An end to cheap* WiFi for airlines?

Maybe it has never truly been cheap for passengers, but airlines historically took advantage of great deals from suppliers to secure inflight wifi connectivity solutions relatively inexpensively. As those vendors now seek financial stability more than market share a shift is underway. Is the era of cheap wifi over?

For several years suppliers struck deals that subsidized or financed the installation of the necessary hardware on board commercial aircraft to help secure customers and increase market share. The deals placed the capital risk on suppliers, leaving airlines relatively well motived to install and activate the hardware. Recent deals, however, moved away from such financial structures. Some blame the slow down in new airline contracts (2018 has been very light) on a lack of large carriers still in play. The cost to acquire and install the kit, combined with rising expenses elsewhere, is likely more to blame.

So long, subsidies!

Inmarsat is one of several providers now explicitly stating that it is not financing the installation of hardware for customers. The company announced “deals” with Garuda Indonesia and SpiceJet in recent weeks that follow this new path. A company spokesman confirms “no installation capex for SpiceJet and Garuda” as part of those deals. Also of note, those deals are not finalized. The contracts are not inked and the aircraft not included in the company’s installation backlog count.

Read More: Second-guessing the Garuda/Inmarsat GX deal

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Gogo arguably created the hardware subsidy model with its early ATG installs. It carried through to the 2Ku satellite market and some observers believe the associated CapEx burden a major part of the company’s balance sheet and financing woes today. Some existing contracts include those subsidies, a point Gogo is trying to renegotiate to help improve capital flow. In the company’s most recent earnings call CEO Oakleigh Thorne noted that some airlines are balking at the up front costs associated with managing the full system internally (the “Airline Directed” model) and considering a return to the turnkey approach where Gogo manages the system completely. Any alarms this may raise over a return to heavily subsidizing the installation costs are likely unfounded, however, according to VP Investor Relations Will Davis.

Speaking with PaxEx.Aero Davis suggests that a “true partnership” with airlines is key, where both parties incur costs but both also stand to benefit from the investment.

Ultimately we want to be able to partner with airlines and manage those subsidies… We have to be efficient with our capital and put capital in places where it can produce the best returns for us and our shareholders. We want to enter into attractive deals that provide a good service for our airline customers and allow us to make a return. Every airline deal is different. But the airline directed versus turnkey discussion is separate to some degree from these subsidies.

Similarly, Panasonic Avionics has long held that it does not want to play the hardware subsidy game. Global Eagle maintains a similar position publicly as well.

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Some still subsidizing??

Less clear in its position on such financing plans is Thales. The company’s deal with Spirit Airlines is rumored to carry a heavy cost exposure for the provider, though no one is sharing explicit details. Former InFlyt head Dominique Giannoni described the deal earlier this year as “well balanced.”He also admits that there is “some risk, but we see the potential.”

Read More: UON set to connect with unique business model

At the complete other end of the spectrum is the UON offering from Taqnia Space in Saudi Arabia. That service is a fully managed Ku/Ka solution offered by the vendor. But it is also an offering in which the vendor reaps all of the financial benefits. UON is buying access to passengers and their connectivity data with the hardware installations. The company will own that part of the experience rather than letting the airline own it. The true value of that data remains unclear, particularly against the high costs of installing and maintaining the on-board kit and the cost of bandwidth. The first UON-equipped aircraft is now in service, only about 6 weeks after initially predicted.

Even with these couple vendors still playing the subsidy game the shift is clear. Subsidies exist to grab market share. For most suppliers today grabbing additional market share is less valuable than being smart about capital.

Someone has to make some money in this space eventually. Right??

 

*It has never truly been cheap. At a quarter million dollars or more to get the satellite hardware on board the costs to fit a fleet are huge. And both the airline and the vendors were incurring parts of those costs.