Amid a steadily growing global market for commercial avionics that saw an estimated $20 billion spent for airliners in 2015, an ongoing lawsuit over aftermarket cockpit upgrades between Delta Air Lines and avionics provider Innovative Solutions and Support (IS&S)—which will play out in 2016—is exposing the riskier side of the bull market for smaller avionics providers eyeing lucrative cockpit refurbishment contracts with airlines.
Oil prices, which the U.S. Energy Information Administration says will remain at about $50 per barrel in 2016—down a factor of two from 2013-14—are a key driver in airlines holding on to older aircraft with higher fuel consumption. Modernization occurs in the cockpit, where upgrades solve obsolescence issues and help carriers benefit from satellite-based navigation, and also meet the FAA’s January 2020 mandate for installing Automatic Dependent Surveillance-Broadcast (ADS-B) Out. Upgrades represent a significant portion of aftermarket sales, and together with original equipment avionics, will account for a growth rate in the “high single-digits” in 2016, according to Rockwell Collins.
Flight deck efficiency, particularly related to the flight management system (FMS), is what drove Delta in 2010 to seek out an upgrade for a legacy and acquired fleet of about 180 McDonnell Douglas MD-88s and MD-90s. The company evaluated several options but in March 2013 signed contracts with Pennsylvania-based IS&S to install new flat-panel displays and FMS with satellite-navigation capabilities in its aircraft and full-flight simulators, and to obtain FAA approval for the upgrade.
IS&S’s press release at the time noted that the new cockpit, which the company later estimated could be installed in as few as four days, would provide Delta with required navigation performance (RNP) and required time of arrival functions, as well as data link and ADS-B capabilities. Pre-upgrade, the aircraft had no GPS and an FMS that, because of its age, lacked the computer memory needed to handle the increasing number of performance-based navigation procedures the FAA and airports were steadily rolling out.
According to court documents, IS&S estimated that a NextGen-capable Honeywell “Pegasus” FMS upgrade, which Delta had considered, would cost about $1 million each, while IS&S was offering the entire cockpit upgrade plus installation for approximately $325,000 per aircraft. IS&S’s most relevant previous work with airlines had included retrofitting its flat-panel displays into legacy aircraft, including Boeing 757s and 767s for American Airlines, FedEx, Icelandair and Air Transport Services Group, an aviation holding company that owns and leases aircraft. The company had also built and certified an FMS for the Eclipse EA550 very light jet.
The “honeymoon” was over fairly soon and by October 2014, Delta had terminated the contract “for cause” and according to IS&S had paid “nothing” toward several years of development costs. Delta admits to not paying but says it did not have an obligation to do so and that IS&S’s delivery failure cost it more than $1 million for pre-work to prepare the aircraft for the installations, and millions more to find a suitable replacement. The “he said, she said” story that follows is taken from a complaint filed by IS&S on Feb. 25, 2015, and an answer to that complaint, filed by Delta on June 10, 2015. IS&S is asking for a jury trial, which the U.S. District Court for Eastern Pennsylvania will set after a pre-trial meeting in June.
While many of the details are redacted from the documents, the basic story is intact and tells a cautionary tale regarding projects that seem too good to be true or contractors that cannot deliver what they promise, depending which side you believe. Since the case is ongoing, neither company would respond to Aviation Week regarding specific questions in the documents.
According to IS&S, Delta wrongfully and prematurely terminated the contract, which the company describes as a development project in which the parties did not specify that “time is of the essence” or that Delta would be able to terminate the contract if the product wasn’t ready by a certain date. Delta, in its filing, says IS&S was to have delivered a functional and certifiable FMS to Delta in early 2014.
The “development” aspect of the program was particularly true for the legacy FMS, for which IS&S was to replace some—but not all—of the functions. “Delta prohibited IS&S from completely replacing the existing FMS because it contains proprietary algorithms that calculate the optimal vertical flight path to minimize fuel consumption,” says IS&S in the complaint. Delta denies that claim as well as IS&S’s assertion that the airline ultimately canceled the program because it “adopted a new fleet-planning strategy” that calls for replacing the MD-88s and MD-90s. “In short, Delta has changed its mind about the retrofit project and come down with a case of buyer’s remorse,” the complaint argues.
The FMS performance, or lack thereof from Delta’s perspective, was the linchpin that led to the termination. “Delta admits that it terminated the agreements following a failed demonstration of IS&S’s overdue, incomplete, uncertified and dysfunctional FMS,” the airline says in its response.
