Gogo has set its sights sky-high — literally. The company, which went public two years ago, provides wireless Internet connectivity to 2,100 commercial airplanes and more than 6,600 business jets.

Gogo also has set its sights sky-high figuratively. It currently serves about 20% of the world’s commercial and business-jet aircraft, so there is a lot of room to grow.

That’s particularly so in its non-North American commercial segment, where its penetration is low — that arena generated just $2.1 million in revenue last year, out of $408 million for the whole company. North America was profitable, to the tune of $89 million, much of which is being plowed into bolstering the rest of the world. On a consolidated basis, Gogo took an operating loss of $51 million.

Norm Smagley

Norm Smagley

Long-term, the company’s revenue vision goes way beyond its current Internet connectivity, in-flight entertainment, and texting services, notes CFO Norm Smagley. The company is deep into R&D to create “connected aircraft” with enhanced operational and safety features. There, even the sky might not be the limit. “Maybe the biggest challenge I’ll have is counting the money,” says Smagley with tongue in cheek. “We will have a very long growth phase.”

The company, which historically was primarily a provider of satellite-based telephone service for private aircraft, connected its first commercial airliners in 2008. Smagley sat down with CFO to talk about what future growth will look like. An edited version of the discussion follows.

What’s your revenue model?

On the commercial aviation side, we charge the passengers directly for the use of WiFi. They have multiple possible ways to buy the service — by the hour, by the flight, for a 24-hour period, or they can get a monthly or annual subscription. We collect all the revenue and pay a revenue share, averaging roughly 20%, to the airlines. The airlines also pay us up front for the equipment.

For business aviation, including fractional aircraft owners, we get service revenue by way of monthly subscription fees, as well as equipment revenue.

How do you figure out where to set the pricing of Internet connectivity in order to maximize your revenue?

We started out with a very simple pricing methodology. We had six mileage bands, and within each band everyone was charged the same amount for a session. And all the pricing was session by session.

We’ve created a revenue management group by hiring some people from the airlines, which as you probably know have a very sophisticated revenue management discipline for pricing seats on different flights and at different times. We now have a much more sophisticated pricing methodology that’s based on city pairs. For example, if you’re flying from Atlanta to New York you’ll pay one price, but on a flight from Chicago to Orlando, which is approximately the same distance, it’s a lower price.

The difference is that in the former case there will be a much higher proportion of business travelers who will want to use the service for business, whereas the flight to Orlando will have a lot more families going to see Mickey. We adjust the rates to capture the population on the plane, much the way the airlines price their own product. And it’s working — we’ve had seven consecutive quarters of revenue growth.

Where will continued growth come from?

For business aviation, we’re about 12% to 13% penetrated for air-to-ground broadband. So we have significant room to grow by capturing additional planes, and also by adding services such as in-flight entertainment and texting.

For commercial aviation, North America and the rest of the world are in very different positions right now. In North America we’ve captured roughly 60% of the 5,000 planes. We expect to install about 375 additional aircraft this year, so we will see some increase in plane count. There are 13,000 planes in the rest of the world, so we have a tremendous opportunity there that will take several years to nail down.

But the primary driver will be additional services. And that also breaks up into two [categories]. One is passenger-oriented. In addition to further penetration of WiFi service, [airlines can offer] additional services such as Gogo Vision, our wireless in-flight entertainment system, so passengers can watch movies that we stream to them. We’ve also introduced texting. And we’ve got advertising and e-commerce solutions that generate eyeballs on a retail basis, and we get paid for that.

Then there’s a relatively new concept, which is the connected aircraft.

What’s that?

It’s connectivity for the crew, the cockpit, and the aircraft itself. There’s a huge revenue opportunity there on a per-plane basis, as the airlines want to improve their efficiency and safety.

What improves safety?

I’ll give you a perfect example. I was on a flight to Germany last week. We took off from Newark, went out about a half hour over the Atlantic and there was a hydraulic problem, and the plane had to turn back. Fortunately there was not a crisis, but there could have been. If the plane had been hooked up with sensors in its hydraulic system, and those sensors were connected to aircraft operations on the ground, they would have known on the previous flight that a hydraulic problem was about to occur, and that plane never would have taken off.

