Aero and Maritime Broadband Providers Expect Consolidation Despite Market Growth

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PARIS — Aeronautical and maritime satellite communications service providers said the sector’s merger-and-acquisition activity has only just started, with much more to come, despite the fact that the market’s growth is providing good business for all of players.

Markets growing this fast — demand growth is well over 10 percent per year now and likely to continue that way for several years — sometimes feature inflated values for even second-tier companies, which can slow merger activity.

But the biggest of them said the fixed-cost nature of buying satellite capacity argues so heavily in favor of fewer and larger service providers that consolidation is inevitable.

“There are only a certain number of aircraft flying over the Pacific at any one time and it’s expensive to light up,” Global Eagle Entertainment (GEE) Chief Executive Dave Davis said in a Sept. 16 panel discussion of mobile satellite markets at Euroconsult’s World Satellite Business Week here.

“It makes a whole lot of sense to have a whole bunch of vessels under there as well that you can sell bandwidth too,” Davis said. “We believe in scale, across verticals.”

Glenn Latta, president of Thales LiveTV, which is mainly an airline entertainment content provider but is now moving into bandwidth provision, said several airlines have said they want only two satellite service providers, just as they are content with Boeing and Airbus as a commercial airline duopoly.

“They don’t want the complexity of dealing with multiple suppliers,” Latta said. “That’s another reason why consolidation would be positive, for the airlines and for us.”

Today’s connected commercial aircraft, most of them flying North American routes, generate around $150,000 in revenue per year per aircraft for bandwidth service providers. Gogo Inc., which dominates the U.S. market, has said that figure will climb to $750,000 or more in the coming five years as airlines race to provide broadband to customers and to the airlines themselves for pilots and crew, and to send aircraft health status.

No one else was willing to go that far in revenue forecasts, but most did agree that the double-digit annual percentage growth in the market would continue for at least five years.

Less than 10 percent of non-North American commercial aircraft are connected, and none of the provider companies saw any reason why foreign airlines will be any less willing to make their planes broadband compatible.

Rupert Pearce, chief executive of mobile satellite services provider Inmarsat of London — now moving to include broadband in its portfolio in addition to its heritage narrowband satellite links — said the per-aircraft figure could climb to around $300,000 per year within five years in addition to the growth of the overall market as more planes are fitted with broadband access.

GEE’s Davis said his company “sees a clear path to double where we are today. So let’s say $120,000 to $170,000 per aircraft is where we are. Can we see a clear path to $300,000 per aircraft in the relatively near term? Yes. We’re not sure how high it goes.”

Latta of Thales LiveTV said his company has identified some $1 million in annual savings, per aircraft, if airlines fully connect their planes as broadband works its efficiencies on aircraft maintenance, systems checkup and other functions.

“I don’t know that all of that immediately flows to [service provider] revenue, because the airline wants to keep a majority of those savings,” he said. “But clearly we can be a facilitator for that.”

David Bruner, vice president of global communications services at Panasonic Avionics, said his company’s recent purchases of large amounts of satellite capacity have been based on forecasts that per-aircraft revenue will double.

For now, Bruner said, companies like Panasonic Avionics are spending more money on booking satellite capacity than they are making in return as they seek the economies of scale needed.

“A new generation of HTS [high-throughput satellites] are close,” Bruner said. “The pricing associated with those new satellites will help us get to profitability with a several-fold decrease in the price per bit.”

Bruner said the model is threatened if HTS do not offer per-megabit prices at “radically reduced price” compared with today’s conventional satellites.” Some six years ago, he said, Inmarsat could charge 15 U.S. cents per kilobyte. “Now you can get a megabyte for less than that. In the next six years we’ll have to do as radical a reduction in the price per bit. Satellites have got to get cheaper.”

Abel Avellan, chief executive of EMC, which has focused on maritime markets, said sooner or later the maritime and aeronautical providers that survive will have customers in both markets — and perhaps land-based too — in search of greater operating leverage.

EMC now manages some 3.5 gigahertz of bandwidth on multiple satellites. “And we have new capacity coming in. If HTS really reduces the cost per megabit to where it needs to be, there will never be enough satellites to fill demand,” Avellan said.