Normally a deal to upgrade the hardware on nearly 140 of a customers’ aircraft would be seen a a big win. Alas, for Gogo that deal – more than 130 American Airlines planes migrating from ATG to the faster 2Ku satellite-based solution – is notable not because of what is converting, but because of what is not. In a combination of releases from Gogo and ViaSat it is clear that the latter is the big winner in this latest chapter of the saga which became public in mid-February when the airline filed a lawsuit against Gogo to move negotiations forward on this front.
ViaSat was the potential winner when that suit was filed, with 200 of AA’s older 737s set to have the ATG kit removed and the Ka-band satellite system installed. In the intervening months there has been much speculation as to how the scenario would play out. For ViaSat the confirmed win is not quite as large – rather than 200 737s it gets 100ish 737 MAX aircraft – but the potential is huge. The first of AA’s 737 MAX is expected to be operating with the ViaSat kit in September 2017, pending delivery of the aircraft from Boeing and receipt of the STC for operation from the FAA. For the latter it is expected that efforts by ViaSat to achieve STC on the El Al 737s will translate well to the MAX fleet once they are issued.
The delivery timing allows the AA planes to take advantage of the pending ViaSat-2 launch scheduled for January 2017, with entry in service expected 3-6 months after that. The new satellite adds a significant capacity boost and also increases coverage from the current CONUS-only to include most of the Caribbean, as far south as northern South America. The expanded coverage area should include all of AA’s 737 routes, at least as they are filed today.
American already has a mix of providers for connectivity, with Panasonic hardware (an reportedly a mix of Panasonic and T-Mobile ISP services) on the long-haul fleet where wifi is available. Adding a third vendor to the mix brings it closer to United’s approach of multiple vendors across various fleets. So long as the sub-fleets are large enough that the management headaches are mitigated this is likely a good thing from a flexibility and pricing perspective in the back office. But it also raises a number of passenger experience challenges, hurdles which United continues to struggle with. Eventually this sort of arrangement will be trivial for airlines to deploy, but it is not there yet.
While signing this deal with ViaSat, American also signed a new deal with Gogo. That deal will see 430 AA aircraft, mostly regional jets, keep the ATG/ATG-4 hardware on board. It also covers the 130+ planes migrating to 2Ku. But there are 550 other aircraft which American has the right to de-install at its convenience. And Gogo, per its 8-K filing with the SEC, expects that will happen.
[A]pproximately 550 Gogo-installed mainline aircraft that are currently under contract with Gogo pursuant to the Existing Agreements are subject to deinstallation at any time at American’s option. While we cannot predict with any certainty when and with respect to which aircraft American will exercise such option, we currently expect that the option will be exercised by American with respect to a significant portion, or potentially all, of such approximately 550 aircraft from time to time over the next several years.
There’s more in the filing which is not especially good for Gogo. The 2Ku commitment includes several termination options, including delivery schedules, a flat fee or simply the end of three years. Given that prior contracts were more commonly 5-10 year affairs the shorter duration of this commitment is notable.
— Seth Miller (@WandrMe) June 3, 2016
This AA deal is also the reason that Gogo pulled its planned half-billion dollar bond deal off the table late last month. At this point it is unclear if a new filing will be made for similar financing or not. The proceeds from that deal, after covering the old debt it was paying off and other fees would have been about $150-180mm. That’s a lot of cash to finance growth, hardware manufacturing, and transponder time on satellites to fuel the 2Ku platform. While the additional 130+ aircraft in the 2Ku backlog is good news and may require additional funding, it is not clear that the bond issue – particularly at such a high interest rate – is now necessary to get there.
Winners and Losers
For passengers it is also mixed news. More planes with more bandwidth is a good thing. The potential for mixed portal environments, inconsistent pricing and challenges with monthly plans are bad things. Virgin America seems to have mostly figured out the portal part but there are still pricing challenges. Just want access for mobile messaging? Gogo can do that (at a significant discount to the full access options) while ViaSat does not currently offer such a plan. And there’s also the challenge of the extended rollout schedule any changes like this will require.
American gets to play the field, testing 2Ku and Ka on relatively large subfleets with the ability to switch aircraft more or less at will from one to the other. And drawing a few hundred planes off the ATG network should actually improve performance for those still flying.
ViaSat wins with a new customer on the books and a solid commitment of aircraft, though there is the challenge of getting the STC and eventually line-fit offerability of the product. It also has to only deliver on a relatively small number or aircraft initially, at least based on the confirmed MAX plans; only 40 are set to be delivered by 2020.
Gogo, while losing overall, doesn’t lose quite as badly as it could have. The commitment, albeit a small one, to 2Ku is a nice offset to the potential for 500+ aircraft to leave its books in the near future. And maybe the 2Ku will perform at the right price and performance levels that some of those 500 convert rather than depart. But it’ll be a year or more before we know for sure.
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