Probably not right away, but there are some naysayers out there who are questioning the long-term viability of the service and putting it is questionable company – namely Connexion by Boeing – in terms of viability. That cannot be good.
First, a quick recap. Gogo is the brand name for the in-flight Internet service provided by Aircell. They have gear on planes in the American Airlines and Virgin America, with Delta and United having announced plans to put the gear on their planes in the very near future. So with such great market penetration, how could they possibly not be destined to succeed? Easily, it turns out. There are significant questions as to just how many people are paying for the service and whether it can turn in to a profitable business model.
One pundit/Analyst is now openly questioning the same thing that many have been quietly suggesting since the service and the rates were announced: Will enough people pay the asking rates to make Gogo go?
On a American SFO-JFK afternoon flight last October, we decided to walk the plane and count the number of users: the result was 8 out of 34 business and first passengers were using it, but only 2 out of about 110 economy passengers. I’m sure American is pleased with this – since the high revenue customers at the front of the plane are happy, but the amount of money flowing to Aircell is far from enough to pay for the network. We understand that to date Aircell has installed the equipment for free, so the only cost to the airline is the fuel to fly it around.
Based on the usage levels we saw, gross Aircell revenue is probably only ~$60K-$80K per plane per year, less even than the $100K seen by Connexion-by-Boeing back in 2006. Connexion had many of the same characteristics – giving away equipment, a high fixed cost network (in that case global satellite capacity leases rather than a national tower network), a large staff, and was also a great service for passengers and airlines.
OK. First off, a single flight is NOT statistically significant. I get the difference. But there are still a lot of open questions:
The carriers have no real stake in the efforts. They are putting the hardware on their planes and paying a small amount of extra fuel costs to fly the gear around, but they can more than cover that in goodwill benefits from being able to advertise that they have the service. Aircell is on the hook for the costs of the hardware for each plane they equip and they are taking all the risk there. This approach is pretty much identical to that which LiveTV is taking with their implementation on the Continental fleet. Both are very high risk to the technology company and very low risk to the carrier.
Then there are the costs to consider. LiveTV’s internet solution is very limited but also free to passengers. At least at that price you can’t really complain about what you are getting. When you’re paying for the service ($10 on a short flight or $13 on a long one) then you are actually going to care about the performance. All indications I’ve seen to date suggest that the performance is pretty good, but there is still some risk there. And for a very frequent flier the costs of remaining connected are going to be pretty high. At one point there was a rumor that Boingo was going to team up with Aircell to provide roaming coverage on the in-flight service, but that has yet to pass. Maybe a monthly unlimited pass for $40 would help for the folks who fly a lot. But there is still some pricing pressure on the service that would cause me concern if I were running their shop.
I’m reasonably convinced that the value in in-flight internet is based on a flight duration metric that isn’t really met in the domestic US market, at least not in high volume. Yes, there are more commercial flights in the USA than in just about any other region in the world, but the flights are generally short. Short enough that it is pretty easy to remain otherwise entertained or working without coughing up $10 for 45-90 minutes of internet access. Even on an expense account that is hard to justify. There just aren’t enough transcon/mid-con flights with enough people willing to pay for Internet on them. That’s my completely made up market research.
And, finally, there is the limited coverage area. Right now the Gogo service only covers the continental United States. That is pretty limiting. Runway Girl is reporting that Aircell is looking at overseas options, but in the same post she mentions that AA isn’t convinced that Aircell is the correct solution for their fleet-wide deployment. Uh-oh.
Another failure of an in-flight Internet provider could prove catastrophic to the whole concept. I really don’t want to see that happen, as I believe that there is value in being able to provide such connectivity to passengers. Much like Tim Farrar, however, I worry that the high Cap-Ex costs will outrun the low revenues too quickly and the providers will continue to strike out in their efforts.
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