus Epic avionics suite. "We had to invest in these programs with Honeywell," says Hall. "We're doing the development work before we have the demand, which is new to us."

Meanwhile, Midcoast Aviation, Cahokia, Ill., sees potential in cabin retrofits and recently signed a letter of intent with Lufthansa Technik to be the North American provider of the nice cabin management and entertainment system. "We also see a big demand for phone systems and, in the larger jets, high-speed data connection," says Blake Hogge, Midcoast's director of avionics sales.

Landmark Aviation, too, pursues the sale of cabin systems and cockpit displays. However, Landmark still sees business in RVSM equipment. "There's still a lot of airplanes that aren't compliant," says Anderson. "We've tried to educate the customer to show the value of complying with RVSM."

As to future technologies, Anderson says his company "is looking at synthetic vision products." Hogge sees "a lot of interest in electronic flight bags and graphical, real-time weather." And Duncan's Hall believes automatic dependent surveillance-broadcast (ADS-B) could become a "hot item," germinating in Australia and East Asia, and then migrating to Europe and North America.

Some Concern

The outlook for the aerospace market in general, and the avionics market in particular, appears upbeat. But can we count on it remaining so? Concerns persist, most notably the rising fuel prices. If economic growth declines and fuel prices go up, then there could be a problem.

Presently, manufacturers worry about the continuing flow of raw materials through the supply chain. Demand has escalated, fed by the hunger for raw materials in China and other developing countries. "Only the concern about the supply chain prevents us from being overly optimistic," says Cessna's Pelton.

Military Outlook: Time of Sustainment

Two words would appear to dominate the military budget vocabulary: "sustainment" and "jointness." In the United States, particularly, pressure is being applied to eliminate "stovepipes" and establish cross-service cooperation, or jointness. This is evident in new programs, such as the Joint Strike Fighter (JSF) and the Joint Tactical Radio System (JTRS).

Sustainment, too, is prevalent in the United States, which must buttress its forces for a prolonged conflict in Iraq. However, this desire to "get as much service as possible out of military equipment" also exists in other countries, whether they are at war or not, according to Steve Shea, senior partner with Wakefield, Mass.-based STS Research Group.

Although funding for the Iraq war resides in a supplemental budget, the conflict has affected the U.S. defense budget, as well. "New programs generally have not been cut, but they have been shaved or delayed," says Shea. "More money has been allocated to the O-1 [operations and maintenance] part of the budget and less to the P-1 [procurement] and R-1 [research and development] parts."

Sustainment during the Iraq war calls for a steady supply of parts, including avionics, and at times also includes retrofits. For example, an anticipated strategic shift that would reduce the U.S. ground presence in Iraq and increase the use of air power has stimulated interest in precision weapons delivery, using electro-optics (EO) and infrared.

Two apparent trends in military equipage are the expanded application of unmanned air vehicles (UAVs) and establishment of a network centric warfare environment. After observing the effectiveness of pilotless aircraft in Iraq and Afghanistan, militaries around the world are looking increasingly at UAVs. The U.S. Air Force has decided to expand the number of Predator UAV squadrons from three to 15. Provided funding is available, France and the United Kingdom plan to expand their UAV fleets, too, according to Larry Dickerson, analyst with Forecast International. He foresees more than 9,000 UAVs being purchased over the next 10 years. And sales of UAV reconnaissance systems--including air vehicles, ground control equipment and payloads--are expected to be worth $13.6 billion through 2014.

"It's been mushrooming," says John Robinson, managing editor of Defense Daily, a leading defense industry newsletter, referring to the UAV market. "It is becoming a larger and larger share of the [U.S.] defense budget. A few years ago, Congress recommended that the Pentagon spend at least a third of its aviation budget on UAVs." The UAV has proven its worth as a surveillance vehicle, and Forecast International estimates that "up to 5,000 potential EO platforms could be produced in response to the growing interest in UAVs. Significant to the UAV's growing acceptance, however, is the expansion of its role beyond reconnaissance to include armed combat.

Manned or unmanned, aircraft are viewed as platforms--and increasingly as nodes in the new network centric warfare environment. Emphasis is expected to continue, therefore, in developing and acquiring military airborne communications systems that can securely transfer tactical data between aircraft and the ground in real time. Forecast International claims JTRS and the Multifunction Information Distribution System (MIDS) "will be the most dominant factors within the U.S. airborne communications market over the next 10 years...[accounting] for 72.65 percent of the projected $2.743 billion U.S. military airborne communications market."

Since its successful deployment in Afghanistan, demand for MIDS has been high, the forecasting organization claims, adding that "in both Afganistan and Iraq, data link-equipped UAVs have been widely used as strike vehicles, as well as for surveillance and targeting." Forecast International further states that, "following MIDS, the JTRS program is expected to replace all radios currently used in the U.S. military and will account for 28.52 percent ($782.1 million) of the 10-year communications market share." Both newly built and fielded aircraft are to be fitted with the new communications systems.

Many of the trends involving the U.S. military affect non-U.S. militaries, as well. "There's a desire to be interoperable with the U.S.," says Shea, who believes the proliferation of F-16s will stimulate worldwide interest in the fighter's successor in the United States, the F-35 JSF.

In terms of new manned aircraft, the F/A-22 and Eurofighter Typhoon are now in production. And 2006 should be a big year, with the first flight of the F-35 and relaunch of the U.S. military tanker program, pitting Boeing against an EADS/Northrop Grumman team.

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