Why In-Flight Wi-Fi Is a Great Business
Worldwide, there are over one million commercial airline flights each year. In the U.S. alone, roughly 87,000 flights take place per day, including commercial airlines, as well as private planes and air taxi flights. With population rising, and the economy gradually recovering, the number of flights should continue rising in the next few years.
As the number of flights per year increases, demand for in-flight services like Wi-Fi, video, and music streaming should also rise. Gogo , a leading provider of in-flight broadband Internet service for commercial and business aircraft, is an example of how to benefit from a rising demand for in-flight services.
Source: Gogo Investor Relations, Presentation slides
The idea behind Gogo was born in a barbecue restaurant in Texas, where company founder Jimmy Ray sketched his idea for an affordable telephone system for private airplanes on a paper napkin. In this way, the company started its business by providing analog-based voice communications on private flights.
However, the real growth story started after 2008, when Gogo launched its robust Internet access service on commercial flights. The company soon saw a massive improvement in top-line performance and went public in June 2013. Since then, shares have risen more than 24% to date.
A great business model
As an early mover in the in-flight Wi-Fi segment, Gogo enjoys several advantages. First, it has the largest number of online aircraft in service, with more than 2,000 planes connected. This is equivalent to more than 7,000 daily flights.
That being said, most of Gogo's business is concentrated in North America, where the company has an 80% market share. There is plenty of room left for growth in overseas markets, where in-flight Wi-Fi is still unknown to most consumers.
This is why Gogo is securing satellite and terminal contracts, and is looking for partnerships with foreign airlines to expand its service globally. Note that Gogo has already secured contracts for Delta's international fleet, and partnerships with main foreign airlines may be on the way.
To protect its market share, Gogo invests heavily in technology. The company is said to have invested more than $220 million since its launch, and roughly 36% of its total employee base is comprised of technology staff.
Gogo isn't the only player in town. Panasonic and OnAir are also interested in the in-flight Wi-Fi market. More than 200 airlines worldwide use Panasonic's wireless satellite Internet connectivity. Note that Panasonic not online provides Wi-Fi, but it also provides in-flight shopping, phone service, video games, and GPS flight location display. Its industry-leading X Series, a robust in-flight entertainment system, can be configured to an airline's individual brand objectives and marketing goals.
OnAir also provides in-flight Wi-Fi in commercial flights using satellites. More importantly, OnAir has also been able to secure contracts with international airlines. For example, OnAir is the only provider authorized to deliver in-flight Wi-Fi service to airlines in Thailand.
However, to date, Gogo is by far the largest player with nearly 4,000 broadband aircraft online, and over 5,000 satellite aircraft online. In North America, Gogo has roughly nine times more broadband aircraft than the closest competitor. Not surprisingly, Gogo also has the largest engineering and IT investment in the whole industry. This is because, to protect its market share and continue expanding globally, Gogo relies heavily on permanent technological innovation.
Final Foolish takeaway
An early mover, Gogo has become the largest provider of in-flight Wi-Fi in North America. Aware of the existence of high barriers to entry in the industry -- heavy upfront capital per aircraft is needed -- the company protects its market share by investing heavily on technology. At the same time, Gogo has several exclusive, long-term contracts to secure its business. Finally, plenty of overseas growth opportunities make this company a must-watch in the tech sector.
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The article Why In-Flight Wi-Fi Is a Great Business originally appeared on Fool.com.Adrian Campos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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