Boeing to Discontinue Connexion Service After $1-B Loss

Connexion by Boeing is shelved permanently.

CHICAGO, Aug. 18, 2006/Satnews Daily/ ― The Boeing Company [NYSE: BA] announced on Thursday its decision to exit the in-flight high-speed broadband communications connectivity markets after six years of work and about $1 billion of losses.

“Over the last six years, we have invested substantial time, resources and technology in Connexion by Boeing,” said Boeing chairman, president and CEO Jim McNerney. “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 estimated it would rake in revenues of $25 billion a year when it launched Connexion. But McNerney admitted his predecessors had overestimated demand.

As initially disclosed in the company's second-quarter 2006 financial results on July 26, Boeing said it now expects to recognize a pre-tax charge of up to $320 million, or $0.26 per share, in the second half of 2006, of which approximately $290 million will be taken in the third quarter and the balance in the fourth quarter.

The charge relates to writing down certain assets, payments of early termination fees and other costs related to shutting down the service. Boeing said it expects the majority of 560 Connexion employees to find other jobs within the company.

But the company also said it also expects a benefit to earnings of approximately $0.15 per share starting in 2007 without further investment in Connexion. The company will update its financial guidance when it releases third quarter results on October 25.

Boeing promised to work with its customers to facilitate an orderly phase out of the Connexion by Boeing service.

Meanwhile, Telecom, Media and Finance Associates, Inc. has predicted that the market opportunity for in-flight communications will be much smaller than many analysts and consultants have been projecting.

TMF Associates in its forecast in June 2006 said Connexion service would ultimately be shut down and that backers of other systems would need to re-evaluate whether their business projections are simply too optimistic. However, other consulting firms have continued to project that a multi-billion dollar market will be realized for in-flight passenger communications over the next five years.

Tim Farrar, author of the research, said it is all too easy to blame the failure of Connexion-by-Boeing on its high costs and large terminal equipment. 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, Farrar said.

He cited a July 2006 Booz Allen forecast of $2.56 billion (EUR 2 billion) market for in-flight cellphone use in Europe alone by 2010. This, Farrar said, compares to a total pan-European cellular roaming market of $10.25 billion (EUR 8 billion) in 2005, when by TMF estimates business travelers are on an airplane for at most 3 percent of their trip.

“While the in-flight communications market opportunity within the US 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,” Farrar said.

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