Sky's the limit: new AP labs unit targets in-flight communications

San Diego Business Journal, Sept 22, 2008 by Ned Randolph

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Seeking millions of dollars in new revenue, San Diego defense contractor AP Labs Inc. has formed a business unit to try to capture a slice of the $1.5 billion in-flight communications and entertainment market.

Called AP Avionx, the unit is rolling out boxes for servers and modems for two clients testing wireless Internet service for commercial airlines.

One of the companies, Aircell LLC, which uses cell towers, is working with Air Canada, American Airlines, Delta Air Lines and Virgin America; and the other, Row 44 Inc., which uses satellites, is testing the service on Alaska Airlines and Southwest Airlines.

"We ended up with two major programs--ground and satellite--within our engineering team and we're working both programs," said Michael Humphrey, AP Avionx director of business development. "We're very well positioned to take that experience we have now to develop systems for others in this business."

AP Labs announced the launch of AP Avionx on Sept. 9 at the 29th annual World Airline Entertainment Association conference in Long Beach.

In addition to Humphrey, the new unit will be managed by Andy Mason, vice president of product development, and Eric Tarter, director of commercial products, who "led the charge" into the commercial space, said Humphrey.

"The three of us are moving forward," he said.

A timetable for hiring more employees for the unit was not available by last week's deadline.

Well-Known Clients

Formed in 1985, AP Labs builds rugged enclosures for computer platforms and equipment deployed on military aircraft, submarines and surface cruisers. Its customers include Boeing Co., Lockheed Martin Corp. and Raytheon Co.

AP Labs began in the commercial airline space four years ago with Verizon AirFone, which owned 4 megahertz of air frequency spectrum. However, Verizon's ambitions were stifled when it failed to renew its Federal Communications Commission license in 2006. Aircell captured most of the spectrum for about $30 million, says Humphrey.

"We went through a period of hiatus where our Verizon program slowed down to a halt," he said.

Aircell then hired a core group of engineers, who were used to dealing with AP Labs and essentially steered the project back to San Diego, he says.

Aircell has been working with AP Labs in the last 18 months to commercialize a system that includes 92 ground-to-air cell towers.

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Aircell's Gogo service was successfully tested on 15 American Airlines jets in August. For $12.95, passengers would get three hours of limited Internet access and e-mail for their Wi-Fi-enabled laptops and PDAs.

"The days of being cut off from the rest of the world while in the air become history," Aircell's president and chief executive officer, Jack Blumenstein, said Aug. 20 in a news release.

Row 44 is expected to test its service with Hughes Network Systems LLC's Ku-Band satellite system soon.

Thinking Inside The Box

"I think we're occupying a fairly unique position. The actual communication receivers that we built are pretty unique," said Humphrey. "You can't actually go out and buy a box that does what our boxes do. That's why both companies came to us."

He added: "It requires a lot of systems knowledge--the ability to take a commercial off-shelf product, ruggedize it, and add other elements to it to give it a solution. Pieces of the puzzle are out there, but they require adaptation and modification."

Based in Rancho Bernardo, AP Labs has 69 employees. It does not disclose revenues beyond ballpark figures of $25 million to $40 million annually.

Humphrey says the military business is robust, but the commercial side offers the greatest growth potential.

AP Avionx hopes to become a supplier for not only Aircell and Row 44, but other providers such as Panasonic Avionics Corp. and Thales Avionics Inc., which are both developing broadband products for airlines, Humphrey says.

There are about five companies experimenting with Internet service for U.S. aircraft and more overseas, says Richard Owen, executive director of the Virginia-based World Airline Entertainment Association.

Airlines are on pace to spend $1.5 billion on in-flight entertainment hardware and software in 2008, including $350 million on content, Owen says.

Recent research from MultiMedia Intelligence suggests that the market for in-flight broadband services is expected to grow to $936 million in passenger revenue in 2012, up from $6.6 million this year.

JetBlue Airways provides in-flight email and some Internet capability on its A320 aircraft. The Dubai-based Emirates Group plans to equip its entire commercial fleet with broadband access by next year, Owen says.

Humphrey says AP Avionx would compete in a $50 million to $100 million hardware sub-market that could easily double in a year.

"It's very easy to see that within two or three years, this commercial business could be matching our military business," he said.