Panasonic Avionics: “jury’s still out” on profitability of in-flight connectivity

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This article was updated at 11:29 p.m. Eastern.

WASHINGTON — Panasonic Avionics, one of the largest providers of satellite-enabled broadband to aircraft, says the long-term viability of inflight connectivity as a moneymaker remains an open question.

Lower capacity costs, something buyers have typically praised, are acting as a double-edged sword, according to David Bruner, Panasonic Avionics’ vice president of global sales and marketing, thinning profit margins to the point of concern.

Growth is easy, but profit?

Bruner said Panasonic has just under 1,600 aircraft connected, and anticipates adding around 700 more this year out of a backlog of 2,500. A substantial number of the company’s customer airlines are located in the Asia-Pacific, including Singapore Airlines, Air China, and Taiwan-based Eva Air — a concentration that motivated Panasonic to become an anchor customer for the Eutelsat-172b satellite that launched June 1.

Once the satellite completes its electrically-propelled orbit raising and enters service, which Bruner estimated would be in November, Panasonic will use Ku-band high-throughput capacity for “the fastest growing area in aeronautical service, [and] also the fastest growing in maritime.”

“We need to deliver significant new capacity to this region to support the growth of mobility in this particular region. It just can’t come fast enough to meet the demand,” he said.

But even with that demand and the capacity investments Panasonic is making, Bruner said the price declines brought about by oversupply and the higher throughput of new satellite systems is actually squeezing inflight connectivity into a lower margin business.

“Prices are falling rapidly, but if you are a service provider like ourselves, you’ve got to position yourself so that you make a penny or two on every megabit you deliver,” he said. “Otherwise, the business is not sustainable. That is the biggest challenge in our marketplace today. Growth: not a problem. Profitability: a real problem.”

“Business is booming but no one is making money,” said Claude Rousseau, research director at Northern Sky Research, adding that inflight connectivity providers have a number of challenges to turning a profit that have yet to be worked out.

“It’s very capital intensive and the take rates are still too low. We see that the price for connectivity hasn’t moved much, except when it’s free, but then if it’s given for free somebody has to pay for it. In the end if it’s not the passenger, it will be the airline or the service provider, and in that latter case the service provider has a hard time recouping the money,” he said.

Bruner said Panasonic would be struggling itself, were it not for the success of its inflight entertainment business and technical services team. Competitor Global Eagle Entertainment also has a robust inflight entertainment business independent of satellite connectivity, along with maritime connectivity and other services through its acquisition of EMC. Gogo, another major inflight connectivity provider, is less diversified. Despite posting a 17 percent revenue increase as of March 31, the Chicago-based company has been operating at a loss since going public in 2013, and doesn’t expect to be cash-flow positive until 2019.

For Panasonic, Bruner said the company trusts market research reports indicating inflight connectivity will grow at double-digit percentages, but said whether that’s enough to ensure a positive return is still to be determined.

“Even with that growth rate, can you make a profit delivering this service to airlines? I think the jury is still out on this one. We all have to all figure it out,” he said.

Custom payloads and future capacity

Those doubts don’t mean Panasonic isn’t going full steam ahead with multiple capacity procurement projects. Panasonic has collaborated with satellite operators on designing payloads optimised for inflight connectivity, of which three are active: Intelsat-29e, SES-15 and Intelsat-33e each have payloads Panasonic helped design. Bruner said another three Panasonic-influenced payloads are coming up this year. That trio will be have bespoke characteristics from Panasonic, which the company intends to lease the majority of the capacity.

Bruner said Panasonic is waiting longer to announce these payloads to prevent competitors from drafting behind the company’s work. The next big collaborative payload will also be for the Asia Pacific, he said, to augment Eutelsat-172b. He estimated Panasonic will use at least 60 percent of the capacity on that new satellite, which will be announced in the coming months.

“Our business model lets us layer new satellites and we’ll add more Ku-band capacity as we outgrow our current capabilities,”he said.

Echoing Gogo, which last month said it would rather lease openly from different satellite operators than to operate its own spacecraft, Bruner said the cost and complexity of satellite ownership discourages Panasonic from taking the ownership route.

“We are not moving to become a satellite operator,” he said. “We work with a number of satellite operators and will continue to work with a number of satellite operators, mainly because these orbital slots and frequency rights are controlled by a number of different operators, and as we grow, we need more and more capacity and we can’t see ourselves locking into one or two.”

As the number of high-throughput satellites, commonly referred to as HTS satellites, increases in orbit, Panasonic is continuing to build out what it refers to as an “extreme high throughput” or “XTS” network to deliver more capacity to planes and maritime vessels.

Bruner said Panasonic is pursuing more “XTS” capacity, including the forthcoming Asia-Pacific payload, which involves layering higher-throughput capacity over dense areas of aviation and maritime traffic.

“We are doing the same thing in Europe, the Middle East and India, and we will also introduce XTS service in the Americas to provide coverage there,” he said. “The Americas is very difficult because massive capacity is needed, so the dollar values are higher. It is difficult to put all this together but it’s happening.”

Antennas and modems

Bruner said Panasonic’s two big antenna projects have both proven more difficult than initially expected, but that an upgraded modem will soon enable throughputs up to 26 times faster than Panasonic’s current modem.

Panasonic teamed with Boeing in 2014 to create a new phased array, electronically steered antenna, initially intended to market in 2016. Bruner said the result was an “incredibly good antenna,” but one with a low-volume pricetag of $1 million each, which was too expensive to compete with mechanically steered antennas.

For maritime, Panasonic struck up an exclusive partnership with Kymeta for its metamaterials antennas, but Bruner said that antenna “just doesn’t give the radio frequency performance that we need.”

Panasonic is still working with both companies on their respective antenna products, he said.

“All of these players have really good ideas, but nothing has materialized into a complete antenna subsystem that delivers what we need, particularly for aero,” he said. “Aero is the most demanding, most environmentally challenged vertical segment that needs the best of the solutions, and we’ll keep looking for a solution that meets our requirements.”

On the modem side, Bruner said satellite ground systems supplier Newtec in Belgium has produced a third-generation modem that Panasonic will be rolling out “as fast as we possibly can” in 2018 at teleports and on aircraft.

“For our customers that have been surviving on this first-generation modem that does about 15 Mbps, they will jump to about 250 to 400 Mbps,” he said, adding that airlines could add multiple modems per aircraft if desired.

Bruner said the new modem can switch seamlessly between beams and handle data and multicast video reception simultaneously. The modem is part of the Newtec Dialog multiservice platform, he said.

Originally, Panasonic had a second-generation modem planned that would have been in the range of 60 to 80 Mbps, but the project took so long that the company chose to cancel it. Southwest Airlines will be first to receive the system, he said, followed by a broader rollout in North America and then the rest of the world.

Ongoing Department of Justice investigation

Bruner said that none of Panasonic’s operations have stopped as a result of an ongoing Foreign Corrupt Practices Act investigation by the U.S. Department of Justice that parent company Panasonic Corp. disclosed in February.

Panasonic Avionics CEO Paul Margis and Chief Financial Officer Paul Bottiaux both left the company when the investigation was announced. The company filled those voids with Hideo Nakano, previously deputy CEO, and Seigo Tada, a Panasonic employee since 1985.