The embryonic In Flight Entertainment and Connectivity industry has been badly hurt by the Covid-19 pandemic. No flights mean no passengers, and nobody to tap into aircraft-based broadband. Indeed, last week it emerged that Delta Airlines is contemplating offering ‘free’ WiFi on its US routes, and looking to trim its fees to its (current) main supplier Gogo.
A report from Northern Sky Research (NSR) says that normally in times of economic downturn companies that made acquisition, often at ‘bargain basement’ prices tended to do well out of their purchases.
“The Aero Satcom market was considered as one of the major opportunity verticals for satellite operators and service providers for scaling topline and improving profitability. But in the last 3-4 months, the Covid-19 global health crisis has changed everything, at least for the next 18 to 24 months, forcing stakeholders to shift from business scaling strategies to risk mitigation measures,” suggests NSR.
“In the last few months, the Aviation industry has become slimmer and with the ongoing pandemic, the trend is likely to remain for some time. Consequently, it is raising questions on the coexistence of all Aero Satcom players in the value chain. So, has this crisis finally unlocked the favorable Merger & Acquisition scenario leading to a consolidated IFC market?” asks the study.
“First, user market shrinkage is leading to loss in revenue opportunity. According to NSR’s Aeronautical Satcom Markets, 8th Edition report, the industry is estimated to lose $1.8 billion in retail IFC revenues (Service + Equipment) from 2020-2022 owing to reduced operations and revised load factors. In March 2020, overall Narrowbody Commercial Aircraft operations reduced by 49 per cent to 85 per cent, and Wide-body Commercial Aircraft operations reduced by 59 per cent to 88 permcent across different regions. The trend followed with multiple Aviation market exits and OEMs reducing their production rates. The impact is certain to flow to upstream players resulting in a capacity revenue opportunity loss of $1.1 billion from 2020-2022,” states NSR.
“And second,” says NSR, “distressed downstream players are treading water to survive. IFC is clearly a highly competitive market, particularly at the service provider level where most of the focus is on specialised Aero solutions. While satellite operators such as SES and ViaSat are witnessing resilient toplines owing to diversified target markets where Aero Satcom contributes <10 per cent of total revenues per Q1 2020 earnings, service providers are facing major and immediate challenges. For instance, GoGo witnessed >20 per cent drop in ARPA [Ave. Revenue per Aircraft] in Q1 2020.”
NSR says that looking at the value chain, the AERO Satcom market is on a consolidation endgame curve. “In the Pre-Covid scenario, Aero Satcom was on track to transition from Stage Scale to Stage Focus with the top three service providers (GoGo, Panasonic & Iridium) cumulating 67.7 percent of total market share. The other major drivers pushing the market to the next stage were the free service model, capacity/service price drops and improvement in per Aircraft Bandwidth or Data usage. The result was that regions such as the North American corridor were beginning to experience a supply crunch, and Delta’s free model was regarded as the shape of things to come for most, if not all, airlines in all regions of the globe.”
NSR suggests that most companies are examining how they might respond to the ongoing crisis. Option 1 is a downstream horizontal merger or acquisition. “However, the seamless merger will depend on identification of efficient network/product/services and removing overlaps. On the upstream side, this will result in reduced capacity leases/contracts for satellite operators because of the reduction in their number of customers (service providers),” says NSR.
Option 2 is for Vertical Integration where a Satellite Operator acquires a Service provider or Service Provider + Equipment Supplier: “Satellite Operators have been gazing and facing challenges to move downward in the value chain. The current scenario could be considered as an opportunity knock at their door. This scenario coupled with optimized solution (capacity + service interface + hardware) can lead to more affordable solutions for end customers as margins will not get added to the cost at different levels. Also, a satellite operator with global coverage can lead to an efficient scalable solution.”
NSR’s ‘Bottom Line’ says that market consolidation must become a top priority. “At present, the AERO Satcom Market is going through major challenges with the most pressing being: 1. Distressed downstream players in survival mode, and 2. User Market Shrinkage likely to continue over the next 18 to 24 months. Over the horizon, however, long-term fundamentals of the segment remain strong. Hence, the key question now is how to cross that inflexion point at the industry level or put simply, how do downstream players survive in the next 24 months and prepare for the market rebound?”