Gogo Inc. pitches revamp for service in the sky
‘The business model has to change,’ firm’s CEO says of inflight connectivity service
DALLAS— It took a mere decade for surfing the internet up in the air to shift from novelty offering to essential service. Yet for Gogo Inc., the largest provider in the field, selling an amenity that almost everyone wants has, oddly, become a business that stinks.
The company operates two units, one focused on business aviation and the other on commercial airlines. The latter has brought Gogo a slew of fiscal and operational headaches. Its stock has plunged more than 50 per cent this year, hitting a record low July 9 after Guggenheim Partners cut its estimates for the company, which in May tossed out earlier assessments pending a comprehensive review of its business strategy.
Even worse, Gogo is shadowed by about $1 billion (U.S.) in debt and has become a favourite of short sellers, who hold 60 per cent of its share float, according to financial analytics firm S3 Partners. A muchanticipated announcement of a planned company revamp failed to sway markets Friday as GoGo fell 8 per cent to $4.43 in morning trading.
In many respects, what the product’s airlines and millions of their customers want — web access that’s as fast and simple — was built on a business model that no longer works. For years, carriers managed to pay almost nothing when they agreed to equip aircraft with Wi-Fi as Gogo and others raced to sign up as many customers as possible. It was the classic “spend-money-to-make-money” proposition, but the money-making has typically fallen short, especially for Gogo.
“Most of the competition has the same problems we do in that they’re running losses on this business,” CEO Oakleigh Thorne said Thursday. “And in our conversations with airlines, they are very focused now on their inflight connectivity and they realize that that business model is not sustainable. And if they want to still have quality inflight connectivity providers, then the business model has to change.”
Thorne, a private equity investor, is Gogo’s largest shareholder with an almost 30-percent stake worth $125.7 million. He took over in March when Gogo’s board jettisoned former CEO Michael Small.
Gogo’s future hangs very much on the success of its 2Ku satellite broadband service, an upgrade from the far slower ground-based system that has bedevilled millions of air travellers. But the initial installations at Delta Air Lines Inc., the largest customer to date, and other carriers came with glitches when de-icing fluid sprayed onto aircraft this winter seeped into the Gogo domes, marring its service.
U.S. restrictions on sales by Chinese telecommunications company ZTE Corp. also weighed on Gogo, which had planned to purchase equipment from the company for its next-generation air-to-ground system. The Trump administration has softened aspects of its curbs on ZTE, and the firm is working to comply with U.S. rules. On Thursday, Gogo announced it’s considering splitting into two companies, although Thorne said he views the airline and business aviation units as highly complementary. The board wants to explore whether shareholders might benefit if it pursued “any of the suggested relationships or transactions or others suggested by third parties or conceived by management and its advisers.”