Challenges Run High For Connexion by Boeing

Connexion by Boeing is an ambitious project to provide in-flight, high-speed broadband services that should become a technical success but may well stumble on the project’s high costs as it seeks profitability.

Industry observers acknowledge the service could be extremely useful for airline passengers but the prospective users will need to be convinced to pay the price. International business travelers on an expense account may be the most likely candidates to become loyal Connexion by Boeing customers.

But those customers will need to fly a great deal to generate the revenue streams needed to turn a profit. Scott Carson, Connexion by Boeing’s president, is talking about the venture generating annual revenues of $5 billion by 2010. Although Boeing [NYSE: BA] is tight-lipped about its cost structure and the investment it has made in the project thus far, revenues of that magnitude almost assuredly would put Connexion by Boeing on a profitable path.

The bankruptcies of Iridium and Globalstar, a pair of mobile satellite voice services that never came close to covering their multi-billion dollar startup costs, raise concerns that Connexion by Boeing could become the next grandiose new satellite project to flop financially.

However, Connexion by Boeing is on track to begin commercial service this March to its first airline, Lufthansa [OTC: DLAKY]. The service is unique, since no other companies are ready to start providing satellite broadband on a global scale.

Key questions include how much would people be willing to pay, how many passengers per flight would buy the service and how many airlines would offer it to their passengers on long-haul routes. Connexion by Boeing officials predict people will pay for the service in sufficient numbers on the roughly 4,800 commercial aircraft that handle long-haul flights each day.

Connexion by Boeing management demonstrated practical thinking by changing the original plan of launching it as primarily a U.S. service after three major U.S. carriers withdrew from the venture in the wake of Sept. 11, 2001. Management at Connexion by Boeing showed resolve by forging partnerships with major carriers in Europe and Asia.

U.S. airline partners ultimately may join the fold, along with prospective airline customers elsewhere in the world. Indeed, discussions with other airlines are ongoing, said Sean Schwinn, Connexion by Boeing’s director of strategy and business development.

“After a slow start, Connexion is indeed making impressive strides all around the world,” said D.K. Sachdev, president of the Vienna, Va.-based SpaceTel Consultancy. “In late 1990s, the thinking was that live airline broadcasts will be an offshoot of digital radio or would utilize dedicated S-band satellites. However, Boeing chose the lower cost route to start by leveraging competitively available Ku-band capacity all over the world.”

Dedicated satellites will offer in-flight broadband services using Ku-/C-band, Sachdev said.

It is too soon to pass judgment on Connexion by Boeing’s “financial viability,” since very limited operational data exists today, Sachdev said.

“As is happening elsewhere, the unanswered question is if passengers would prefer broadband Internet or better live broadcasts of sporting and other events,” Sachdev said. “With hardly a place for elbows in economy class, it is hard to envision too many laptops in that section. However, live Internet access via mobile phones and PDAs [personal digital assistants] could indeed become attractive in the future.”

Roger Rusch, president of the TelAstra satellite-consulting firm in Palos Verdes, Calif., said it appears that Boeing will at least have a business modifying aircraft to incorporate communications equipment. It is far from certain that the Connexion Internet service can be successful, he added.

In the near-term, the venture should be expected to lose a “great deal of money,” Rusch said.

–Paul Dykewicz

(Sherry Nebel, Connexion by Boeing, 206/655-5205; D.K. Sachdev, SpaceTel Consultancy, 703/757-5880; Roger Rusch, TelAstra, 310/373-1925)