Web-connected cabins offer flight path for aerospace investors

LONDON Tue Jul 22, 2014 9:30pm IST

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LONDON (Reuters) - The web-connected aircraft cabins of the future, powered by technology on show at last week's Farnborough Airshow, are offering a path to investor returns through suppliers like Cobham Plc and Thales SA.

The market for inflight wireless internet, entertainment and communications services, driven by a flying public who increasingly want to chat, tweet, stream movies and check Facebook uninterrupted, is set to grow to $2.1 billion by 2023 from $440 million in 2013, consultancy Euroconsult says.

While the past is dotted with inflight internet schemes which failed to take off, such as Boeing Co's Connexion, there are more reasons to be bullish as installation costs have come down and the use of social media has skyrocketed.

"It's gone from the days when you were completely cut off in an aeroplane, to where very shortly every carrier will be offering real-time television," said Nick Cunningham, an analyst with Agency Partners.

"You're talking about an installed base of literally tens of thousands of aircraft, starting with wide-bodies and working your way down ... It's going to be a must-have."

Analysts say this is good for parts makers such as UK-based Cobham, which makes compact, lightweight satellite-communication systems for both small and large planes. Cobham, named after its aviator founder who pioneered mid-air refueling in the 1930s and 40s, showed off its antenna technology at Farnborough.

Other key players include France's Thales, Europe's largest defence electronics firm and one of the leading providers of in-flight entertainment and streaming systems, competing with the Avionics arm of Japan's Panasonic Corp.

Thales bought LiveTV - a provider of in-flight entertainment and broadband services - from JetBlue Airways Corp earlier this year. Florida-based LiveTV has more than 500 employees and expects 2014 revenue of over $150 million.

Such investments underscore the reasons for investors to be optimistic on take-up of the technology in the still-booming commercial aviation market: installation costs are falling, systems are becoming lighter and satellite coverage is becoming available to most areas where air traffic is dense, according to Euroconsult.

The downsides? There is no consensus yet on how to charge for such services, onboard satellite communications equipment is still costly and the certification process is relatively long.

HIGH STAKES

Not all airlines agree wireless technology is the right service to offer passengers. Its main competitor comes from the in-flight entertainment industry, whose movie and game systems are hard-wired into aircraft seatbacks.

At a global travel fair in March, Lufthansa announced plans to wirelessly stream movies on long flights, but Qatar Airways called the technology untested and said it would stick to traditional seatback screens.

The stakes are high for airlines because in-flight entertainment is increasingly seen as a lucrative shopping platform as well as a place to watch games and films.

Meanwhile, broader aviation trends are strong, with Boeing and Airbus Group NV betting the world will need some 30,000 to 36,000 new aircraft over the next 20 years.

It is tough to pick out cheap aerospace stocks as a result, with the STOXX Europe 600 aerospace and defence index up some 95 percent from 2011 lows, compared with a rise of about 50 percent for the broad Euro STOXX 50 index.

Thales - about 30 percent of whose sales come from civil aerospace including cockpit systems - trades at a forward price-to-earnings ratio of 11.98, while Cobham, which gets 19 percent of its revenue from the commercial aeronautics sector, is trading at 13.87, according to Thomson Reuters data.

Both are lower than the median multiple of 14.07 for a basket of eight aerospace stocks, including Airbus, Safran SA and Rolls-Royce Holdings Plc.

Other U.S.-listed stocks in the field include Gogo Inc

, a supplier of broadband services, Honeywell International Inc, network operator AT&T Inc, manufacturer General Dynamics Corp and Global Eagle Entertainment Inc.

Giving an indication of the rates of growth on offer, London-listed satellite operator Inmarsat Plc - market leader in aviation - said last year its compound annual revenue growth rate for all aviation services had jumped 22 percent between 2005 and 2013, more than other divisions.

"Thales are saying it's quite a good fit to provide interconnection and Cobham are well-positioned because they do all the antennae and the other hardware that connects," said Zafar Khan, analyst at Societe Generale.

"I'm not sure how huge a money spinner it will be in the grand scheme of things, but it is an interesting area."

(Editing by Tim Hepher and David Holmes)

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