Nexa Seeks U.S. Loan Backing to Steer Airlines Into “HOV Lanes”
May 12, 2011
By Will Daley
Nexa Capital Partners wants the U.S. government to broaden aerospace loan guarantees, starting with debt in the investment firm’s $1.5 billion fund to lease cutting-edge traffic control gear to airlines.
U.S. backing would ultimately make it cheaper for carriers to equip jets for the Federal Aviation Administration’s shift to satellite-driven guidance systems from radar technology, said Russell Chew, a general partner in the fund.
Cutting equipment expenses is important because the FAA estimates the technology upgrades may cost the government and airlines a combined $42 billion. Guarantees such as those sought by Nexa are offered for highway construction projects, nuclear power plants and through the U.S. Export-Import Bank, which backs some overseas aircraft purchases.
Still, the concept is “absolutely novel” for the FAA and for the air-traffic control business, said Chew, one-time chief operating officer for the FAA and a former executive at JetBlue Airways Corp.
Gear must be added to most of the nation’s commercial fleet before the satellite-based Next Generation Air Transportation system, known as NextGen, can be fully brought online. That creates a bottleneck as the FAA-led construction of about 800 ground transmitters by 2013 outstrips modifications by carriers, not required until 2020.
The fund would use commercial debt along with private capital from investors such as ITT Corp., which has a contract to install the transmitters, to buy about $1.5 billion in NextGen equipment, Nexa said. That equipment, enough to retrofit about 75 percent of the U.S. commercial air transport fleet, would then be leased to airlines, the firm said.
Nexa, founded in 2007, provides capital planning and corporate finance services to aerospace clients. The firm is still gathering funding for its plan, which would meet the general goal of helping airlines implement NextGen outlined in differing FAA budget bills. The proposals are under negotiation in a House and Senate conference committee.
The Senate legislation, approved in February, calls for encouraging airlines to upgrade with incentives such as grants, while the House version backs private-sector capital and public-private partnerships. The House bill was passed April 1.
“Deploying NextGen cannot be accomplished by any single participant in our aviation system -- it requires cooperation and investment by numerous stakeholders,” Representative Dan Lipinski, an Illinois Democrat who backed the House proposal, said in a statement. He said he would work to ensure “an effective NextGen equipage component is included in the final bill.”
One part of the NextGen system keeps tabs on planes with data from GPS satellites rather than using radar signals bounced off an aircraft at regular intervals. Another component lets controllers communicate with pilots via text messages rather than voice.
With better aircraft tracking, controllers should be able to safely put more planes in the same amount of airspace than is possible now and ease delays, the FAA has said. Execution of the concept, which dates at least to 2005, would allow the FAA to handle three times more air traffic while reducing operating costs, the U.S. Department of Transportation said in a report.
Among the first airlines to benefit from the NextGen rollout is JetBlue Airways Corp., which agreed this year to equip some of its flights with $4.2 million in NextGen satellite-positioning devices paid for by the FAA.
JetBlue will be able to fly its narrow-body Airbus SAS A320 jets on more direct routes from Boston and New York to Florida and the Caribbean starting in 2012, the FAA said.
“They can use the ‘HOV’ lanes in the sky,” Babbitt said.
While airlines support NextGen, they want the FAA to make better use of equipment already in cockpits, said Jean Medina, a spokeswoman for the Air Transport Association, the lobbying group for the largest U.S. carriers.
Delta Air Lines Inc. and other carriers have made significant investments in traffic-control equipment that isn’t yet being used, Chief Executive Officer Richard Anderson said in April.
"When we do make those additional investments, which we support, we want to be certain that it results in block time savings and fuel savings and is not just a big sales program by the avionics salespeople,” Anderson said.
Nexa’s NextGen Equipage Fund would speed startup of the system by reducing a retrofitting cost to airlines that may average $325,000 per plane. Carriers, the five biggest of which lost a combined $951 million last quarter, have been reluctant to make the investment.
By leasing equipment purchased by the fund, airlines would avoid a large cash outlay or adding more debt, and payments would be deferred until the system is in operation.
“Anything that would help accelerate and bring us the benefits of the NextGen system, we certainly would look at,” Babbitt said in an interview today.
The loan-guarantee legislation, if passed, would provide backing for much of the fund’s debt, Nexa said. The equity put up by investors would all be at risk.
“If the fund works well, they will make reasonable returns,” said Michael Dyment, managing partner at Nexa Capital Partners. “But if the fund, for some reason, gets clobbered, the equity investors would lose their investment.”
As the upgrade unfolds, the U.S. has a system that’s “somewhat analogous” to a cellular system with towers and no phones, Richard Wynne, Boeing’s director of policy analysis, told reporters in February. With the satellite-based infrastructure in place and the ground-based infrastructure being developed, the aircraft need specific capability.
Jim May, former CEO of the Air Transport Association, who now runs a consulting firm with Nexa as a client, likes the cell tower analogy. Creating a public-private partnership may prove crucial to bridging the gap, he said.
“If you get this in place and it moves forward, then the odds of making a 2020 deadline are very good,” May said in a telephone interview May 6. “If you can’t find a way to have a new paradigm to move forward with a public private partnership, then that puts that 2020 deadline in real jeopardy.”
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