Boeing Co. warned that it would take a $350 million charge before the end of 2006 if it shuts down its Connexion by Boeing satellite Internet service for aircraft, the company announced July 26.

In a release detailing the company’s 2006 second quarter financial performance, Boeing said its business segment that includes the Connexion service reported an operating loss of $90 million in the quarter, which closed June 30.

Boeing unveiled the service in 2001 but the business plan, which included investments from three U.S. airlines, had to be changed after the Sept. 11, 2001, terrorist attacks on the United States placed the airlines under a financial strain. The service eventually debuted in 2004, finding a market with international airlines, business jets and with governments, but the U.S. airlines never returned and Connexion has not come close to meeting Boeing’s financial expectations.

Boeing announced in June that it would halt new sales of the service while the company evaluated strategic alternatives for the satellite Internet business,

"The market for the service has not developed satisfactorily," Boeing said in a statement. "Therefore, the company will be working in conjunction with customers to thoroughly evaluate the Connexion marketplace and business model to determine its next steps." Options for the unit include "a sale, partnering arrangement or termination of service," and the decision will be made after meeting with Connexion customers.

In a June note to clients, Tim Farrar, president of Telecom, Media and Finance Associates Inc. (TMF), a Mobile Satellite Services consulting firm, warned investors that it will not be possible to make Connexion a commercial success. The service has attracted just more than 1,000 users per day across 125 commercial aircraft that have installed the service and cost about $150 million per year to operate, Farrar wrote. "Even if usage of the service grows further, at least 1,000 aircraft would need to be fitted out for the business just to break even. The service has won plaudits from users, but in our view there simply isn’t enough demand from passengers to make Connexion a commercial success."

The service could have potential if aimed only at military and government audiences, "but we do not believe that the commercial passenger service can realistically be maintained," Farrar said. "Airlines using the service already incur a substantial penalty in fuel costs for the weight and drag of the Connexion equipment and are unlikely to subsidize the service still further."

While a $350 million charge would further weigh down Boeing’s 2006 performance, the company said the short-term pain would lead to long-term benefit by cutting operating expenses and improve earnings in 2007.

Charges Lead To Second Quarter Loss

Overall, Boeing lost $160 million in its 2006 second quarter due in part to charges related to the settlement charges of ethical conduct related to the U.S. Air Force Evolved Expendable Launch Vehicle (EELV) program. Boeing reported revenues of $15 billion in the second quarter, up 2 percent over revenues of $14.7 billion in the 2005 second quarter when the company reported a profit of $566 million.

In May, Boeing agreed to pay the U.S. government $615 million to settle charges of ethical misconduct surrounding the EELV competition and the attempted hiring of a former Air Force acquisition official. The settlement led to a net charge of $571 million for Boeing in the second quarter.

The Network & Space Systems unit, part of Boeing Integrated Defense Systems segment, reported revenues of $2.9 billion in the quarter, down from revenues of $3.1 billion in the 2005 second quarter. Boeing attributed the decline to lower volume in proprietary programs and the sale of Rocketdyne in August 2005.

Network & Space Systems reported an operating profit of $109 million in the 2006 second quarter, down from $200 million in the same period in 2005. The decline was due to charges of $74 million on the Delta 4 program due to the settlement and some launch manifest changes.

Boeing increased its 2006 revenue guidance to between $60 billion and $60.5 billion and raised its 2007 guidance $1 billion to between $64.5 billion and $65.5 billion. The increases mainly are driven by commercial airplane operations.

Network & Space Systems expects revenues of about $11.5 billion and margins of approximately 5.5 percent in 2006, with a moderate growth outlook for 2007. The guidance does not reflect the impact of the proposed United Launch Alliance joint venture, which would merge the government launch operations of Boeing and Lockheed Martin.