The saga began in 2010, when IS&S says Delta’s senior vice president for operations, Steve Dickson, discussed an MD-88/90 upgrade program with a former Delta employee who was working at IS&S. Delta soon after released two competitive requests for proposal (RFP), one for an MD-88/90 FMS and another for upgraded cockpit displays for the MD-88/90 and Boeing 757/767. IS&S responded to both RFPs, noting in its cockpit-displays proposal that interfacing with a Pegasus FMS retrofit would be the lowest-risk option.
While IS&S initially shied away from an FMS development program that would “divert its best engineering talent for a significant amount of time,” the company says Delta convinced officials that the MD-88/90 FMS development program “would be the beginning of a long-term cooperation between IS&S and Delta.” According to IS&S, Delta made further statements that it would have a “permanent seat at the table” for future aircraft updates, assertions that Delta denies.
In early 2011, IS&S, without a contract and with its own money, built a prototype FMS to show Delta pilots the features of the system in a Delta simulator in Atlanta. “The demonstration was a resounding success,” says IS&S, adding that the company continued to spend money developing the FMS but that Delta was “reluctant to enter into a contract.” Delta, speaking of the same event, says the FMS simulation did not include vertical navigation or autothrottle control. The carrier denies making any complimentary statements or comments about its position on the contract at that time.
In July 2011, IS&S entered into a contract with the National Nuclear Security Administration (NNSA) to retrofit two Boeing 737s with flat-panel displays and a next-generation FMS, a move to which Delta would later attribute IS&S’s delays in building the MD-88/90 FMS.
Delta and IS&S eventually signed contracts for the MD-88/90 upgrades in March 2013. In July of that year, the FAA, on reviewing the project, said it would likely require an “issue paper” to certify the FMS. Given that the FAA uses issue papers to track the resolution of significant technical issues during a project, IS&S felt the finding would no doubt “complicate and prolong” the certification and that Delta directed the company to consider alternative FMS designs. A new, favored design emerged in the spring of 2014, and IS&S says “both parties understood and agreed that the project time line would have to be extended.” Delta denies giving direction for a new FMS design or agreeing to an extension.
Delta says the NNSA 737 project, which in the beginning was a selling point for awarding the contract to IS&S, later became a threat to the program. “IS&S further represented to Delta that IS&S could quickly and efficiently develop a new FMS because it had already done so for a different aircraft, a Boeing 737, and that IS&S’s design of the 737 FMS could largely be carried over to the new FMS for the MD-88 and MD-90,” the airline says in its response to the complaint. According to Delta, the NNSA aircraft were originally scheduled to be certified in September 2012, a schedule that IS&S’s chief executive said would “facilitate obtaining the [supplemental type certificate] on the MD-88/90 and reduce overall program risk.” IS&S eventually certified the FMS for the NNSA 737s in November 2014.
The NNSA delays, combined with the higher potential for retrofits in the 737 fleet, resulted in IS&S “redirecting the bulk of its resources” to that project, says Delta, “thus sacrificing any chance IS&S had to meet the schedule in the [Delta] agreements solely for the benefit of other business opportunities IS&S believed to be more lucrative.”
IS&S says Delta “praised” the performance of the new FMS in an April 2014 simulator demonstration for Delta’s new vice president of engineering, Gil West, even though deadlines had been advanced by 45 days from the original schedule. “Delta’s pilots were thrilled by the cockpit displays, and IS&S successfully showed that its FMS could control the aircraft laterally and vertically from takeoff to landing,” says IS&S, adding that West later wrote to IS&S chief executive Geoff Hedrick, saying Delta was “encouraged and hope we are finally on a path that will lead to success for both our companies.” Delta says the quotes are taken out of context.
Less than two months later, IS&S says it received a letter from Delta saying it “lacked the technical ability to complete the FMS in a timely fashion,” and demanded that the company demonstrate a fully qualified system on the simulator by Aug. 31, 2014. Delta later accelerated the schedule, and IS&S says technical issues that were initially blamed on the FMS but were later attributed to the simulator’s GPS signals, complicated the demonstration. Delta described the effort as a “failure.” After the simulation, IS&S says a new schedule was agreed to, but Delta ultimately terminated the contract on Oct. 6, 2014.
While IS&S saw progress in 2014, Delta apparently saw warning signs. “IS&S’s half-hearted and understaffed development efforts had yet to produce a workable [FMS] capable of gaining FAA certification,” says the carrier. “In fact, IS&S had not delivered a single functional FMS to Delta for testing. Along the way, IS&S attempted to conceal its lack of progress by initially refusing Delta’s reasonable requests to review and evaluate detailed aspects of the FMS software architecture.…When IS&S finally relented and made more information available [it became clear] that IS&S was nowhere near being able to produce an FMS that could gain FAA certification or be installed on Delta’s aircraft.”