They don’t have that now, but connecting to the aircraft when it’s monitoring not only the hydraulic system but also engine performance, brake systems, and a myriad of other systems would give ground operations real-time information on how the plane’s performing before a problem actually occurs.

And not only could they fix it before it breaks, but when a technician is sent out to the plane he would know what needs to be repaired and bring the right parts and tools with him, instead of having to make a couple trips.

Now take it up a step to the cockpit. Everyone has seen a pilot walking onto a plane carrying the big leather bag filled with operating manuals, aeronautical and navigational charts, weather information, and pilots’ documentation and licenses. Although they’re not doing that much anymore. They use tablet computers and electronic flight bags instead — and we can wirelessly update them. Very few of them are connected during flight to receive real-time information that could affect some of the decisions that pilots make.

You mentioned connectivity for the crew in addition to connectivity for the cockpit. Is there something else?

Most recently, we announced a new crew-messaging service called Crew Connect. It allows crews to communicate by voice or text messaging with each other and with ground crews. It’s available on Android, Apple, and Microsoft devices that offer group messaging, event-based alerts, multimedia messaging, and message tracking. The only other way for cabin crew to communicate off the aircraft is through traditional flight deck voice or datalink (ACARS) systems, which have historically been difficult and expensive to use.

Also, when passengers swipe their credit cards to buy food, drinks, and other items, those can be live transactions over the Gogo connectivity system, and the airline pays us for that. Currently when cards are swiped in the air, the transaction isn’t processed until the aircraft is back on the ground and connected at the gate. Real-time credit-card processing helps airlines streamline operations.

Does the connected aircraft offer anything for passengers?

Yes. It further cements the relationship between the airline and the passengers. Say, for example, that you just made the plane — you literally got to the gate the minute before they closed the door. You’re wondering if your bag made it aboard. If you’re on Delta, we would white-list delta.com so you could get on the site for free, you could check to see whether your bag made it, and Delta would pay us for the capacity you use to do that.

Now say you’re on the tarmac, and the pilot announces that the plane is delayed for two hours. You have to make a connecting flight. You could get online and check that flight, or rebook right then instead of making a mad dash around the airport after you land.

Think about it — right now, you have multiple interactions with the airline before you get on a plane. You can check schedules, you can check prices, you buy your ticket, you get your seat assignment, and you sign in. But once you get on the plane, it’s radio-silent. You’re sitting right in their lap and they can’t reach you, and you can’t reach them.

So a lot of this is still in R&D?

A number of those technologies are. We’re working with our airline partners to create products and services that help them achieve operational goals and enhance the passenger experience.

How long do you think it will be before Gogo is profitable on a consolidated basis?

We’re only about three years into investing in our rest-of-the-world segment. As you can imagine, building the infrastructure for a large global business, including developing the technologies and rolling out the people to support that, is not inexpensive.

There is no ecosystem to support this business. If you look at, say, a standard telecom, it can call a number of different suppliers and order the equipment for cell phones and towers, or equipment for their data centers or whatever they need. We have really had to design and develop whatever we need. We outsource our manufacturing, but we’re heavily involved in the design and development of all our technology and our hardware. Because of that, we have a lot of people. Our overhead is people. There are over 800 right now, compared to 300 when I joined four and a half years ago.

How is your in-flight entertainment system better than the seat-back systems?

Most planes in North American are narrow bodied. Most of them don’t have much in terms of entertainment systems, because the seatback systems are very expensive and very heavy, so they’re not cost-effective. Anyway, how many times do you want to watch reruns of “How I Met Your Mother”? We figured there was a real unmet need. As long as you have a phone, tablet, or laptop that’s WiFi-enabled, you can watch a movie.

Same thing goes for texting — we felt a need. The average cost of a Wifi session is $11. There’s a subset of consumers, particularly young people, who are not going to pay that. But would they pay a couple of bucks for a texting session? Absolutely.

How did your IPO go? Were there any wrinkles?

We did one thing that’s not too common. We have unique accounting for our equipment transactions, and because of that I decided we should go through a pre-clearance process. So before we filed our S-1, we had the SEC review our accounting for those transactions, and they signed off on them. Then when we filed, I think we got a total of three comments on the financials, which is unheard of. It’s more typical to get 100 questions. The pre-clearance made the S-1 process much more efficient. We could really focus on disclosures and the legal requirements rather than what the financials looked like.

, , , , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *