With spending on airport security equipment and services sure to go up this year in the wake of the Sept. 11 attacks, the stocks of several small companies that operate in this niche have received an exceptional amount of attention lately.
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One of those companies is
, which makes bomb detection equipment. InVision's shares gained 165% on Sept. 17, the first day of trading after the terrorist attacks, and its shares have since gone up even more.
recently caught up with InVision's President and CEO Sergio Magistri for his view on how airport security is likely to change and what the U.S. can do to make air travel safer. Not surprisingly, he thinks that intensive capital investment in security systems for airports and airlines, as well as regular and rigorous testing of those systems, are two of the main things the industry needs.
TSC: Your career has been about making airplanes and airports safer. What are the suggestions you have about the things that still need to be done?
There are three very important points: First, safety will require a lot more money. Second, safety will require better people.
TSC: Better training of security personnel?
Better training doesn't cut it alone. We need to pay them better also. We cannot perform solid security work with people being paid minimum wage. The difference between compensation for U.S. airport security personnel and its European counterpart is staggering -- by a factor of three.
The third point, which is really most important, is that, if you want to ensure that your security system is working at an optimal level, you have to inspect and measure the performance of your system by independent means at consistent frequencies, like every week, instead of trying to see if the system is up to snuff every four or five years.
Therefore, it takes an independent agency, which would send out a team that would test and try to fail the system every day. We have to better manage the system, and manage additional capital investment in the system and compensate the workers in the system based on performance. That's the only way we will ever make security work. Right now, while the Federal Aviation Administration buys the equipment, the detection process is contracted out to private companies by airlines.
TSC: What kind of trends and events have shaped the securities system and services industry since InVision's founding in 1990?
InVision was spun off in 1990 from a manufacturer of medical computer tomography (CT) equipments. After the tragedy of Pan Am 103 over Lockerbie, Scotland, in 1988, we saw an opportunity to adapt medical scanning technology to detect explosives in passenger-checked luggage.
In 1990, the U.S. Congress passed the Aviation Security Improvement Act, which empowered the FAA
Federal Aviation Administration to do three things: First, to fund the development of technologies capable of detecting bombs like the one that downed Pan Am 103; second, to establish the Explosives Detection Certification standard; and third, to deploy the FAA-certified technology for general use.
It took InVision four years and $20 million to certify its first CT scan unit in 1994. Six million dollars of the funding came from the FAA; the rest came from private equity. We sold 15 units of our first model to Europe. Our first customer was the Brussels International Airport in Belgium. Shortly thereafter, we provided units to airports in the U.K. The reason for this was that Europe, and especially the U.K., was more sensitized to the horror of terrorism.
In 1995, we started deploying our first units in the U.S. The first-ever unit to be used in the U.S. went to the San Francisco airport at the United Airlines check-in counter. We went through a battery of tests. In 1996, we took the company public. In June of that year, TWA 800 crashed. At the end of 1996, we received an order for 54 units from the FAA.
TSC: So this was the largest order you had ever seen up until that point?
That's right. In early 1997, however, it appeared that TWA 800 went down not because of explosives, but because of mechanical failures. This definitely took away some of the motivation for aggressive deployment of scanning technology from both the aviation industry and on the part of regulators. This summer, though, we were already forecasting an increase in activities for the next year, ahead of the European deadline for increased screening.
Then we had the terrorist attacks in New York, and it has started accelerating everything again. Today, there are about 250 units deployed worldwide. About 100 to 125 units of that total are being used in the U.S.
TSC: What is the average cost per unit of your products?
We have three models: the CTX 2500, the CTX 5500 and the CTX 9000. Prices range from $0.7 million to $1.5 million. The cost of the unit includes support and maintenance.
TSC: How do you break down the security scanning market?
We have 90% market share in the premium FAA-certified CT scanner machine market. Of the 250 machines worldwide, about 240 of them are ours. If you look at the market a little differently -- in terms of geography, for example -- there is about a 50-50 split between the U.S. market and the rest of the world.
Inside this market, we have two main trends: In the U.S. we are using, based on the FAA regulation, the CAPPS system -- the Computer-Aided Passenger Prescreening system.
The CAPPS system matches a set of data about the passenger with his or her luggage. That is the trend in the U.S., and a very powerful mode of operation, because this allows the nation to achieve the maximum security level, which would otherwise have to be achieved with a much larger amount of equipment.
In the rest of the world, our machines tend to be part of a multilevel system. At the front end of such a system, you would have a faster, less powerful technology; thereafter, you may have a CTX, and after that you may even have another unit completing the detection process. This is what a multilevel system would consist of.
TSC: What was your growth forecast for 2002 and beyond before Sept. 11? And how did you modify this estimate after the attacks?
Before Sept. 11, we estimated that we could take our operation to the break-even revenue level of $45 million
in 2001. For 2002, we forecast revenue of $55 million.
By now, we think, day by day since the Sept. 11 attacks, the demand and orders for our technology will increase both in the U.S. and in the international markets.
We do not know yet what is going to happen in the U.S., and how the events will shape the way we travel. I think the FAA and the Congress will work out in the coming months what the nation can do to better protect itself.
We will definitely need more rigorous screening of checked-in luggage and carry-ons, and to deploy more metal detectors, but I don't have a sense yet of how all these factors will fit together under the new rules.