Gogo defends heavy spending on 2Ku airline installations
Updated Aug. 15 at 11:44 a.m. Eastern to reflect correct 2Ku international installs.
WASHINGTON — Gogo says the larger loss it took last quarter, largely for financing airline customers’ 2Ku satellite antenna installations, will pay off meaningfully as those customers start generating revenue.
The Chicago-based inflight connectivity provider reported a $44 million net loss for the three months ended June 30, a 10 percent deeper loss than the same quarter last year.
In an Aug. 7 conference call with investors, Gogo executives said the increased capital expenditures, or capex, of today will help the company meet its goal of being profitable in 2019 as planned.
“While this airborne equipment represents significant current investment, it is a source of future growth and profitability,” Barry Rowan, Gogo’s chief financial officer, said during the call. “We expect approximately 70 percent of the $230-$260 million in 2017 capex to be for these success-based 2Ku airborne equipment costs, and it will continue to represent a significant portion of our capex as we install our 2Ku backlog.”
Michael Small, Gogo’s CEO, said the company has around 1,600 aircraft signed up for 2Ku, a mechanically steered phased-array antenna system that offers 70 Mbps today and 200-plus Mbps when paired with next generation high-throughput satellites. The company launched 2Ku service on five airlines — Air Canada Rouge, British Airways, JTA, Virgin Atlantic, and Virgin Australia — during the quarter, and has 248 aircraft currently equipped with the service, he said. Gogo expects to complete 450 to 550 2Ku installations this year in total.
Outside of 2Ku, Gogo’s other investments are mainly for Supplemental Type Certifications, or STCs (needed from the U.S. Federal Aviation Administration for aircraft antenna installations), global operational support centers, satellite capacity and the company’s next-generation Air-to-Ground (ATG) network. STCs are one-time costs, Small said, and the ATG network upgrade, for which prototype equipment is demonstrating throughputs of 134 Mbps, is on schedule for completion in 2018.
John Wade, Gogo’s chief operating officer, said the company should have the STCs needed for over 90 percent of this year’s aircraft installations by the U.S. Labor Day holiday (Sept. 4), and for more than 80 percent of all 2Ku-capable aircraft by year’s end. He added that Gogo has been able to reduce 2Ku installation times to under two days per plane. The company said installations took around three and a half days in late 2016.
“This progress results in significant cost savings for us, and even more importantly enables our airline partners to keep their aircraft in service and generating revenue,” he said.
Wade said Airbus has completed the first aircraft with 2Ku installed during aircraft production, and added that progress is continuing with having a similar setup with Boeing.
Profit nearing, but not here yet
Gogo reported a loss of $31 million for its international, or “rest of world” commercial aviation business, during the quarter, compared to a $23 million loss in Q2 last year, mainly due to installation costs. Wade told investors these losses have to be gauged “in their strategic and financial context.”
“We are clearly making significant investments to pursue the world’s most important untapped connectivity market opportunity, which is outside North America. Based on the number of aircraft online and in backlog, CA-ROW [Commercial Aviation-Rest-of-World] has sufficient critical mass to achieve profitability, and we expect to announce more ROW airline wins this year. These factors meaningfully derisk the financial dimensions of pursuing this important market,” he said.
In North America, Gogo made a $16 million profit in commercial aviation — 2,791 of the company’s 3,109 total commercial aircraft are based in the continent. Gogo has 318 international aircraft connected and 620 awaiting installation. Wade said 150 international installs are scheduled by year’s end; 57 international aircraft had 2Ku as of June 30.
Gogo has more commercial-aviation aircraft connected than any of its competitors. Panasonic Avionics said it had around 1,600 connected aircraft as of June, Global Eagle Entertainment 831 aircraft as of March 31, and ViaSat 559 aircraft in July. Inmarsat, counting just inflight Wi-Fi and not its lower-bandwidth L-band services, counted more than 1,200 aircraft under contract as of Aug. 3.
Gogo’s international push means facing off with some of these competitors in other regional markets. Small said Gogo is now well staffed in the Asia-Pacific region, and will go after large airlines that have around 100 or more aircraft, including at least one airline that Gogo believes could be wooed from Global Eagle.
“We are going to be aggressive in that part of the world, and Hainan is a large airline so that would be one of the targets,” he said.
Hainan, part of the HNA Group, is a Global Eagle customer through Shareco, another HNA Group company. U.S. regulators shot down a Shareco-Global Eagle joint venture last month that would have given Global Eagle exclusive connectivity rights for HNA aircraft.
Small didn’t detail Gogo’s plans for Europe, but said the company has chosen not to join Eutelsat and ViaSat in a lawsuit over Inmarsat’s use of a European Commision-granted S-band license.
“I do believe Inmarsat has taken an extraordinary liberal interpretation of the rules to implement their European network, but we are focused on winning on the playing field and think we have far superior service regardless,” he said.
With some 4,453 connected aircraft in business aviation (comprised of business jets and other typically smaller aircraft) using its U.S. ATG terrestrial network, Gogo estimates it has roughly 90 percent of the business aviation market.
Business aviation is the company’s most profitable division so far, charting $25 million in profit on $58 million in revenue, a 33 percent profit increase year over year.
Gogo generated $172.8 million in revenue for the quarter, up 17 percent compared to the same period in 2016. The company projects total revenue for 2017 will be at the high end of previously stated guidance of $670 million to $695 million.