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Consolidation seen as inevitable for inflight connectivity industry

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“How much blood do you have in your pockets? You’re bleeding out all this time. Everyone says, ‘Oh, it’s not a problem.’ But it is a problem. It is a real problem.”

That’s not the optimism and excitement you’re hoping to hear when talking to a senior executive from an inflight connectivity provider about the future of the industry. But this is the view David Bruner, VP of Global Communications Services for Panasonic Avionics shared during a frank discussion at the recent Aircraft Interiors Expo in Hamburg, Germany. Opining on the current state of the business, Bruner said, “One of the things we don’t talk about in our business very much is that nobody is making any money,” and also the necessary investment to get from here to “there” where things might stabilize and even become profitable. He appears reasonably convinced there will be more bloodshed before the industry reaches that point.

The success of these connectivity systems hinges on volume. Getting the per bit price low enough depends on significant volume discounts on contracts from satellite operators. Getting the management, maintenance and operations budgets low enough depends on amortizing many of those costs across thousands of installed aircraft, not just hundreds. And, perhaps most significantly, getting the necessary coverage and capacity in the sky depends on stimulating sufficient demand to justify the launch of satellites which cost hundreds of millions of dollars each. “You won’t have everyone going out to build global networks; not many people can lose that much money,” said Bruner.

His comments suggest that simply being a conveyor of bits and bytes is not a long-term recipe for success. And diversity and consolidation in the industry so far seems to bear that out. The acquisition of LiveTV last year brought a number of low-cost IFE and connectivity services into Thales’s premium IFE business. Gogo is branching out in its business model including with a recent Crew Connect announcement which will put a messaging platform into any aircraft to drive operational efficiencies.

Crew Connect is optimized to run on a Gogo-connected plane, naturally, but “Crew Connect is also available to airlines with alternative connectivity suppliers”, indicated Andrew Kemmetmueller, Gogo’s new VP of Airline Operational Services and Platforms. Even in the Panasonic suite of products the connectivity platform might not be the profit center. But the Ku-band link helps provide “more cost effective line maintenance. It can provide higher reliability on our IFE systems and help us win business in that category and that really helps. We’re a bit of a loss leader right now,” said Bruner of the embedded IFE giant.

Further consolidation is seen as all but inevitable. Noting that there are “too many suppliers not enough airlines basically”, ViaSat director Don Buchman said the paradigm is “very similar to the mobile telephone market 10 years ago. You had a lot of regional players, even in the US. And the name of the game was, the metric was, subscribers, and now the name of the game is how many airlines you have. It can’t keep going the way it’s going, so I do agree that there will probably be some level of consolidation in the market.”

Buchman demurred in offering firm predictions, but admitted “there’s definitely some battle fields” including the crowded Ku connectivity provider space, which sees Panasonic, Global Eagle Entertainment and Gogo duking it out. There is “three in Ku and two in Ka” (ViaSat and Inmarsat with its providers), notes Buchman, “and we’re both aiming at the same spot in 15 years which is global high capacity. It’s going to be interesting.”

He insists, however, that ViaSat is different than the others, as it also serves residential. “I don’t need to continue to make airline deals to keep the pipeline going. We’re in it for the long haul.”

Bruner, meanwhile, expressed skepticism at the long-term viability of some current pricing models, noting irrational competition as “everyone is trying to make a name for themselves”. Maybe per bit pricing will stabilize or costs will come down so there are better margins to be had, but Bruner did not have a specific timeline nor budget in mind, “It takes a LOT of money and a long time to get enough aircraft under the network that you can start to break even and see profits.”

He acknowledged that his message was a bit of a downer overall but he’s not ready to write the industry off. Even though Panasonic is a loss leader in connectivity right now, Bruner said, “Fairly soon we should break even,” though he would not offer up specifics on a date or number of aircraft needed in service to get there.

Featured image credited to istock.com/shironoso