What good is having an inflight wifi connectivity product if no one is using it? For the past few years Gogo worked to keep take rates on its platform limited. Prices were high, in part, to dissuade casual usage as capacity in the terrestrial network was stretched to the breaking point. Today CEO Michael Small describes the company as at “an inflection point in terms of bandwidth. Our bandwidth allows us to engage more users whether that’s passengers, pilots or crew.”

With hundreds of aircraft now carrying the company’s satellite-based connectivity solutions (and all that extra bandwidth) Gogo is pushing the take rate message hard. And prices to passengers are coming down to help drive that trend.

From scarcity to abundance

The dropping per-session costs are tied to a shift in how the on-board connectivity is paid for and marketed by the airlines. The majority of Gogo’s airline partners operate on what the company calls a “turnkey” model. In this configuration Gogo sets the prices and shares revenue with the airline. Those rates were kept high, in part because of the limited bandwidth available. A significant shift is underway to the “Airline-directed” model where the carrier pays Gogo per session consumed but gets to set the price and keep any profits generated. The airline-directed model represented 10% of the Gogo-equipped fleet at the end of 2017. It is expected to be nearly half by the end of 2018, largely driven by international carriers with some North American aircraft (e.g. AA’s fleet) dabbling in that space.

We actually view the airline control of pricing is a good thing. They are likely to put more marketing dollars behind this, increase distribution channels. We believe this will drive take rate upward over time. – Gogo CEO Michael Small

The lower session costs are good for consumers, but it puts pressure on Gogo’s revenue stream. That revenue will be further pressured by American Airlines deinstalling some 400 ATG4 aircraft this year, migrating to Viasat‘s Ka-band kit as previously announced. Fortunately the satellite-fitted aircraft are generating significantly more revenue than their ATG brethren.

Gogo will drop ~650-750 ATG mainline aircraft while adding ~250-350 2Ku aircraft in the North America market. The ~$90,000/year revenue premium those satellite-based aircraft drive helps offset the loss in total aircraft numbers. Gogo expects service revenue YoY in North America to remain flat as the satellite conversions make up for the loss of ATG aircraft in the fleet.

Outside the North America market the airline-directed approach is even more pronounced. Japan Airlines is Gogo’s “biggest success story to date” regarding the ability to convert to higher take rates and higher corporate revenue per Small’s comments in the earnings call. British Airways is pursuing a similar plan with its long-haul fleet, though not entirely without troubles. The carrier has struggled to get its portal and payment process to a stable, reliable offering in recent months (based on my personal experience, conversations with cabin crew and other online reports).

Line-fit Progress

Gogo updated progress towards line-fit offerability with three aircraft manufacturers during the call. With Bombardier‘s CSeries line the initial Delta Air Lines deliveries are expected later in 2018 and will come with 2Ku and Gogo Vision Touch installed at the factory. Similarly, COO John Wade notes that the company is “on track” for Airbus line-fit approval and expects “to see our first Airbus line-fit orders in the first half of 2018.” On the Boeing front Gogo expects that the 737 MAX will be the first type where 2Ku is a factory option, with the initial delivery coming in 2019. Wade also reiterated the idea that the 737 MAX line-fit work will carry over to other aircraft lines, similar to what is expected at Airbus.

Getting to line-fit is a significant milestone and should help Gogo secure more airline deals; recent moves from Aeromexico and Iberia show the value of a factory-delivered installation to the airline. Those are airline customers that recently added Gogo to their fleet but chose other options for new deliveries in large part because line-fit was not an option.

ATG: The Next Generation

Gogo’s ATG-NG platform continues its flight testing over a 10-cell network in the Midwestern United States. The company says the technology is on track for nationwide coverage and commercial availability later in 2018. Upgrading the cell sites to support the ATG-NG service is expected to cost the company an additional $25mm this year, with some potential rollover into 2019 as some coverage “fill-in” sites are built.

It will come down to STCs and installation dates on whether the [ATG-NG] aircraft are in service this year. But we’re going to be actively out there selling it. And we believe it will be a hot seller. So the aircraft will follow behind very quickly. – Small

Controlling Costs

Gogo executives acknowledge that the company’s debt costs are high and that it will “continue to monitor opportunities” to refinance that debt. At the same time the company believes that its cash position is stable, even as the rules change how it accounts for “co-investment” hardware installs where Gogo is financing the kit for airlines. The shift towards more turnkey installations could help on that front as well.