Boeing launches Internet service; will passengers make the Connexion?

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If all goes according to plan this month, a Lufthansa Airlines passenger traveling from Munich to Los Angeles will tap a few keys on a laptop and become the first paying customer of Connexion by Boeing, the aerospace giant's long-awaited inflight Internet service.

It will be a satisfying moment for Boeing and Connexion's 600 employees, most of whom have spent four years laboring to bring the broadband satellite service to life.

Yet crucial questions will hover over the venture long after the inaugural flight touches down.

Can Connexion satisfy the demands of disparate global airlines on a daily basis? Will enough airline passengers be willing to pay enough for the service for Boeing to make money on its $1 billion investment?

"We can run models until we're blue in the face," said Connexion chief executive Scott Carson, "but how are consumers going to react when faced with a choice the first time this is available?"

Carson, who has led Connexion since November 2000, is optimistic the high-speed Internet service will work and be installed on 4,000 to 5,000 aircraft a decade from now.

Three-quarters of those jets will be retrofitted with Connexion hardware and software, Carson said, but he believes it will eventually be a standard feature on Boeing planes.

"All of us believe the capability is so profound that it becomes part of the fundamental structure that allows you to sell the airplane," he said.

Connexion is headed in that direction. After two years of evaluation and testing, Carson's team recently persuaded the leaders of Boeing's 777 program to begin building Connexion into widebodies on the production line. The first will be a 777-300ER destined for All Nippon Airways in 2005.

Their next battle is to persuade 7E7 program managers to incorporate Connexion into Boeing's next new jet, but there are no guarantees.

"It's a very rigorous process," Carson said. "We're confident we'll be selected one of their industrial partners ... we're not there yet."

Popular, but not at any price

Many airline executives believe passengers would welcome high-speed Internet access at 30,000 feet and regard such services as inevitable, particularly on international flights.

But when, and at what price, remain huge questions.

"Connexion's offering is a good product," said Kent Craver, manager of onboard marketing and research for Continental Airlines. "But what we have to do is constantly balance the costs of providing the service against the benefit we're providing for our customers."

All Continental jets now offer JetConnect, an e-mail and text messaging service available through Verizon's AirFone division. Tenzing Communications, a Seattle-based venture that is part-owned by Airbus, provides the software that enables the low-rate data service.

Passengers access JetConnect by plugging their laptops into the existing AirFone network, so Craver said the airline's deployment costs were minimal.

The cost to outfit a single plane with Connexion, by contrast, is estimated at $500,000 to $700,000 by industry analysts. Boeing would not provide cost data.

At a time when cost-cutting is the top priority of many airlines, such expenses are difficult to justify. Few operators expect services like Connexion and Tenzing to produce hefty new revenue streams.

"It's not expected to earn a big amount of money," said Burkhard Wigger, who is overseeing the deployment of Connexion on Lufthansa's long-haul fleet. "The most important part for us is to keep existing business customers and to gain possible new customers."

One reason for Carson's upbeat outlook is the proliferation of high-speed wireless networks on the ground.

Wireless local-area-networks at coffee shops, hotels and office parks give consumers opportunities to roam the Web free of cords or cables.

Connexion will provide a similar service in flight.

Passengers with wireless-ready laptops will open an Internet browser and, after agreeing to pay a Connexion access fee, send and receive data through a wireless network inside the cabin.

The signals will go to a computer server on board, and then to a sophisticated antenna atop the jet. The antenna will transmit the data to one of eight satellites renting capacity to Connexion.

The satellite will in turn send the signals to the nearest of four Connexion ground stations in Colorado, Russia, Japan or Switzerland. The ground station will forward the data to its ultimate destination through terrestrial telecommunications networks.

Four years ago last week, Boeing convened simultaneous press conferences in New York and London to launch Connexion, which it promised would "revolutionize the way people travel."

Leveraging satellite technology Boeing planned to acquire in a $3.75 billion purchase of Hughes Space and Communications, Connexion would enable airline passengers to surf the Web at lightning speeds, watch TV and attend videoconferences.

Boeing, in turn, would gain access to a booming telecom market that would generate $70 billion in its first 10 years, according to the company's press materials.

Crises hurt airlines

But a torrent of crises rained on Connexion's parade.

The dot-com stock bubble collapsed the same month Connexion was announced; the Nasdaq 100 stock index lost 32 percent of its value from March 27 to April 14, 2000.

Tech-savvy business travelers who had been Connexion's target market evaporated, and U.S. airlines began losing money.

The terrorist attacks of Sept. 11, 2001, then scared travelers out of the skies and the airline industry went into a financial tailspin.

United, American and Delta, Connexion's first customers and risk-sharing partners, fled the venture, and Boeing had to rebuild its customer base.

Connexion slashed its work force by 40 percent, to fewer than 300 employees, and refocused on Asian and European carriers that suffered less than U.S. airlines after Sept. 11.

Revising the flight plan

Connexion has gradually regained momentum.

It had 119 jets under contract at the end of 2003, according to Boeing's annual report. In addition to 80 jets with Lufthansa, All Nippon Airways, Japan Airlines and Scandinavian Air Systems have contracts for the service on undisclosed numbers of planes.

An additional contract to put Connexion on Korean Airlines' 747s and 777s was announced last month.

Singapore Airlines and China Airlines have signed letters of intent, and Carson hopes to announce additional Asian and European customers soon.

However, some carriers once considered "sure things" for Connexion have hesitated as their own financial troubles linger.

British Airways tested Connexion for three months last spring on flights between London and New York. Passenger satisfaction was high, but the airline is still not in the Connexion fold.

"We've been evaluating the data and looking at the business case of the product," said Diana Fung, a British Airways spokeswoman. "That evaluation is still ongoing."

She noted that an investment in Connexion would be considered in the context of the carrier's other priorities, which involve streamlining the operation.

British Airways Chairman Rod Eddington said in January that the carrier planned to save $530 million by 2006 by reducing its staff by 30 percent, on top of 13,000 job cuts since February 2002.

"To maintain our position as a world-leading airline, we must further reduce our costs so we can invest in our products and people," Eddington said.

No quick end to losses

Boeing does not break out financial results for Connexion, but the service is the largest business within the "other" category on Boeing's balance sheet, which until recently also included its Air Traffic Management division.

The two units lost $1.2 billion from 2001 to 2003, including $449 million last year.

Chief executive Harry Stonecipher said earlier this year the losses are going to get worse before they get better, and last week he said "it's kind of an '07, '08 time period" before Connexion produces positive returns. But he said he's comfortable with the long lead time to profitability.

Carson said he has received enthusiastic support from Stonecipher, the no-nonsense CEO known for emphasizing the bottom line.

Whether Connexion maintains Stonecipher's support will now come down to performance.

"When we begin flying with Lufthansa," Carson predicted, "I think Lufthansa will be surprised and the rest of the industry will be surprised how widely accepted (Connexion) is by consumers."

David Bowermaster: 206-464-2724 or dbowermaster@seattletimes.com