Sector

TelCoAviation

Background

Oak Thorne is the President and CEO of Gogo. We cover the size of the market for in-flight connectivity, the technology powering Gogo's offering, and how Starlink differs.

Cover

Date

June 22, 2022

Episode Number

62

Gogo Business Aviation Business Breakdown

Background / Overview

Gogo, a key player in the in-flight connectivity (IFC) market, focuses exclusively on business aviation, providing WiFi services to private aircraft. Originally founded in 1996, the company initially targeted business aviation with analog cellular technology before pivoting to satellite-based solutions and eventually developing its proprietary air-to-ground (ATG) network. Gogo underwent a significant transformation in 2020, exiting the commercial aviation segment to concentrate solely on the business aviation market in North America, with plans to expand globally. Headquartered in the U.S., Gogo operates a capital-intensive infrastructure model, leveraging its ATG network and partnerships with satellite providers like OneWeb for global expansion. The company employs a workforce focused on engineering, network operations, and customer support, though specific employee numbers are not disclosed in the transcript.

Gogo’s business model centers on installing proprietary equipment (antennas and onboard systems) on aircraft and monetizing these installations through high-margin, recurring service subscriptions. This model resembles digital infrastructure, where upfront investments yield long-term revenue streams, akin to a “build once, monetize for decades” approach.

Ownership / Fundraising / Recent Valuation

Gogo is a publicly traded company, with significant ownership by GTCR, a well-regarded private equity firm, and Oak Thorne, the CEO, who collectively hold over 40% of the company. Specific details on recent fundraising, enterprise value (EV), or valuation multiples are not provided in the transcript, but the company has deleveraged, reducing interest expenses and boosting free cash flow (FCF). The focus on deleveraging suggests a strategic shift toward financial flexibility to fund growth initiatives like the 5G network and global broadband (GBB) product.

Key Products / Services / Value Proposition

Gogo’s core offerings include equipment and connectivity services tailored to business aviation. The value proposition lies in providing reliable, low-latency WiFi for professional aircraft, enabling passengers to work, stream, or communicate seamlessly during flights. Below is a breakdown of key products:

Value Proposition:

• Low Latency: ATG’s proximity to ground towers (hundreds of miles vs. 22,000 miles for geo satellites) ensures faster, more responsive connections.
• Cost-Effective: ATG systems are cheaper to install ($150K-$300K) and operate compared to geo satellite systems ($400K-$700K install, higher service costs).
• Scalability: The AVANCE platform’s multi-bearer capability allows seamless upgrades (e.g., adding 5G or GBB), reducing switching costs within Gogo’s ecosystem.
• Longevity: Equipment remains on aircraft for ~20 years, ensuring stable, recurring revenue.

Segments and Revenue Model

Gogo operates a single business segment focused on business aviation IFC, with two economically separable units:

1. Equipment Sales: One-time revenue from selling and installing antennas and onboard systems (e.g., AVANCE L3/L5, 5G, GBB).
2. Service Subscriptions: Recurring revenue from monthly connectivity plans, typically consumption-based, with high margins (~75%).

Revenue Model:

• Equipment: Sold at a discount to dealers or OEMs, with Gogo capturing 50% of the $150K-$300K installation cost. Revenue is lumpy, tied to new installations (1,300 units shipped annually) and upgrades.
• Service: Subscription-based, with no long-term contracts but high stickiness due to switching costs. Service revenue scales with the installed base (~6,600 planes) and data consumption (25% YoY growth).

Splits and Mix

Channel Mix

• OEMs: ~40% of new installs, integrated during aircraft manufacturing (e.g., Textron, Gulfstream). Stable but less flexible due to production cycles.
• Aftermarket (Dealers): ~60% of installs, driven by upgrades or retrofits during maintenance events. More flexible, with 120 dealers and STCs (Supplemental Type Certificates) for various aircraft models.
• Mix Shift: Increasing aftermarket share due to faster scalability and rising demand for retrofits.

Geo Mix

• North America: 100% of current revenue (U.S. and Southern Canada). The ATG network operates on licensed 850 MHz spectrum, covering 24,000 business aircraft.
• Future (GBB): Expansion to 14,000 non-U.S. aircraft, increasing the total addressable market (TAM) to 38,000 planes.

Customer Mix

• Fragmented Base: ~4,000 customers, with the top 10 (e.g., NetJets, Flexjet, Wheels Up) accounting for ~20% of revenue. No single customer exceeds 1% of revenue, reducing concentration risk.
• Demographic Shift: 67% of customers are Gen X, Y, or Z, driving demand for connectivity as younger, tech-savvy flyers prioritize WiFi.

Product Mix

• Classic (3G/4G): ~50% of installed base, declining as customers upgrade to AVANCE or 5G.
• AVANCE (L3/L5): ~25% and growing, the core platform for mid-to-large jets.
• 5G/GBB: Future growth drivers, targeting higher speeds and global coverage.

End-Market Mix

• Business Aviation: 100% of revenue, targeting professional aircraft (turboprops to large jets). Excludes recreational single-engine planes.

Revenue vs. EBITDA Split

• Equipment: Lower margins (not specified, likely 20-30%) due to discounts and third-party labor costs.
• Service: ~75% EBITDA margin, driven by low variable costs (backhaul, customer service, tower rent) and fixed network costs.

Mix Shifts:

• Historical: Shift from legacy Classic to AVANCE, with L5 capturing 25% of the installed base in five years.
• Forecasted: 5G and GBB will drive a mix shift toward higher-speed, higher-value services, with GBB adding global revenue by 2025.

KPIs

• Installed Base: 6,600 ATG systems, growing 600 net units annually (10% YoY).
• New Orders: 1,300 units shipped annually, with a 4-5 month installation lag.
• Penetration Rate: ~30% of 24,000 U.S. business aircraft, with 60% of new U.S.-bound planes equipped with Gogo.
• Data Consumption: 25% YoY growth, driving service revenue.
• Churn: Low, with only 20% suspending service during COVID and a 4% revenue decline in 2020.
• Book-to-Bill (OEMs): ~2x, indicating strong demand but cautious production ramp-up.

Acceleration/Deceleration:

• Acceleration: Rising aftermarket installs, 5G launch, and GBB expansion signal growth acceleration.
• Deceleration Risk: Potential economic downturns could slow OEM deliveries, though aftermarket demand may offset this.

Headline Financials

Long-Term Trends:

• Revenue: Service revenue dominates, growing with installed base (~10% YoY) and data consumption (25% YoY). Equipment revenue is lumpier, tied to installations.
• EBITDA: High service margins (~75%) drive profitability, with slight dilution expected from GBB’s variable-cost model.
• FCF: Strong FCF growth ($125M in 2022, $200M by 2025 pre-GBB) due to deleveraging, low maintenance CapEx ($15-20M), and high incremental margins.

Value Chain Position

Gogo operates midstream in the IFC value chain, between network infrastructure providers (e.g., cell tower operators, satellite operators like OneWeb) and end customers (aircraft owners, operators). Its primary activities include:

• Equipment Design/Manufacturing: Developing antennas and onboard systems (e.g., AVANCE, ESA antennas).
• Network Operations: Managing the ATG network (250 towers, licensed spectrum) and partnering for LEO satellite access.
• Service Delivery: Providing subscription-based WiFi with customer support.
• GTM Strategy: Dual-channel approach via OEMs (line-fit installations) and dealers (aftermarket retrofits). Dealers handle STCs and installations, earning margins on labor and parts.

Competitive Advantage:

• Licensed Spectrum: Exclusive 4 MHz ATG spectrum ($31M acquisition cost) creates a barrier to entry.
• Dealer Network: 120 dealers with STCs for multiple aircraft models enhance market reach.
• Switching Costs: High costs (~$200K-$700K) to replace Gogo systems deter competitors.

Customers and Suppliers

Customers

• Profile: Fragmented base of ~4,000 customers, including high-net-worth individuals, fractional operators (e.g., NetJets), and charter services (e.g., Wheels Up). Top 10 customers contribute ~20% of revenue.
• Demographics: Shifting to younger Gen X/Y/Z flyers (67%), increasing WiFi demand.
• Concentration: Low, with no customer exceeding 1% of revenue.

Suppliers

• Key Partners: OneWeb and Hughes for GBB’s LEO satellite access and ESA antenna design.
• Towers/Backhaul: Leases tower space and backhaul capacity, part of fixed/variable costs.
• Dependency: Moderate, as Gogo owns its ATG network but relies on satellite partners for global expansion.

Pricing

• Equipment: $150K-$300K for ATG systems (Gogo’s share ~50%), $400K-$700K for geo satellites. GBB expected to be cheaper than geo satellites.
• Service: Consumption-based subscriptions, with geo satellite services significantly more expensive due to overage costs. Gogo’s pricing is slightly higher than SmartSky’s unproven 4G offering.
• Contract Structure: No long-term contracts, but high stickiness (20-year equipment life, high switching costs).
• Drivers:
• Mission-Criticality: WiFi is increasingly essential for business travelers.
• Low Latency: ATG’s responsiveness commands a premium over geo satellites.
• Price Elasticity: Moderate, as high-net-worth customers prioritize quality over cost.

Bottoms-Up Drivers

Revenue Model & Drivers

Gogo generates revenue through:

1. Equipment Sales: ~$150K-$300K per installation, with ~1,300 units shipped annually. Revenue is driven by:
• Volume: New installs (~600 net units/year) and upgrades (e.g., Classic to AVANCE).
• Price: Fixed, with discounts to dealers/OEMs reducing Gogo’s share to ~50%.
2. Service Subscriptions: $260M in 2021, growing with installed base and data consumption. Drivers include:
• Volume: 6,600 planes, growing ~10% YoY, with 25% YoY data consumption growth.
• Price: Consumption-based, with stable pricing due to low competition and high switching costs.

Revenue Mix:

• Service (~90%): High-margin, recurring, driven by installed base and data usage.
• Equipment (~10%): Lower-margin, cyclical, tied to installations.
• Organic Growth: Driven by aftermarket retrofits, OEM penetration (60% of new U.S. planes), and 5G/GBB launches.
• Inorganic Growth: None currently, though GBB partnership expands TAM.

Cost Structure & Drivers

• Variable Costs:
• Backhaul: Data transmission costs, scaling with usage.
• Customer Service: Staff for support, partially variable.
• Contribution Margin: ~75% for service, reflecting low variable costs.
• Fixed Costs:
• Tower Rent: ~250 towers, stable cost.
• Network Maintenance: $15-20M annually.
• Staff/Overhead: Engineering, admin, and R&D.
• Operating Leverage: High, as fixed costs are spread over growing service revenue.
• EBITDA Margin: ~75% for service, with slight dilution from GBB’s variable-cost model.

Cost Analysis:

• % of Revenue: Service costs (backhaul, support, rent) are ~25% of service revenue.
• % of Total Costs: Fixed costs (towers, maintenance) dominate, enabling margin expansion as revenue scales.

FCF Drivers

• Net Income: Driven by high EBITDA margins (~75%) and deleveraging (lower interest).
• CapEx:
• Maintenance: $15-20M annually (~6-8% of 2021 service revenue), low intensity.
• Growth (5G): $100M total ($66M CapEx, $33M OpEx), with $90M spent by 2022.
• NWC: Not specified, but likely stable due to subscription model and low inventory needs.
• Cash Conversion: High, with $125M FCF in 2022 and $200M projected by 2025 (pre-GBB).

Capital Deployment

• Organic: $100M for 5G, $15-20M annual maintenance CapEx, and GBB equipment development.
• Inorganic: None currently; focus on organic growth via 5G and GBB.
• Returns: High, as incremental service revenue yields ~75% margins with minimal CapEx.

Market, Competitive Landscape, Strategy

Market Size and Growth

• U.S. TAM: 24,000 business aircraft, with 30% penetration (8,000 planes equipped). Gogo serves ~6,600 (82% market share).
• Global TAM: 38,000 planes (24,000 U.S. + 14,000 non-U.S.), addressable via GBB.
• Growth:
• Volume: Penetration expected to reach 100% in 10-15 years (NBAA/GAMA estimates).
• Price: Stable, with premium pricing for low-latency ATG and competitive GBB pricing.
• Absolute: ~10% YoY installed base growth, 25% YoY data consumption growth.
• Industry Drivers: Rising high-net-worth individuals (>30M net worth), younger demographics, and digital infrastructure trends (more data, faster speeds).

Market Structure

• Consolidated: Few competitors due to high barriers (licensed spectrum, STCs, switching costs).
• Competitors:
• Geo Satellites (Inmarsat, Viasat): High-cost, high-latency, global coverage. Serve large jets (~4,000 U.S. planes, Gogo has 1,800).
• SmartSky: Unproven 4G competitor on unlicensed spectrum, facing interference and design challenges.
• Starlink (Potential): LEO-based, targeting regional jets and high-end business aviation. High maintenance costs and unproven in aviation.
• MES (Minimum Efficient Scale): Large, due to network infrastructure and STC requirements, limiting competitors.

Competitive Positioning

• Matrix: Gogo leads in cost, latency, and ease of installation for mid-to-light jets. Geo satellites dominate large, global jets.
• Risk of Disintermediation: Low for ATG due to spectrum ownership; moderate for GBB if Starlink enters aggressively.

