ITT offers fund to help airlines finance NextGen cockpit technology

The Next Generation Air Transportation System (NextGen) is the Federal Aviation Administration’s long-term plan to modernize our air traffic control system. The strategy will replace our current system with new satellite-based navigation and communications systems and will reduce environmental impact, decrease passenger delays and ease congestion.

All sounds good. But what if, for instance, airlines were reluctant to invest in the cockpit technology needed to make NextGen happen, several years before the FAA systems can deliver the benefits that would yield a return on those investments? That’s exactly where things stand today, in an industry already so tight on cash that passengers can barely step onto the jetway without incurring extra fees.

So in what ITT’s vice president of Next Generation Air Transportation Systems John Kefaliotis calls the work of a “good corporate citizen,” the company has teamed up with Nexa Capital to launch the NextGen Equipage Fund. I talked with Kefaliotis last week about the challenges airlines are facing with NextGen and how the public-private initative will enable carriers to invest in modern avionics.

First, will you provide a little background on the challenges airlines face in overhauling their cockpit technology?

Substantial growth in aviation and air traffic is forecast worldwide for the next 20 years—Europe, Asia and the U.S. That growth in air traffic portends under current air traffic management technology substantial growth in delays and inefficiencies from the passenger standpoint. It also implies increased fuel use and increased and unnecessary carbon in the atmosphere.

So to put the technology in place that will modernize the air traffic control system that will allow air traffic management to accommodate the growth and do it efficiently, the U.S. has initiated the Next Generation Air Transportation Systems. Those initiatives move the air traffic management system more to a satellite-based system with an increased use of data communication.

To facilitate that evolution there are changes in ground infrastructure and a requirement for avionics. The problem from the air carrier side is that the avionics cost money, and the carriers don’t have the best balance sheet in the world, period. So any additional cost requires them to be able to close a business case. For air carriers to invest, their gentle approach to a business case require relatively near-term payback. It’s about being able to justify the expense.

How much of the NextGen funding is the government providing?

The general model under which the system works is the ground infrastructure is provided by the air navigation service providers, such as the FAA in the U.S. So they pay for the technology on the ground—radars, radios, landing system equipment. Aircraft operators pay for the equipment in the cockpit.

This spring you announced the creation of the NextGen Equipage Fund. Tell me how that works.

We’ve been developing the concept over the last couple years. The funding of equipage for the Next Generation Air Transportation technology is a topic that’s been on the table for a few years. The Air Transportation Association in the U.S. has been pushing heavily for grants to put the technology in their cockpits. It didn’t appear in the current fiscal climate that grants would occur. So ITT is working with Nexa Capital to offer an alternative that could potentially be utilized to deal with what is being called the equipage paradox.

Under the NextGen Equipage Fund concept there would be private sector equity contributed by ITT, aerospace companies and other investors. So there is private sector equity and then borrowings, which will establish a fund of $1.5 billion. Nexa Capital has established that a fund of $1.5 billion would fund about 75 percent of the U.S. commercial air transport fleet with core NexGen aviation capability such as ADS-B [Automatic Dependent Surveillance-Broadcast] and data communications.

The fund has been working and seems to be getting some traction around legislation that would allow a federal loan guarantee. One of the premises has been that the payments the carriers would have to make would start at such time that the benefits from the technologies start to accrue.

So this fund takes the pressure off government to provide funding.

We think the initiative is a good one. It’s a public-private partnership. Government participation is in the form of a loan guarantee. It’s very little financial risk to the government. It achieves a national objective. Our position on the fund is that we’re doing this to be a good corporate citizen. It’s not our primary business, but we want to put an option on the table so the equipage problem can be solved.

What is the status of the fund now?

The first next step would be a closing of the equity investors. The fund has been actively working with Congress to work to achieve language in the FAA authorization legislation that would allow a loan guarantee program to be enacted.

I understand you’re doing some work in emerging markets like Brazil and India.

Brazil and India are both contemplating nationwide ADS-B rollout and pilot programs. ITT is deploying the largest and most complex ADS-B network in the world and doing it successfully in the U.S.

How would you describe their air traffic control systems currently?

I wouldn’t.

This post was originally published on Smartplanet.com