Outlook for Flight Training Market: A Mixed Bag.

Some growth expected in niche areas, such as 'collaborative' simulations

The current downturn in the commercial aviation industry could result in lower sales of simulators and trainers in the short term, but how long the slump will last is difficult to predict, said experts. The military sector is not expected to decline, but companies in the simulation and training industry face tough competition, as more niche players enter the marketplace.

The outlook for commercial aviation is grim, said the president of the Aerospace Industries Association, John Douglass. "The effects of the [September 11] terrorist attack on the U.S. aviation industry ... will be long lasting," he told a congressional panel. "Eventually, there will be renewed growth in the air transportation industry, but the immediate outlook is bleak."

The cutbacks in airline operations and the accompanying free fall of revenues, said Douglass, are "already having an effect on industries that support the airlines, including suppliers and maintenance providers."

According to AIA estimates, commercial aircraft and parts sales are expected to decline this year by approximately $2 billion, compared to previous forecasts. For 2002, AIA projects that industry sales could decline as much as $5.6 billion, and could drop by $6.7 billion in 2003.

The bad news for providers of simulators is that the commercial airlines have been the biggest buyers of simulation-based training services in recent years, said Jerry Weltsch, senior consulting analyst at Frost & Sullivan Aerospace and Defense Research Group, a business intelligence firm.

"There will be lower demand for pilot training if the airlines cut back on their schedules in the long term," Weltsch said in an interview. "How long that will last is hard to tell."

Expected declines in commercial sales of simulators are unlikely to be offset by sales of military flight trainers, even though, "there will always be a demand for military flight simulation," Weltsch said. "A military conflict would not necessarily drive up demand."

Any near-term upswings in Pentagon budgets likely will take care of immediate priorities, such as ammunition and replacement parts for aircraft.

The simulation and training market, Weltsch said, "doesn't seem to be growing in the defense areas."

Outside of fight training, there are other applications that could boost demand for visual simulation technologies, he said, such as biological research. The use of modeling and simulation will be expanded in the pharmaceutical and medical fields, Weltsch said, as well as in engineering.

Among the companies best poised for future growth in the military sector, Weltsch said, are CAE, L-3 Communications, FlightSafety International and Thales Training and Simulation.

He was less optimistic about Silicon Graphics (SGI), a $1.5 billion company that specializes in high-end computers and visual systems for the simulation industry. "SGI wanted to be commercially driven and develop products that are applicable to both commercial and military markets," said Weltsch. The problem with that approach, he said, is that the company tried to "make everybody happy and lost focus on what was really needed."

The popularity of SGI's high-end computers has helped keep the company afloat, he added. "But smaller niche market players are taking bits and pieces of SGI market." One of those players is Sun Microsystems, said Weltsch. The company's PC-based image generation technology, he said, "has pushed SGI out of areas where they used to sell a $1 million box for something that now can be done with a $50,000 box. ... That is why they are struggling now.

SGI now is working to recapture market share and to solidify its position in the federal sector, said John Burwell, the company's director of government business. The target markets for SGI, he said, are those that require complex data processing, such as simulation-based weapons design, the Energy Department's stockpile stewardship program, military training, imagery and signals intelligence for classified programs.

Given the current emphasis on homeland defense, said Burwell, "the military will use modeling and simulation to figure out what is going to be operationally effective.

Among the industry's latest buzzwords is "collaborative visualization," the virtual-reality technology that allows people to view data remotely, from different parts of the world. That technology is widely used in the automotive industry, for example. Burwell expects that military customers will be spending more money on high-end visual systems that provide a "common operating picture." That market represents a "growth area we are focusing on," he said.

A similar forecast was offered by John Lenyo, president of CAE Military Simulation and Training, an $853 million firm.

In the U.S. market, said Lenyo in an interview, there is a "move toward distributed tactical training simulators."

The military services want to be able to train "as they fight," he said. Advanced simulations could provide a common environment so that, for example, attack helicopters, ground troops and fighter aircraft can train together. "That is where the growth is in the U.S. military," Lenyo said.

As the United States prepares to fight a military campaign against terrorism, he added, "we will see more demand for coalition training." Using a synthetic environment, British units may train with U.S., French and German forces. "You plug into this environment different types of trainers."

A joint training environment will not be achieved easily, however, even within the U.S. services. "Today, the Army and Air Force have their own programs. They are not on a merge path."

Growing interest in deployable trainers should result in new business opportunities, said Lenyo. The Army and the Air Force have programs under way for deployable aviation trainers. The Navy plans to develop transportable trainers as well. "I believe that activity will continue," he said.

To prosper in this industry, however, the key is to have competitive prices, said Lenyo. "It's a price-sensitive market."

Under a project called Sim XXI, CAE plans to produce a high-fidelity full-flight simulator that could be adapted for various types of aircraft and would be relatively inexpensive to maintain. "It's the foundation-core hardware and software of our next-generation commercial flight simulator for the airlines," he said. "We are introducing some of the [Sim XXI] technologies in a helicopter-simulator program we are doing for a Middle-Eastern customer right now."

