Boeing Co. will close its Connexion satellite Internet unit for aircraft following "a detailed business and market analysis" of the service, Boeing announced Aug. 17.

"Over the last six years, we have invested substantial time, resources and technology in Connexion by Boeing," Jim McNerney, Boeing’s president and CEO, said in a statement. "Regrettably, the market for this service has not materialized as had been expected. We believe this decision best balances the long-term interests of all parties with a stake in Connexion by Boeing."

Boeing unveiled the service in 2001 but the business plan, which included investments from three U.S. airlines, had to be altered after the Sept. 11, 2001, terrorist attacks on the United States placed the airlines under a financial strain. The service eventually debuted in 2004, finding a market with international airlines, business jets and with governments, but the U.S. airlines never returned.

Boeing eventually landed the service on 12 international airlines and charged customers by the hour, with prices starting at $9.95, as well as a flat rate fee of $26.95 for the entire flight. In February, Boeing said more than 1,000 passengers use the service daily on more than 110 flights, but the service has not come close to meeting Boeing’s financial expectations.

Boeing announced in June that it would halt new sales of the service while the company evaluated strategic alternatives for the satellite Internet business. "The market for the service has not developed satisfactorily," Boeing said in a statement at the time. "Therefore, the company will be working in conjunction with customers to thoroughly evaluate the Connexion marketplace and business model to determine its next steps."

Boeing is believed to have lost about $1 billion on Connexion.

In a June note to clients, Tim Farrar, president of Telecom, Media and Finance Associates Inc., a Mobile Satellite Services consulting firm based in Menlo Park, Calif., warned investors that it will not be possible to make Connexion a commercial success. The service has attracted just more than 1,000 users per day across 125 commercial aircraft that have installed the service and cost about $150 million per year to operate, Farrar wrote. "Even if usage of the service grows further, at least 1,000 aircraft would need to be fitted out for the business just to break even. The service has won plaudits from users, but in our view there simply isn’t enough demand from passengers to make Connexion a commercial success."

Boeing expects to take a pre-tax charge of up to $320 million for writing down assets, paying early termination fees and other costs related to shutting down the service. About $290 million of the charge will be recorded in the third quarter and the balance in the fourth quarter. The size of its continuing losses is reflected in the fact Boeing expects to see its profits improve by about 15 cents per share once the Connexion dust settles. That hints at a continuing hemorrhage of $185 million per year if Connexion remains in operation.

"It is all too easy to blame the failure of Connexion by Boeing on its high costs and large terminal equipment," Farrar said in an Aug. 17 statement following Boeing’s announcement. "However, set in the context of the expenditure by business travelers on other communications services, projections that in-flight communications can become a multi-billion dollar market over the next few years are completely unrealistic. … While the in-flight communications market opportunity within the [United States] remains significant, and may grow to around $300 million in annual revenues over the next ten years, the opportunity on both long-haul and intra-European flights is far smaller. Inmarsat-based services will provide an appropriate solution for cell phone-based connectivity, but given the modest size of the overall market it is hard to see affordable in-flight Internet services for laptop users being widely deployed outside North America."

Boeing has not set a date for the end of the service and "will work with its customers to facilitate an orderly phase out." It is not clear if Boeing is going to have to refund money spairlines spent to outfit planes. Airlines offering the service are: Air China, All Nippon Airways, Asiana Airlines, China Airlines, El Al Airlines, Etihad Airways, Japan Airlines, Korean Air, Lufthansa, Scandinavian Airlines and Singapore Airlines.

Boeing says that while a majority of the 560 people working at Connexion will be transferred to other jobs inside the company, some lose their jobs.

— Jason Bates