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A pair of recent earnings reports left open questions about just how many aircraft are generating how much inflight connectivity revenue. Both Gogo and Inmarsat clarified those positions, providing better context around their numbers.
Inmarsat’s ramp up to collect revenue on its GX Aviation installs is a slow roll. The company only began realizing such revenue in Q2 ’18 on the first 50 aircraft. In Q3 ’18 another 20 frames joined the ranks of those paying (on an overall install growth of 30) to be online. Paying airlines now include Qatar Airways, Air New Zealand, Singapore Airlines and Philippine Airlines. The company also reported a nice boost in airtime revenue, hitting $3.3mm in the quarter, an increase from the $1.4 million the prior quarter.
The $47,000+ revenue per aircraft in the quarter is a significant jump from Q2 and bodes well for the company. With some of the aircraft coming online paying only during a portion of the quarter the annualized ARPA for these Inmarsat installs could top $200,000 once things settle. That is a strong number relative to the competition, though not necessarily tops. It is also something to keep an eye on as the other 250 installed aircraft join the ranks of those paying. Keeping that pace once fully active would put Inmarsat in a very strong position across the industry in terms of ARPA.
Full Fleet or Bust!
Gogo CEO Oakleigh Thorne cited a $300,000 annualized ARPA number for the international fleet installed prior to 2017 in his company’s earnings call. That strength is built mostly on the back of the Japan Airlines fleet which delivers complimentary connectivity to passengers. ARPA for the rest of the 2Ku fleet globally (CA-ROW) remains relatively anemic. Is this a function of the airlines involved? The pricing plans? The rollout progress? A follow-up conversation with VP Investor Relations Will Davis suggests that all these factors are in play.
There are different dynamics at work. Some of the new fleets we’ve installed have a lower ARPA until they get seasoned. The thing to keep in mind about ROW is that we’ve got a great lineup of international fleets that are starting to ramp up, including British Airways, Air France, KLM, Virgin Australia, Cathay Group. Those are world class airlines. Once we get those installed they’re ultimately going to drive revenue growth and ARPA. By continuing to add 2Ku aircraft, combined with the newer airline brands, we will be able to start growing ARPA on the ROW side. We see good trends ahead of us there.
Davis also highlights the difficulty of consistent passenger experience and airlines’ hesitance in marketing a partial deployment of the kit.
If we’re rolling out a fleet with 100 aircraft and we’re only done with 50 of them the airline won’t start marketing or launching the product. They want a consistent customer experience in terms of service availability. There are some timing difficulties but those will sort themselves out. Our biggest issue has been lack of scale and the only way to fix that is putting more planes in the air. We’ve got a big backlog of 2Ku and that’s ultimately a big part of fixing that problem.
Gogo’s position here is echoed by other suppliers and airlines alike. Lufthansa Group is the launch partner for Inmarsat’s GX offering; it has been flying the kit active for passenger more than 18 months now in some cases. But it is not fully deployed and that has slowed the marketing efforts. It is also one of the reasons cited by Inmarsat as to why Lufthansa Group is not yet paying for the service on board.
Spirit Airlines is also focused on delivering its new Thales-supplied Ka-band service on the A321 subfleet before beginning A320 installs. Spirit VP Sales & Marketing Bobby Schroeter explained earlier this Fall that getting a single fleet complete was critical to developing the sales channel for the product. Bundling of ancillaries is a huge part of the Spirit proposition and the company needs a full subfleet to make that work.
Full Fleet and Bust??
Not all airlines feel the same way, however. While full-fleet deployment is on the roadmap for Finnair and SAS the two carriers got aggressive in marketing their newly equipped wifi planes over the summer as the service launched, well before the Viasat kit made it on all the planes. Even with a half-complete fitting of the fleet the airlines were comfortable pushing the product.
The full fleet argument is also offset in part by Gogo’s deployment in Mexico. Aeromexio turned the 2Ku system on first and benefitted from a huge early marketing push on the platform. The Virgin Atlantic fleet is fully equipped (save one recent addition), mostly on the 2Ku platform. The company is advertising the product and it has been online a year now. GOL has its 737-800 subfleet online, too.
There is a very real possibility that, despite all the survey results claiming otherwise, passengers are simply not willing to pay for inflight connectivity at the necessary levels to generate the revenue.
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Hi Seth, you wrote “There is a very real possibility that, despite all the survey results claiming otherwise, passengers are simply not willing to pay for inflight connectivity at the necessary levels to generate the revenue.”
It seemed like you found the Inmarsat datapoint to be positive/encouraging? Are you reading through on the slow ramp and the lack of carrier urgency that they think there isn’t much demand?
Fair question, Brendan, and one where my thoughts are mixed.
I do think that the boost Inmarsat showed in its ARPA is impressive. I’m also not 100% sure how stable those numbers are given that the company is just starting to derive revenue from the system and less than a quarter of the installed frames are reporting so far. I’d say cautious optimism is a valid stance on that front. But I’m also skeptical that Inamrsat airlines are paying significantly more than Gogo airlines straight out of the gate. That would be a rather surprising development in the market.
And maybe I’m overly harsh on the Gogo numbers given the lack of full-fleet or even full sub-fleet deployment on many of the ROW carriers. I know the company believes that the tide is turning on the numbers.
But I really don’t see the paid consumer demand ticking up past 5-10% of passengers on any given flight. And with the ROW carriers generally flying longer stage lengths that’s fewer sales opportunities per aircraft. And then many overnight flights where the odds of purchase are even lower. I believe that passengers want the service. But I also believe they want it for free. Convincing sufficient numbers of travelers to pay enough to cover the costs of the kit remains an elusive goal and I don’t think the numbers are shifting sufficiently to change that position yet.