Airport Security Mkt. is About to Get More Bullish

The next few years present an excellent opportunity for investing in firms that develop or sell airport-security equipment, according to a new market analysis by the consulting firm Frost and Sullivan.

For one thing, the airport security market is giving all indications it will start another boom period, following an initial rush of federal spending that came on the heels on the 9/11 terrorist attacks. In 2003, Transportation Security Administration (TSA) purchases from security firms spiked at nearly $6.5 billion. That created a temporary "overcapacity" of equipment, according to Rani Cleetez, a Frost financial research analyst.

In the following year, 2004, aviation-security spending from TSA dropped to about $2 billion. Recently, there has been an annual 20 percent increase in spending that Frost expects will continue into 2007 and 2008. This translates into another spike.

In fact, the top 30 firms in the field, which earned a collective $2.6 billion in 2004, are expected to bring in more than $6.1 billion in 2009. The global aviation services market is now worth $69 billion, with 75 percent of that represented by airport security equipment. North America and Europe account for 40 percent and 35 percent of that smaller market segment of security equipment.

Furthermore, the "market mix" in both North America and around the globe is not expected to change significantly over the next few years, says Ken Herbert, Frost's global vice president, and co-author of the analysis with Cleetez. "Market mix" refers to the regulatory, political and economic conditions that can confound predictions for the growth rate in particular industries or market segments.

Frost was founded in 1961 with a mission of "providing market consulting on emerging high-technology and industrial markets

Within the airport-security equipment industry, the firm expects to see particularly healthy growth rates in an unusually high number of industry sub- segments, which are rank ordered in the box at right. But Cleetez cautions against taking this ranking too literally, as there is actually not that much separation between these sub-segments. For example, the top-rated area, digital surveillance, is given a 22.4 percent projected growth rate and the second-place area, explosive detection, will be at 21.9 percent. (The firm does not want to disclose the exact growth rates in the other areas.)

Although Frost & Sullivan puts biometrics in the third position, SITA's "Airport IT Trends Survey" released earlier this fall shows that only about 3 percent of airports globally have deployed passenger biometric identification systems. With issues such as reliability, privacy and technical standards still being worked out, most airports are probably in a wait-and-see mode. But as these issues are inevitably resolved, SITA believes this percentage will jump to 33 percent within the next four years.

Similarly, the use of radio frequency identification (RFID) technology for baggage management remains on the periphery, with only 6 percent of airports deploying it, SITA says. But by 2008 or 2009, RFID could make a "serious impact" when that percentage could jump to 45 percent. Adoption of RFID for cargo handling should be slower. While no airports currently make use of this RFID application, the rate could be 22 percent in another five years. "The technology's high start-up costs make the value proposition for individual airports unclear," SITA says. The firm's survey, now in its second year, is supported by Airports Council International and Airline Business magazine.

Meanwhile, Frost's Cleetez and Herbert note that numerous smaller firms have jumped into the aviation security market, many since 9/11. To survive, these smaller firms are going to have to make sure they have enough money budgeted for research and development (R&D). In a field with an emphasis on technological updates, change and innovation, this is a critical area. Another factor is that TSA considers R&D investments an important criterion in deciding whether to award certification.

The larger security firms are able to invest heavily in R&D, and it's a prime factor that keeps them on top. L-3 and Bioscrypt, for example, invest as much as 12-18 percent of their revenue in R&D.

To compensate, smaller start-up firms will have to continue in their efforts to attract venture capitalists who specifically agree to help fund this area.

A different kind of market sub-segment involves small U.S. airports, where there is an increasing awareness of security needs. Many have already made significant purchases of digital surveillance and explosive detection systems.

After North America, the next part of the world that is gearing up for a boom is the Asia-Pacific region, Cleetez adds.

>>Contacts: Rani Cleetez, +91-44-52044523, rcleetez@frost.com; Ken Herbert, 33 (0) 1-42-81-38-22, kherbert@frost.com; Thomas Frankl, SITA, +41 22 747 6296, thomas.frankl@sita.aero

Security Priorities

The following are Frost and Sullivan's 10 sub-segments of the airport security industry as ranked by their growth rates from 2004-2009:

1. Digital surveillance

2. Explosive detection

3. Biometrics

4. Perimeter and access control

5. X-ray and infrared

6. Metal detectors

7. "Others" and integration

8. Closed-circuit television

9. Intercom and video door phones

10. Alarms and sensors

Source: Frost and Sullivan

[Copyright 2005 Access Intelligence, LLC. All rights reserved.]

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