Connectivity Revenue: Where does American’s shift leave Gogo?

In last week’s earnings call Gogo indicated that expected service revenue for its North America Commercial Aviation segment would be flat YoY in 2018. Considering the impending loss of some 400 American Airlines aircraft from its service fleet (~15%) that’s a tough position to hold. Digging in to the revenue numbers a bit shows how it might play out.

In Q3 ’17 Gogo‘s service flew on just over 2800 commercial aircraft in North America (“CA-NA”). Some 253 of those had satellite service on board while the others carried the company’s terrestrial ATG kit. Looking at a breakdown of the total revenue numbers in the quarterly earnings report and in an investor briefing filed this week we can deduce certain revenue per aircraft types in more detail than Gogo typically reports.

Breaking down Gogo's connectivity revenue by aircraft type for Q3 '17
Breaking down Gogo’s connectivity revenue by aircraft type for Q3 ’17

Getting to a split by aircraft type is especially important when looking at the potential 2018 revenue as the American Airlines planes leaving or converting to 2Ku will be mainline. The American RJs will remain on the ATG network.



Revenue numbers ticked up slightly in Q4 ’17 based on a slight increase in aircraft flying but mostly thanks to nearly 200 more planes fitted with the 2Ku system versus ATG. A mainline aircraft flying with 2Ku realizes approximately 50% higher revenue than an ATG plane, based mostly on higher take rates. With the significant increase in available bandwidth Gogo can support more users per flight.

Breaking down Gogo's connectivity revenue by aircraft type for Q4 '17
Breaking down Gogo’s connectivity revenue by aircraft type for Q4 ’17

Of this revenue, based on fleet size and aircraft type mix, it appears that American Airlines contributed approximately $154mm, or 35% of the CA-NA service revenue in 2017.

How much revenue does the American Airlines fleet contribute to Gogo? It looked a little like this in 2017.
How much revenue does the American Airlines fleet contribute to Gogo? It looked a little like this in 2017.

Projecting out into 2018, and taking Gogo’s word of flat ARPA growth mostly at face value, delivers an interesting perspective. Gogo expects approximately 400 American mainline aircraft removed from the system. Another 250-350 mainline planes will convert from ATG to 2Ku.

Estimating Gogo's 2018 North American connectivity service revenue based on shifting fleets
Estimating Gogo’s 2018 North American connectivity service revenue based on shifting fleets

Net growth to the North American fleet is expected to be minimal. This results in a net drop in total revenue based on these estimates, in part because of the way the company will account for hardware sales (the company says “CA-NA revenue of $445 million to $485 million, of which approximately 20% is equipment revenue”; that suggests $372mm as a mid-point for service revenue).



For the airlines that set their own pricing – a position American converted to in January 2018 – the average revenue per aircraft (ARPA) is expected to dip initially. Gogo hopes that dip is short-lived, growing as the take rate increases. In this scenario it holds relatively steady for 2018, assuming any increase comes in 2019 which is in line with Gogo’s statements.

The other uncertainty in the revenue shift is based on how quickly aircraft are moved from one system to another. All 400 of the soon-to-be-Viasat aircraft will spend some time generating revenue for Gogo this year. The ATG-to-2Ku planes will also split their time on the two platforms. This model assumes an evenly paced rollout across the year. A 737 that is converting to Viasat service gets ARPA at 50% of the full year number on average. That is not accurate on an individual aircraft basis – conversions happen more in Q1 and Q4 than over the summer – but on average it should be close.

A breakdown of American's potential contribution to Gogo's revenue in 2018
A breakdown of American’s potential contribution to Gogo’s revenue in 2018

The net result here is a $30mm-ish hit to Gogo’s revenue in 2018 from losing the American Airlines aircraft. Overall, the company’s mainline ATG revenue is nearly halved based on this model. At the same time the 2Ku revenue component increases by some $75mm. That gain is offset by an expected $30mm increase in costs related to satellite capacity for 2018. The company also expects to have ATG-NG flying commercially in 2018, increasing ARPA on some RJs as increased bandwidth becomes available on that fleet.

The hope for Gogo is that into 2019 the take rate continues to increase, along with revenue per session. ARPA and total revenue follow from there. Holding steady in 2018 will be a good indication that is viable.

Reported in partnership with AirInsight.com

I'm Seth, also known as the Wandering Aramean. I was bit by the travel bug 30 years ago and there's no sign of a cure. I've been covering inflight connectivity, loyalty and the passenger experience for more than a decade with hands-on experience to deliver unbiased analysis. You can connect with me on Twitter, Facebook, LinkedIn and .