Market Share & Relative Growth

• Share: ~82% of equipped U.S. planes (6,600/8,000), dominant in mid-to-light jets.
• Growth vs. Market: Outpacing market penetration growth (10% YoY vs. 3-5% market), driven by aftermarket and OEM traction.

Competitive Forces (Hamilton’s 7 Powers)

1. Economies of Scale: High fixed costs (ATG network, $15-20M maintenance) spread over growing revenue, yielding ~75% margins. MES is large, deterring new entrants.
2. Network Effects: Limited, as connectivity is per-plane, not networked across users.
3. Branding: Moderate, as Gogo is a recognized name in IFC, commanding premium pricing.
4. Counter-Positioning: ATG’s low-latency, cost-effective model counters geo satellites’ high-cost, high-latency offerings. GBB counters Starlink with simpler antennas and partnerships.
5. Cornered Resource: Exclusive 4 MHz ATG spectrum ($31M) is a unique asset, unattainable by competitors.
6. Process Power: Efficient equipment design (small antennas, low power) and dealer network (120 dealers, STCs) enhance competitiveness.
7. Switching Costs: High (~$200K-$700K to replace systems), locking in customers for ~20 years.

Strategic Logic

• CapEx Bets: $100M for 5G (offensive, to capture speed-driven demand) and GBB investment (offensive for global TAM, defensive against Starlink).
• Vertical Integration: Limited, with Gogo outsourcing satellite capacity (OneWeb) and dealer installations.
• Horizontal Expansion: GBB targets 14,000 non-U.S. planes, leveraging existing AVANCE platform.
• M&A: None currently, focusing on organic growth.

Valuation Overview

Specific valuation data (EV, multiples) is not provided, but Gogo’s characteristics suggest a premium valuation:

• Growth: 10-15 year runway, with ~10% YoY unit growth and 25% data consumption growth.
• Margins: ~75% service EBITDA margins, high FCF conversion ($125M in 2022, $200M by 2025).
• Capital Intensity: Low maintenance CapEx ($15-20M, 6-8% of revenue), with 5G investment nearing completion.
• Risks: Regulatory (low, spectrum is owned), litigation (SmartSky lawsuit, low impact), and cyclicality (mitigated by aftermarket demand and sticky revenue).
• Comps: Digital infrastructure (e.g., tower companies) or SaaS-like businesses with high recurring revenue and low churn.

Key Dynamics and Unique Aspects

Unique Business Model Elements

1. Licensed Spectrum Moat: Gogo’s $31M acquisition of 4 MHz ATG spectrum is a rare, non-replicable asset, ensuring clean, interference-free connectivity. Competitors like SmartSky, reliant on unlicensed spectrum, face interference in dense areas, limiting their viability.
2. High Switching Costs: Once installed, Gogo’s equipment remains on aircraft for 20 years, with replacement costs of $200K-$700K deterring competitors. This creates an annuity-like service revenue stream, even as aircraft change owners (7-year ownership cycles).
3. Flexible AVANCE Platform: The multi-bearer capability allows seamless integration of 5G and GBB, reducing upgrade costs (~$50K-$100K) and locking customers into Gogo’s ecosystem. This contrasts with geo satellites’ bulky, expensive systems.
4. Negative Acquisition Costs: Unlike traditional digital infrastructure (e.g., tower companies), Gogo incurs no incremental network CapEx for new customers. The ATG network supports 3x current capacity, with only $15-20M annual maintenance.
5. Dual-Channel GTM: OEMs (40%) provide steady line-fit installs, while dealers (60%) enable flexible aftermarket retrofits, capturing maintenance-driven upgrades every 5-6 years.

Standout Insights from Oak Thorne

• Defensive Strategy Against Starlink: Thorne’s focus on GBB as both offensive (global TAM) and defensive (aggregating ATG+LEO capacity) highlights strategic foresight. The ESA antenna’s simplicity (no moving parts, quick beam-switching) counters Starlink’s complex, high-maintenance network.
• Cultural Emphasis: Thorne’s lessons on team transparency and cross-functional coordination underscore Gogo’s ability to manage complex product launches (e.g., 5G, GBB) in a regulated, engineering-heavy industry.
• Cyclical Resilience: Despite aviation’s cyclicality, Thorne notes only a 4% revenue decline during COVID, with aftermarket demand and younger demographics offsetting OEM slowdowns.

Critical Analysis

• