The airline industry received some good news from the Federal Aviation Administration’s annual forecast last week: air travel could more than double over the next two decades. Indeed, FAA believes that U.S. airlines will be transporting a billion passengers a year by 2021, two years earlier than the agency predicted just last year.
That’s good news for the revenues of major U.S. air carriers, such as Delta Air Lines (NYSE:DAL), AMR Corp.’s (NYSE:AMR) American Airlines, United Continental (NYSE:UAL) and Southwest Airlines (NYSE:LUV).
As with most glowing future projections, however, this one comes with a significant “but”: with growing congestion at hub airports, will the facilities be up to the task? The FAA offered up a cautious yes — but only if leading-edge technology is leveraged to lead the U.S. aviation system into the 21st century.
Enter the Next Generation Air Transportation System (NextGen), an omnibus, multi-year, multi-billion dollar program to upgrade the nation’s aging national airspace system. Rather than addressing traffic challenges at individual airports, NextGen takes a holistic approach to the task of reducing congestion and boosting efficiency.
Because NextGen addresses the entire national airspace system, it can locate any excess capacity. Aircraft will be able to fly precision routes into and out of busy airports and that will reduce safe separation distances between planes. The system also will better track aircraft moving on the ground, further reducing the risk of runway incursions.
Airlines will, however, have to equip their fleets with avionics and other systems that are compatible with NextGen – and carriers will need strong motivation to pony up the big bucks required to bring their planes up to scratch. And with fleet upgrades for the largest airlines estimated to cost as much as $6 billion, something’s got to give.
As with most things, there are two choices: the stick or the carrot. And federal regulators have a big stick. In this case, the FAA already has a rule requiring aircraft to have automatic dependent surveillance-broadcast (ADS-B) systems in place by 2020, because that’s how the agency plans to replace its existing secondary surveillance radar.
But with that requirement nearly a decade away, the FAA is handing out a few carrots, too. Earlier this month, the agency made a deal with JetBlue (Nasdaq:JBLU) to pay $4.2 million for the airline to equip up to 35 of its A320s with ADS-B avionics over the next two years. The new equipment will allow the airline to begin satellite-based flights from Boston and New York to Florida and the Caribbean beginning next year.
JetBlue will provide flight operations, pilots and aircraft maintenance and will pay for the cost of aircraft downtime while the ADS-B avionics are installed. The FAA hopes the deal will help airlines see the value proposition ADS-B and NetGen provide in terms of operational efficiency and fuel savings.
That’s also good news for major NextGen contractors like Boeing (NYSE:BA), General Dynamics (NYSE:GD) and ITT (NYSE:ITT), who each have won more than $1 billion in NextGen contracts. Those contracts aim to integrate the measurements of latitude, longitude and altitude used by pilots and air traffic controllers with the added element of time.
By integrating advanced satellite technologies, pilots will be able to fly more direct routes while avoiding other traffic and severe weather. Air traffic controllers will have more precise data on aircraft position, enabling them to manage separation and related issues more effectively.
Bottom Line: If the FAA is right, airline passenger volume will rise by some 80% over the next two decades. But the current national airspace system is fraying at the edges today and will be unable to handle tomorrow’s traffic demands without a lot of help.
The Obama administration wants to fund NextGen at more than $1.2 billion next year, if frugal Republican leaders on the House Budget Committee don’t wield the axe. Still, sooner or later, airlines will have to make their own choices about how to plan for future growth. And their options are likely to be limited to lead, follow or get out of the way.
At the time of publication, Susan J. Aluise did not hold a stake in any of the stocks listed here.