InformationWeek

Due mainly to the expertise and connections of CEO Henrik Schroder, AviationX seemed ready to take off. But potential customers turned into competitors by starting their own marketplaces. The financial community, skittish from a tech stock slowdown, refused to provide additional funding at a critical time. And the company, by its own admission, underestimated the difficulty of developing systems sophisticated enough to handle the massive amounts of data necessary to coordinate a billion-dollar market.

Now AviationX has turned its attention to developing software for regional airlines. Exploiting the expertise developed from its marketplace effort, the company offers procurement, workflow, and knowledge-base applications.

Analysts and industry executives say AviationX is an example of what may soon be a steady stream of business-to-business E-marketplaces adopting new business models. Online marketplaces, which aim to streamline transactions and communication among trading partners via Web networks, now number more than 1,000. Competition is fierce as established brick-and-mortar companies launch marketplaces to compete with those created by smaller, independent operators.

AviationX ran into that head-on. Major airline suppliers Boeing, General Electric, and Honeywell, along with smaller companies such as Aerospan.com and TradeAir, all launched aviation-industry marketplaces earlier this year, right around the time AviationX was trying to get started. That crippled the chance AviationX had to attract a critical mass of customers--estimated by analysts to be about 80% of the buyers and sellers in a given market segment.

In February, the company raised $1.6 million in initial funding from the founders of PlasticsNet and venture-capital fund Wired@tlantic. In March, the stock market took a nosedive; tech stocks--especially dot-com startups--were hit hard. That spooked investors and choked off what Schroder had hoped would be a steady flow of venture capital.

In April, six major airlines, including American, Delta, and United, said they were forming an exchange to collaborate with suppliers for replacement parts, fuel, maintenance services, and other supplies; small airlines would be invited to participate. Schroder says several regional airlines--his best potential customers--told him they were going to hold off on AviationX until they saw what the major airlines would do.

Also in April, it became clear to executives at AviationX that the amount of data that would have to be stored on the marketplace was "overwhelming." Each airplane model requires tens of thousands of parts--each of which may be designed differently by any given manufacturer. To track a fleet of planes, an airline must use hundreds of thousands of part numbers--and for the marketplace to be effective, it has to support that information. What's more, Schroder says, airlines continually change the parts specifications.

Handling such an enormous amount of data "made it difficult to create the notion of uploaded catalogs," he says. Getting all the detail onto the site seemed impossible.

Airlines and parts manufacturers also resisted the idea of a marketplace run by a third party. Federal regulations require each manufacturer and airline to maintain meticulous records of each part--serial number, manufacturing date, and other details--in case anything goes wrong. Schroder says it became clear that airlines and parts manufacturers weren't inclined to let a third party manage such information for them, for fear that federal regulators could come back later and determine that records weren't properly kept by the marketplace. "We underestimated industry opposition to turning that data over to a private exchange," he says.

The idea of using an online marketplace also would require the airlines to use new workflow processes--purchase orders and invoices posted on the Web, rather than business conducted by phone, fax, or secure electronic connections. "The airlines didn't feel comfortable with that," Schroder says.

Finally, Schroder says, he and his colleagues realized they would have to give up the idea. "We came to the conclusion that the notion of one party being responsible for a global marketplace isn't going to work in this instance," Schroder says. Jeff Saunders, VP of strategic development and marketing for AviationX, agrees: "The airlines and their suppliers are logically the ones who should control marketplaces."

Since April, Schroder says, AviationX has had to tighten its belt and put a lid on spending. The staff has dropped from 30 to 20. Some who remain work part time, and the company has adjusted payroll costs in other ways, though Schroder wouldn't elaborate. AviationX has moved into offices half the size of the old ones and has even sold off unused PCs. The original $1.6 million is nearly gone. Schroder says AviationX is in the process of deploying its software for several customers and expects revenue to start coming in by September or October. Until then, he says, "we have to control the burn rate."

AviationX did attract three mid-sized airlines to themarketplace, including Express Airlines I Inc., which serves the Memphis, Tenn., hub for parent Northwest Airlines. The company, which was about to beta test the marketplace when the plug was pulled, is disappointed. Says CFO Curt Sawyer, "It's a lost opportunity."