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Drop In Fuel Costs Could Help Airlines Upgrade Avionics

Fuel-driven retrofit opportunities and increasing needs for MRO collectively producing a positive outlook for the civil avionics market in 2015.

Analysts at the U.S. Energy Information Administration say the market dynamics that sent crude oil prices steadily down to less than $2 per gallon earlier this year, compared to about $4 over the past three years, will hold relatively steady through 2015. 

That’s good news for airlines and the industry as jet fuel follows the same trend: Jet A had been stubbornly holding at approximately $120 per barrel (42 gal.) for the past three years, but then dropped to about $70 per barrel in December, according to the International Air Transport Association (IATA). The net effect is a windfall for airlines and a motivator to keep older, less fuel efficient aircraft in operation for a little longer, and in a growing number of cases, the aircraft will get upgraded avionics or a new flight deck. The fuel-driven retrofit opportunities and increasing need for maintenance, repair and overhaul, combined with continued strong production of new airliners at Boeing and Airbus and the introduction this year of the Airbus A350, are collectively producing a positive outlook for the civil avionics market in 2015.

Washington-based Avascent Analytics predicts a 4.8% growth rate for commercial avionics revenues through 2019, based on new aircraft models coming to market and increasing demand for avionics spares and repairs. The company predicts $21 billion in commercial avionics sales in the fixed-wing air transport market in 2015, split between $14.3 billion in original equipment installations and $6.6 billion in spares and repair orders.

“Revenue from this market space will continue to rise at 10.5% per year, driven primarily by ongoing maintenance and upgrade requirements for major existing legacy platforms like the Boeing 777 and A320 family,” the company says. Over the next five years, Avascent is predicting about $90 billion in original avionics equipment sales for the air transport, business jet and turboprop sectors, with a growth rate of 2% per year. “Growth is more modest due to the fact that production rates of numerous ongoing programs are already at record levels,” says the company, adding that orders for more than 2,300 A320neo and 737 max models through 2019 will help generate revenues in later years, along with an expectation of orders for more than 1,000 A330neo widebodies.  

Not included in Avascent’s forecast from July is the fuel price effect, which could further boost avionics sales for retrofit applications. “We are still calculating the potential effect from some recent trends, the most salient of which is the drop in oil prices,” says Doug Berenson, head of the Avascent’s analytics group. “We have not come to a firm opinion on how this will shake out in our forecast, but it seems possible that demand for some highly efficient models may relax as airlines decide that perhaps they can make do with older models.” Berenson, however, cautions that “planning cycles are long” and the company has not come to a firm opinion on the effect, which will be included in its January forecast. “We’re in the throes of recalculating based on oil prices (and other factors),” he says. “There’s a limit to how rapidly some operators can make some of these decisions on long-term fleet plans.”

Rockwell Collins, which along with Thales and Honeywell dominate the avionics market for air transport aircraft, is hinting at more sales of its 787-based cockpit display upgrade for aging 757s and 767s that would otherwise be retired as fuel prices give airlines some leeway for continued operations and discretionary spending. There are more than 800 of the types in revenue service today, according to Aviation Week Intelligence Network’s Commercial Fleets database. FedEx was the launch customer for the Rockwell Collins upgrade for the 767, and received its first completed aircraft after the FAA granted the company a supplemental type certificate in July. The cargo carrier is buying the freighters new from Boeing with the upgraded cockpit.

Kelly Ortberg, Rockwell Collins CEO, said at an investor call in December that the company “has its second customer” for the upgrade and “we’ve got quite a few customers” interested in upgrading the 757 and 767. “As far as the fuel prices, my philosophy is, any time the main component of your end market customer is improving significantly—and their profitability is improving significantly—that’s a good environment,” says Ortberg. “How they’re going to deal with that, whether that’s going to turn into lower ticket prices, which will drive further demand for air travel, or they’ll do more discretionary updates, or keep their less fuel-efficient aircraft in service longer, I think is yet to be seen.”

For the forward-fit segment, Rockwell Collins says growth in the near future will primarily be driven by the A350, for which the company supplies information management systems, communications and navigation gear and avionics and electromechanical data network systems, but also due to rate increases for new 737s and 787s, for which it provides displays and other equipment. The A350 will enter service early this year with Qatar Airways, with Airbus gathering almost 800 orders for the widebody that will come in three variants.

Rockwell Collins says it will see a spike in “provisioning” of avionics “spares” for Qatar and two other airlines taking possession of the new aircraft in 2015, but the “big lift” will occur as more new customers take delivery beyond fiscal year 2015. The company’s fiscal year ends in September. Ortberg says the aftermarket avionics business, much of which is on per flight-hour contracts, will increase in lockstep with aircraft utilization rates, which rose in the second half of 2014. He says “a lot of Pro Line 21 avionics” the company delivered “back when the market was booming” will be coming out of warranty, also providing “a little bit of a tailwind.” Counterbalancing the trend is “cannibalization,” when airlines park some of their aircraft and take equipment out to put into other aircraft in revenue service. “We expect that to continue,” Ortberg says.

Where the company does not expect to see “material addition” to revenue is from changes that will likely be implemented globally by airlines to provide better tracking in the wake of the disappearance of Malaysia Airlines Flight 370 in March 2014. Ortberg says he does not expect that new mandates will be forthcoming from an IATA task group that will make recommendations to the International Civil Aviation Organization (ICAO) in February on how to better track aircraft. But he does think carriers will voluntarily begin sending updates through Aircraft Communications Addressing and Reporting System (Acars) systems over the Arinc or SITA networks on “five-minute or so” intervals for continuous tracking. Rockwell Collins completed its acquisition of Arinc in December 2013. “In the end, that’s not a big driver for us to provide additional position location every five minutes or whatever the time frame will be,” he says. “It’s not a lot of data to do that.”

Honeywell says it predicts its air transport growth for the first half of 2015 will be similar to that of 2014, but with an improvement in the second half of 2015 and into 2016 due to the uptick in build rate schedules for the A350, a development that will also aid revenue for Thales, which supplies head-up displays, air data computers, air data inertial reference units, electronic flight instrument systems and interactive control and display units for the cockpit.

Honeywell’s avionics units for the A350 include the airborne communications system components as well as satellite communications, avionics management systems and weather radar. The company expects that its aftermarket sales will grow “slightly better” than in 2014, with an expected improvement in airline repair and overhaul activity, said Honeywell Senior Vice President and CFO Tom Szlosek, in a recent call with analysts. The company’s most recent technology advances—synthetic vision, wireless connectivity, 3-D maps and a variety of touchscreen controllers—will be fixtures in the cockpits of the new Gulfstream G500 and G600 business jets as part of the Gulfstream Symmetry flight deck, first revealed publicly in October. Szlosek says first flight of the G500 will take place this year with “shipments starting soon thereafter.” Advances in the business jet arena in many cases become standard fare in airline cockpits as the technology matures and prices decrease. 

 

A version of this article appears in the December 29, 2014/January 14, 2015 issue of Aviation Week & Space Technology.

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