Premium #197 – Aircraft Connectivity

The move to e-Enabled aircraft has started. There is no turning back and the future is really about how to extract the maximum benefits from the technology. As we have written before, e-Enablement is really all about connectivity. Absent connectivity, the promise of e-Enablement is sub-optimal. The next generation aircraft, starting with the 787 and A380, are vastly complex pieces of equipment, no airline can operate them without processing the data these aircraft generate during and after each flight. A recent visit to GoGo in Chicago underscored the crucial importance of connectivity to the future of airline operations. While the GoGo system has been built on the proposition that passengers need and want in-flight connectivity, it has been a long road to positive ROI. Even as in-flight connectivity has proven to be highly attractive to air travelers, too few are willing to pay for it. Indeed, even as GoGo has increased prices, passengers grow more used to free Wi-Fi at airports and coffee shops. The only time that GoGo sees its network “maxed out” is during the holidays when the service is sponsored. We understand from GoGo that their latest data shows the passenger service is now revenue positive. However, the infrastructure that supports the service is expensive and still being built out. The capex is growing faster than usage, in our view. Service revenue for nine months is up 30.5% over last year's equivalent, while their operating loss improved nearly 16% but the net loss grew 22%. GoGo pointed out that even as they are moving to Ku satellites they keep adding to the ATG system because, they say, so many aircraft still need it and are not going over water. So where does GoGo (and others in the connectivity business) see the future? It is almost certainly satellites and vastly larger bandwidth. Take a look at this chart. The future seems to be on Ku, even though Ka is faster. Is Ku the smartest choice among the options? GoGo has first mover advantage and now has the largest connected fleet by far. This is no idle boast. GoGo focused on ATG and built up a large fleet within North America. It is today delivering bandwidth to all the large US airlines. As these airlines look forward, and they start to demand satellite coverage, GoGo may be the simplest solution. Take a look at another chart. First mover advantage is real. Our focus in this story is on where airline flight operation communications demand is going. Currently aircraft typically communicate using ACARS. ACARS is the acronym for Aircraft Communications Addressing and Reporting System. The system is designed for short messages to be sent to and from aircraft. It was first developed in 1978, and in technology terms, can be described as old. It worked fine as long as the data transmissions were small. But as we move to e-Enablement, ACARS is going to be too expensive to handle the data transmissions. GoGo recognizes that their future is driven more by what happens on the flight deck than in the passenger cabin. One airline that has publicly stated its views on flight operations value from connectivity is Norwegian. This airline uses Global Eagle (formally Row44) and is also satellite based. As airlines move to cashless cabins, and need to ensure the lowest credit card defaults, connectivity is what ensures the least fraud. Airlines do not like to discuss this issue, but for expensive duty free sales on international flights into certain parts of the world, this is a noticeable cost. Korean Air has reportedly used ACARS to verify credit card purchases of high value items in-flight. They are probably not alone. Airlines also see another value in the cabin in terms of cabin crew using the connectivity to provide better passenger service. Being able to access a passengers’ information should allow for better service – we cannot see this being useful beyond premium passengers. However, among the premium travelers, the ability to make interactions more personable could have an impact. The impact may improve loyalty, but probably has no immediate revenue benefit. The two above cabin related items really only de-risk credit card sales and make premium customers feel better. This is not going to be a big revenue driver. Just like adding IFE, adding connectivity is not something competitive airlines can avoid. So what can airlines do to better exploit connectivity? Clearly the better it is exploited, the more value can be derived and that value turned into lower costs or better revenues. Behind the cockpit door there will be real and significant impacts. This, in our view is where the deep value resides. Aircraft health management – e-Enabled aircraft communicate with the ground. Currently most of the data downloads and uploads occur at the gate. That works for now, but the ability to move decision support data via satellite is very attractive. An example is aircraft health management. This exists on the 787, A380, A350, C Series and E2. It is likely to also be added to the A320neo and 737MAX. Embraer even has a simple version on its current E-Jets which we have seen at work and it is impressive. The ability for an airline to use big data and predict a part failure with sufficient time to effect a repair between flights is measurably valuable. The general thought among industry is that an airline minute is worth ~$150. Taking a delay can be a serious financial impact - a ten-minute delay could be the difference between making a profit or making a loss on a flight by a single aisle aircraft. In a business with low margins and numerous exogenous factors that disrupt operations, having predictable maintenance and a stable schedule is highly valued. Deploying and then exploiting broadband connectivity is a “no brainer” for aircraft health management. Indeed, as Embraer once described to us, the E2 will be a “node on the network.” This is not just a vision; it is where the industry is going. Real-time weather – probably the biggest exogenous impact on airline operations is weather. Even if it can be predicted with some confidence, it changes. This