Gogo says it won big airline connectivity contract on service merits, not price
PARIS—In-flight connectivity provider Gogo Inc. on May 23 denied that it won a recent competition against Inmarsat and Panasonic Avionics by offering what industry officials said was rock-bottom pricing, saying the competition with Inmarsat, at least, presented customer International Airlines Groupe (IAG) with an obvious choice.
“There is absolutely no comparison in the two products,” Gogo Chief Executive Michael Small told an investor conference organized by J.P. Morgan.
He said Inmarsat’s Ka-band Global Xpress service “is not global – not even close, not with three satellites. There are plenty of areas on British Airways’ route structure where you could not get coverage. The theoretical maximum is 50 megabits per second in their network today. We’re clearly going by 100 megabits per second. Ours is flying today. Theirs is still waiting to go operational. We’ve installed thousands of planes around the world. They haven’t installed any,” Small said.
“I think the last thing the decision was made on was price. We have the better next-generation solution.”
Chicago-based Gogo on May 5 announced it had won the contract to outfit up to 137 aircraft – 118 British Airways jets, four Aer Lingus Boeing 707s and up to 18 Iberia Airlines planes. The first aircraft are expected to be in service in 2017, with most of the rest to be flying in 2019.
Small’s remarks came in the wake of industry comment that Gogo offered IAG contract terms that the competitors refused to match. It is not clear whether this commentary is losers’ sour grapes or based on an assessment of the likely profitability of the deal.
The airline connectivity business continues to test several different business models, with no clear pattern established of which party – passengers, the airlines or the service providers – pick up which part of the total investment cost.
London-based Inmarsat’s Global Xpress service uses three geostationary-orbit satellites, with a fourth on the way, to provide Ka-band connectivity. The company is also building a European air-to-ground network to complement Global Xpress in the crowded, high-demand European airspace, and has leased Ka-band capacity for northern latitudes on Norway-based Telenor Satellite’s Thor 7 satellite, which is in orbit.
Inmarsat is conducting Global Xpress tests with Honeywell before debuting Global Xpress airline service this summer. The company has signed on Lufthansa German Airlines as an inaugural customer, with several dozen Lufthansa aircraft likely to enter service in the coming months.
Gogo’s competing product is 2Ku, a service featuring a new modem and antenna design coupled with high-throughput satellite capacity from fleet operators Intelsat and SES, among others.
Gogo has said it would have 75 2Ku-equipped aircraft in service by the end of 2016, with another 300 to be added in 2017.
Inmarsat officials have said that their advertised throughput is closer to what actual airline passengers will see in real-world use, particularly over congested hubs, and that Gogo’s 100 megabits per second to each plane will collapse in congested airspace with high contention ratios – other planes drawing on the same satellite bandwidth pipe.
Gogo and Inmarsat, along with competitors ViaSat Inc. of Carlsbad, California; Global Eagle Entertainment of Los Angeles; and Thales LiveTV of France are all furiously making the rounds of global airlines to line up as many aircraft as possible.
Small said that when the music stops – when the major airlines have picked suppliers – that only two or three companies would be able to survive.
“Scale in this business is measured by thousands of aircraft,” Small said. “It’s our strategy to get to thousands of aircraft by organic growth. Anybody who doesn’t have thousands of aircraft is going to have to find an exit strategy, somehow.”
The adoption by the major airlines of an in-flight connectivity partner is happening fast. Industry officials said within a few years, the major lineups of airlines with service providers should be about completed.
Small said that the top 100 airlines all would have made their choice of service providers by the end of 2018. Only a handful of them have decided on a fleet-wide basis so far.
With the clock ticking, all the competitors are making large investments. Two of them – Inmarsat and ViaSat – are using their own satellites plus strap-on capacity provided by third-party operators to fill in their geographic footprints.
Inmarsat is investing in a fourth Ka-band Global Xpress satellite, in the Thor 7 lease and in an expensive air-to-ground terrestrial network for Europe. ViaSat is investing more than $1 billion in next-generation Ka-band satellites with aeronautical connectivity – military and commercial – as a principal target market.
The three others are scooping up satellite bandwidth as the major fleet operators – SES, Intelsat, Eutelsat, Telesat and others — announce high-throughput satellite capacity.
Small said the glut of satellite bandwidth means Gogo is paying 70 percent less for satellite bandwidth now than it did just a year ago. He said prices would continue to drop – good news for his company.
Less-good is that outfitting an aircraft with new connectivity gear costs between $250,000 and $500,000 per plane, a figure that does not drop much even when lots of planes are involved unless these are line-fits done as new planes are manufactured. Gogo is currently generating about $135,000 per year in revenue per equipped plane, he said.
Additional costs are incurred to obtain the licensing authorities’ Supplemental Type Certificates (STCs), needed for each aircraft type.
These costs add up. Gogo announced May 23 that it had secured a new credit line of $525 million – due in 2022 and carrying an interest rate of 12 percent – to repay existing debt and finance the 2Ku rollout.
Credit-ratings agency Standard & Poor’s gave a “negative rating outlook” on the Gogo debt, saying “ongoing capital expenditures from expansion activity will diminish the company’s current cash balance, possibly resulting in the need for external financing in two to three years.”
In a May 26 filing with the U.S. Securities and Exchange Commission (SEC), Gogo said it would suspend its new credit offering pending finalization of a contract with unnamed U.S. airline that was already a customer. The customer had indicated it would expand its contract with Gogo for both air to ground and 2Ku satellite connectivity, Gogo said. The company did not name the customer as American Airlines but the details are consistent with that airline’s relationship with Gogo.