Airline-Safety Law Opens Market for Dynatech

On Aug. 31, 1986, an Aeromexico DC-9 jetliner with 64 people aboard and traveling 300 m.p.h. descended toward Los Angeles International Airport. At the same time, a small Piper plane with three passengers was climbing nearby.

At 6,500 feet above Cerritos, the planes collided, showering houses with fiery debris and killing 82 people in the airplanes and on the ground.

The federal government, hoping to prevent similar disasters, has ordered jetliners to be equipped with a new electronic system that warns pilots when they are too close to other aircraft. Each system will have backup components in case the main components fail, but for the jetliner to switch from one to the other, two electric switches will usually be needed.

And that has created a marketing opportunity for Dynatech Microwave Technology in Calabasas, a leading producer of sophisticated electric switches.

In August, Boeing Co., which builds 60% of the world’s commercial jets, awarded Dynatech a contract to supply switches for collision-avoidance systems--formally called the Traffic Alert and Collision Avoidance System, or TCAS-II.

The contract, which extends to 1991, should be worth about $1 million to Dynatech. In Dynatech’s current fiscal year that will end March 31, the Boeing deal will provide about $500,000, or 5%, of Dynatech’s expected $10 million in total sales.

Dynatech is battling with Dow Key Microwave, based in Ventura, and other rivals to supply switches to the airlines as they install TCAS systems in existing jets. Planes with 30 or more seats that travel in U.S. airspace must have the system. Those sales will account for an additional 5% to 7% or more of sales this year, said Dynatech Microwave President John Wetzel.

Currently, airlines must have TCAS installed by the end of 1991, although legislation is pending in Congress to extend it an additional two years. The entire TCAS system costs about $300,000. Dynatech’s switch, which is slightly larger than a cigarette pack and is placed below the pilots’ deck with the plane’s other electronic gear, costs between $400 and $700.

The arrival of TCAS came at a key time for Dynatech’s Calabasas operation. A unit of Dynatech Corp., a Burlington, Mass.-based electronic products concern with $400 million in sales, Dynatech Microwave and the rest of the switch industry is struggling with the slowdown in defense spending.

The industry has relied heavily on the military, which uses various switches in missiles, fighter jets and other aircraft. Wetzel, who took over the local Dynatech operation 18 months ago, said he sees no major gains in defense spending any time soon, and wants Dynatech to pursue more commercial customers to offset that slowdown. “For my planning purposes, I basically think of our market as flat,” with industrywide sales at about $60 million, Wetzel said.

That leaves two ways to grow: Find new markets or grab customers from other suppliers. Wetzel, 44, said “that for the past year, the strategy has been very much to take market share” from Dynatech’s competitors.

He claims success, saying Dynatech Microwave’s current-year sales will be up 25% from the previous year in a flat market, making Dynatech the industry’s No. 2 player behind Transco Products in Camarillo. (Dynatech Corp. does not break out exact figures for Dynatech Microwave.)

But Robert F. McKenzie, a Transco vice president, said that if Dynatech is taking market share from its rivals, Transco is “absolutely not” among them. “We did $22 million last year, and will do about $24 million this year” in sales, said McKenzie, adding that Transco is not even trying to compete in the TCAS switch market. “It’s modest growth, but it’s growing.”

The switches made by Dynatech, Transco and the others are not the hardware-store variety used in turning the porch light on and off. Theirs are complex switches that change the direction of microwave signals that control certain functions on jets, missiles and satellites. Often, their use is pre-programmed by computer. Prices for Dynatech’s switches can range from $100 to $7,500, but average $350.

Dynatech was chosen for Boeing’s new jets, but another major jet builder, McDonnell Douglas, plans a TCAS system that avoids using switches and relies instead on twin antennas, Wetzel said. Another big potential buyer, the European plane builder Airbus Industrie, has yet to decide whether to use switches or antennas for their TCAS system.

Then there are the 4,000 or so existing U.S. and foreign jets that must be fitted with TCAS systems. The system includes a computer, two transponders that send and receive signals from other planes and cockpit displays.

The TCAS systems are sold to the airlines by a handful of companies, including Honeywell and the Bendix/King unit of Allied-Signal. But those companies or the airlines must buy the switches separately.

Wetzel said Dynatech has won the contracts to supply Pan American, Northwest and Southwest airlines, but he conceded that one of the biggest carriers--United--picked Dow Key for its jets, except the 747. United’s plans for that aircraft are undecided, Wetzel said.

Other big plums are pending. USAir, which now has one of the biggest fleets after its merger with Piedmont, has yet to pick a switch supplier. Continental also is undecided. But another huge airline--American--has taken McDonnell Douglas’ route and will not use switches.

Wetzel, who earned an engineering degree at Princeton and an MBA from Harvard, began his career spending 12 years at Hewlett-Packard, where he held various engineering, production and marketing posts. After a brief stint at Sierra Electronic, he was named president of Interface Technology in Glendora, a unit of Dynatech Corp. that makes electronic testing equipment. He was tapped to head Dynatech Microwave in May, 1988.

Wetzel concedes that Dynatech was lucky that the TCAS legislation handed it a new market. But Wetzel has made several moves himself to bolster Dynatech’s position.

When he took over as president, Dynatech was losing money and only 40% of its products were delivered on time, he said. So Wetzel streamlined its assembly process to slash production time; the company now takes an average of two days to make a switch, compared with 30 days when he arrived. It currently produces about 2,000 switches a month.

He also is moving Dynatech away from making several hundred types of custom switches--whose prices often failed to pay for their high production costs--to a program where it specializes in just 25 or so switches that appeal to a broad list of customers. By limiting the number of styles, Dynatech can build the switches at a lower cost and still sell either a few dozen or several hundred at a profit.

Wetzel cultivated his former employer, Hewlett-Packard, and now counts it as a customer. The company uses Dynatech switches in its oscilloscopes and other products used for testing electronic equipment.

Wetzel will need more Hewlett-Packards and other commercial customers if his company is to maintain strong growth in the face of slowing defense spending. He’s looking for new commercial projects--in space technology or communications, perhaps--that will need his products.

And in the meantime? “At the rate we’re going now, I’d say we’ll pass Transco in another one or two years” and become the industry’s heavyweight, Wetzel predicted. “When we grow, it has to come from somebody else.”