is especially the case on long haul flights. The weather charts issued via paper or EFB to crews are outdated within hours of departure. On a 12-hour flight, routing needs to be modified to optimize fuel burn and flight times. Bear in mind that an A380, which routinely flies such stages, costs over $26,000 per hour. Think of savings in terms of how many seats this is worth – saving even $5,000 by more efficient use of tail winds or better altitudes to minimize headwinds adds up fast. The best way to keep crews updated is to be able to feed them regular weather updates via satellite. Currently pilots on routes communicate with each other about en-route weather. But this is, at best, a work around. Micro climate changes occur and what one crew experienced even 30 minutes ago may not apply when the next flight goes through that air space. Once again the case for exploiting broadband access is a no brainer. Navigation – in the United States we are seeing to steady move to NextGen. Once again we have the promise of better technology to improve industry efficiency. Faster flight times via more direct routes are supposed to cut costs in fuel burn. This system requires a very large amount of data to be processed on the fly to ensure the system remains safe and aircraft are kept apart from conflicting air space. Not to get into any of the minutiae, the promise is big and the FAA has struggled to get the program to move forward. But it will move forward because airlines are constantly seeking lower costs of production. Provided safety is not compromised, better use of air space is a winner. And we believe the system will demand high bandwidth to ensure the data flows fast and effectively to all air space users. ACARS will probably not be up to this demand, but broadband will. Then there is the item that is rising faster in decision making within the industry than probably any other – cyber security. It is crucial to protect the movement of data between aircraft and the ground. e-Enabled aircraft and the other items listed above clearly require this to function effectively. ACARS was developed in a time where this was not an issue. ACARS is not secure and we don’t see it being made secure. So even as the argument in favor of all the modernization are made it should be clear that going forward the industry has no option – it must move towards broadband, which is more easily made cyber secure. Even if the data flow is via ATG as opposed to satellites. Having made the case that broadband is necessary, let’s look at the vendors. The MH370 disaster still resonates within the industry. Inmarsat, as a major satellite provider, offered to help airlines track their aircraft in flight at no cost. This was not a decision based entirely on doing the right thing. Foot print is crucial and if an airline starts to use Inmarsat, it is likely to use the service for its broadband requirements as well. Offering airlines to track aircraft for free was a very clever move. As GoGo demonstrated recently, there are large parts of the globe where satellite coverage is weak – the yellow bands and higher and lower. Around the two poles there is poor coverage but only about 2% of flights use polar routes. This applies to both Ku and Ka satellites. Other connectivity vendors such as ViaSat are developing a series of Ka band satellites. While much more powerful than Ku, there are few of these aloft. There are about 180 Ku satellites compared to five Ka. For airlines seeking rapid deployment and quick access to the benefits of broadband, the one would think focus has to be on Ku. Yet as Inmarsat explained to us, they have three Ka satellites aloft now that cover the entire globe. Moreover they have a fourth nearly ready for launch as a backup. Unlike the Ku satellites, the Inmarsat Ka vehicles are designed to serve aircraft and ships. The Ku vehicles are not; they are typically satellites used for TV and some bandwidth is used for airlines. The Ku signals are weaker and not easily focused. Ka is much better for commercial airline purposes. However, first mover plays into the hands of GoGo. Having pioneered ATG and built up its fleet, many airlines could move forward with GoGo. With ten airlines, GoGo has over 6,000 aircraft deployed using its broadband solution. Indeed, GoGo has signed up another 550 aircraft for its 2Ku solution in the past 15 months. This makes the competition that much harder for the likes of Global Eagle and Panasonic. Fortunately for GoGo, its largest airline customer is Delta Air Lines. The airline uses the current ATG system to sell connectivity to passengers. But it is also using the service to run its cashless cabin. It is no surprise that Delta is among the 2Ku customers. Delta is seen as a leader in deploying technology to extract value. It has been slow to buy new aircraft, and using technology like connectivity enables the airline to make operational decisions that ensure efficient operations that is close to or better than its competitors. Delta is a poster child for the exploitation of broadband – the airline has even added the feature to its regional jets. Many smaller airlines do not have the resources to study and evaluate broadband options. Some will look to the choice made by Lufthansa (Inmarsat) – the airline has long been among the industry’s most influential because of its painstaking research and testing. British Airways also selected an Inmarsat solution. But the system deployed by BA will be ATG and limited to 4G. Does this mean Inmarsat is the most likely future satellite provider for BA as well? One would think so, but it’s not certain because BA has not announced a decision. Similarly, Singapore Airlines is offering a solution from SITA that exploits Inmarsat. The Ka user base is also growing. The race to offer airlines compelling broadband is tough and growing tougher. As we have seen on the ground, market share means a lot. The infrastructure required is expensive and therefore every provider needs to add as many aircraft as they can to ensure the unit costs drop.

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