May 20, 2013
The U.S. Next Generation Air Transportation System's low-hanging fruit—satellite-based procedures—could be within the grasp of a growing number of airlines with legacy fleets, if the market opens up for lower-cost avionics providers.
Delta Air Lines is on the lower-cost cockpit leading edge. The carrier in early April signed a $62 million contract with Pennsylvania-based avionics maker Innovative Solutions & Support (IS&S) to equip 182 MD-88 and MD-90 twinjets with new cockpits, complete with flat-panel displays, dual GPS/wide area augmentation system receivers and new flight management systems (FMS).
Including eight new cockpits for Delta simulators, the price tag for each upgrade is $326,000 including installation, a number that analyst Michel Merluzeau, managing partner at G2 Solutions, estimates to be less than one-third of what first-tier avionics original equipment manufacturers (OEM) would charge for the similar upgrades.
“OEMs are pricing those upgrades in the $1 million-plus bracket,” says Merluzeau. Ten years ago, such a price would not have raised eyebrows, as airlines at that time did not expect a return on investment for more than two years after the installation. It is different now. “The chief financial officer at any airline these days will want a return on investment for an avionics upgrade in 16-18 months,” says Merluzeau.
A lower-cost solution from second-tier providers such as IS&S could help the operators of thousands of legacy aircraft afford the benefits of time- and fuel-cutting required navigation performance (RNP) procedures and localizer performance-vertical guidance (LPV) approaches.
There's a catch, however: Airlines often have to break long-term master services agreements with first-tier avionics suppliers such as Honeywell, Rockwell Collins and Thales in order to hire a second-tier company like IS&S to upgrade their cockpits.
“The return on investment has to include the costs of breaking the agreement,” says Michael Dyment, CEO of Nexa Capital Partners, adding that often the second-tier supplier will pick up those costs to enter the market.