CAE has a large commercial customer base, "so we can leverage technology into military market."

The Sim XXI is built with Pentium PC-based technology uses electrical load units (replacing hydraulic power) and has a standard instructor operator system design. These simulators will be made with lighter composite materials and will be more modular than current systems, said Lenyo.

"In the military market, the cost driver is not the hardware. It's the software," he said. For that reason, Sim XXI will have a modular software architecture, which will make it easier to reuse the software for various applications.

Given the glum outlook for the commercial aviation business and a relatively flat military market, Lenyo said he believes there will be more consolidation in the simulation and training industry. "There is still excess capacity in the market today," in both the civilian and military sectors, he said. "Even if defense spending goes up, there is still a need for consolidations."

Forecast Is Rosy for Visual Simulation Industry

The cost of visual simulation technologies has plunged to a point that commercial applications are becoming more and more viable, said a recent industry study. Just five years ago, about two-thirds of all revenues generated by the market for visual simulation were accounted for in the military sector. By 2000, about 54 percent of visual simulation revenues were generated by the commercial sector.

By 2007, nearly two-thirds of the total revenues generated by the visual simulation markets will come from the commercial sector, said a report released in late September by Frost & Sullivan, a business intelligence firm in Mountain View, Calif.

Less expensive solutions for visual simulation, said the study, will slow the growth and the overall revenue potential for visual simulation hardware markets in the short- to mid-term.

Numerous hardware and software companies have entered the market over the past two years, mainly focusing on personal computer-based image generation (PC-IG) systems. The growing interest in the market has been driven by advances in PC computing and the emergence of the Microsoft Windows NT operating system (OS), as well as the proliferation of the Linux OS.

Growth in the software sector, additionally, has been fueled by advancements in real-time three-dimensional (3D) simulation software and the development of tools for object modeling and virtual prototyping, as well as scene and terrain database design.

There are three basic types of competitors in the IG market: high-end IG original equipment manufacturers, makers of PC-IG, and IG integrators.

In the high-end IG market in 2000, Silicon Graphics Inc. (SGI) was the market leader, with a 53 percent share. Evans & Sutherland (E&S) followed, with a 21 percent share, and CAE Electronics had a 16 percent share.

SGI and E&S dominate the military sector. SGI captured the largest share of the commercial market, with about 44 percent. E&S is strong in international non-U.S. military sales, while CAE's dominance is in commercial flight simulators.

In the PC-IG market in 2000, Quantum3D was the leader with a 46 percent share. SGI had a 24 percent share and E&S, 8 percent

According to Frost & Sullivan, new product introductions from Quantum3D and SGI are 'heating up competition for this still developing market sub-segment"

In the object modeling and virtual prototyping software tools market in 2000, eNGENUITY Technologies Inc. was the market leader with a 22 percent share. MultiGen-Paradigm had a 15 percent share and SGI, 9 percent

In the highly competitive real-time 3D software market, Multigen-Paradigm was ahead in 2000, with a 22 percent share. Trailing was SGI with a 14 percent share and Thales Training & Simulation, with 10 percent.

In the scene and terrain database development software tools market, Terrain Experts was the leader, with a 19 percent share. Trailing were Autometric, with a 17 percent share and Multigen-Paradigm, with 16 percent.

The total world market for visual simulation systems amounted to $2.33 billion in 2000, with a growth rate of 19.8 percent over 1999.

By 2007 Frost & Sullivan expects the world market for visual simulation will reach $5.3 billion, assuming a compound annual growth rate of 9.1 percent from 2001-2007

Much of this growth will be realized in the PC-IG and scene and terrain database development software markets.

Sales of image generators were $1.14 billion in 2000, with a growth rate of 12.1 percent over 1999. By 2007, the total market is predicted to reach $1.64 billion, given a compound annual growth rate of 3.7 percent from 2000-2007.

In 2000, the market for high-end Cs totaled $1.04 billion, marking a 7.4 percent annual growth rate. PC-IG sales were $98.3 million, a 108.2 percent growth over 1999.

The visual simulation software tools market was $1.19 billion in 2000, with a growth rate of 28.2 percent over 1999. By 2007 the market could grow to $3.7 billion, said Frost & Sullivan. Sales of object modeling and virtual prototyping software tools reached $429 million in 2000, a 33.7 percent growth over 1999. The size of market for real-time 3D simulation software was $538.5 million, an 18.9 percent growth over 1999. And the market for scene and terrain database development software tools generated revenues of $223.1 million, growing by 43.5 percent

The following trends have contributed to the growth in visual simulation software sales, according to Frost & Sullivan:

* OpenGL and HLA (high-level architecture) industry standards allow niche market participants to grow quickly.

* Simulation-based acquisition programs are expanding.

* After-action reviews from simulated training are gaining acceptance.

Conversely, there are other trends that are restraining sales growth, such as the lack of operating system software standards-which forces vendors to support more than one system-and a lack of innovation in the visual simulation software tools market.