Boeing management left little doubt that it intends to sell or shut down its Connexion satellite-delivered Internet service for airlines, saying the business has failed to make sufficient inroads into the commercial-airline sector.
One official whose company was approached about buying Connexion said that, at least until recently, Boeing had outsized ambitions for what prospective buyers would pay for the business.
“The figures they floated with us were hundreds of millions of dollars,” this official said. “That is obviously out of the question. Our feeling was, buying it for $100 million would be a possibility, and at $50 million it would be a probability.”
Boeing invested more than $1 billion in Connexion, whose costs are included in Boeing financial statements in a category called “Other.” Boeing has financed the retrofit of several dozen planes now providing Connexion high-speed Internet service to passengers and airline crews, with passengers paying a fixed price per flight leg for access.
Boeing also has leased satellite capacity over the Atlantic and Pacific Ocean flight routes from Loral Space and Communications, SES Global and other satellite-fleet operators. Shutting down Connexion would likely oblige Boeing to pay a termination fee to these satellite operators.
In a July 26 conference call with financial analysts, Boeing Chief Financial Officer James Bell said shutting down Connexion would cost Boeing up to $350 million in the second half of 2006.
But doing so, Bell said, would add up to 15 U.S. cents to Boeing’s per-share earnings in 2007. Boeing currently is forecasting that its earnings per share in 2007 will be between $4.25 and $4.45.
Connexion debuted in mid-2004 and has since won the support of several European and Asian airlines. An initial commitment by U.S. airlines was scrapped following the Sept. 11, 2001, terrorist attacks and the deteriorating financial condition of many U.S. commercial airlines.
Boeing Chairman Jim McNerney said whatever decision is made on Connexion, the business cannot continue as it is.
“The facts are that our business model is not being met,” McNerney said during the call. “We’re falling badly short of where we want to be. We are asking a series of fundamental questions now. Restructure, terminate or affiliate [are] the obvious options. But continuing to operate as we are now is not an option.”
McNerney said Boeing has been talking to Lufthansa — Connexion’s first commercial user — and to other customers about how to proceed. He said the Connexion technology “is performing reasonably well,” but also said that the airlines must understand that if Connexion fails as a business for Boeing, ultimately it will fail for them as well.
Boeing also reported July 26 that it would not be deducting the $615 million settlement with the U.S. Justice Department following allegations that a U.S. Air Force procurement officer was improperly hired, and that Boeing employees made use of proprietary Lockheed Martin data during the U.S. Air Force’s Evolved Expendable Launch Vehicle program.
McNerney said the settlement, which will reduce Boeing’s 2006 earnings per share by 75 U.S. cents, will better serve as a lesson for Boeing, and a signal to customers and shareholders, if it is not used to reduce Boeing’s tax liability.
Boeing reported that revenue at its Network and Space Systems division dropped 10 percent, to $5.7 billion, in the first six months of 2006 compared to the previous year. The division conducted six successful rocket launches — three Delta and three Sea Launch rockets — in the period.
The unit’s operating profit margin for the six months ending June 30 were down sharply, to 4.6 percent of revenues compared to 7.8 percent a year earlier. Boeing said one factor in the lower profitability was a $109 million settlement related to a Delta 4 launch vehicle services contract, Boeing said in a July 26 filing with the U.S. Securities and Exchange Commission.