Gogo: Satellite price drop good for us, bad for new entrants
PARIS — In-flight-connectivity provider Gogo Inc. says the continued drop in satellite bandwidth costs will act as a barrier to entry for new service providers because other costs, including maintaining a global supply chain and a global sales organization, will take on greater importance.
Chicago-based Gogo reiterated that its loss making operations outside North America is a temporary situation as the company ramps up operations.
Addressing an investor conference Jan. 5 organized by Citi, Gogo Chief Executive Michael Small said the stock market is placing too much weight on the losses, which he said would be absorbed in short order. He said the non-U.S. operations would have a 30 percent EBITDA (earnings before interest, taxes, depreciation and amortization) margin by 2021 as the expansion continues.
“To put a 20 multiple on the negative EBITDA [associated with the non-U.S. business] is just weird,” Small said of Gogo’s current stock valuation.
Bandwidth cost drop means higher barriers for new entrants?
Like most of its competitors, Gogo is benefiting from the sharp drop in satellite bandwidth cost in the past couple of years, a trend that shows no sign of slowing, much less reversing itself. But Small said the costs of maintaining the network of suppliers and installers is easily amortized over large airline fleets, making a low-bandwidth environment potentially more difficult for new entrants.
Gogo’s current 2Ku technology is designed for geostationary satellites operating in Ku-band, but Small said the company is investing not only in using the planned OneWeb constellation of satellites in low Earth orbit, but also Ka-band satellites if that’s where bandwidth cost reductions are most pronounced.
“We’ve invested some dollars if we had to swap out and make it a 2Ka,” Small said. “We want to chase the cheapest bandwidth, wherever it may be.
“Owning a satellite for us would be the biggest mistake we could make,” he said. “You have something that’s going to be shiny when you buy it but has a working life of 15 years. Three or four years in, you’re going to regret that you own the thing. We want to continue to play the field.”
94 2Ku installations in 2016, up to 400 planned this year
Small said Gogo met its goal of installing 75-100 commercial jets with Gogo’s new 2Ku antennas in 2016, finishing the year with 94 completed. For 2017, the company has forecast 350-400 installations, with up to 750 more in 2018.
The company added 1,000 aircraft to the 2Ku backlog in 2016 and booked new contracts with several European airlines. for 2017, Small said, the focus is on the Middle East and Asia.
As airlines become comfortable with what on-board WiFi can do for passengers, they are demanding less investment by service providers like Gogo and competitors Global Eagle Entertainment, Panasonic Avionics, Thales LiveTV, Inmarsat and ViaSat Inc.
“We’re clearly moving in the direction of what we call multi-payer,” Small said, noting that Gogo started business in the United States, with a limited-bandwidth air-to-ground network, by charging high rates for business passengers.
“There is tremendous price inelasticity concerning business travellers,” Small said. “We know if we raised our price another $10 it would be very positive. But it would not be a way to grow the business.”
Gogo is currently rolling out a next-generation ATG network in North America that, like the satellite-delivered 2Ku system, is designed to provide 100 megabits per second of bandwidth to each aircraft, up to 10 times the current speed.
Gogo is using up to 60 megahertz of unlicensed radio spectrum in addition to its 4 megahertz of licensed spectrum for the next-generation ATG service using 250 towers placed mainly on mountaintops for line-of-sight visibility to planes.
No plans for ATG outside North America, skeptical about Inmarsat’s Europe network
The company has no intention of building an ATG network outside North America, and Small said he doubted whether London-based Inmarsat’s ATG network in Europe, to be combined with Inmarsat’s Global Xpress Ka-band satellite service, is a good idea.
“We have 6,500 planes on our North American ATG service and it would be almost impossible to beat that anywhere else,” Small said. “It’s a more challenging business case anywhere outside the United States.”
Small also questioned whether Inmarsat’s fleet of three Global Xpress satellites is enough to meet market demand. “Three satellites don’t do it,” he said. “You can draw a picture where it comes close.”
The speed of installation is not just a matter of the supply chain. Small said the company had sufficient radomes and adaptor plates in stock to meet its installation targets, especially as Gogo focuses on the larger fleets where it can work from plane to plane, at the same site, during aircraft down times.
On the regulatory side, Gogo has secured about a dozen licenses, called Supplemental Type Certificates (STCs) for different aircraft and is awaiting about 18 more to cover most of the world’s commercial fleets.
Peter B. de Selding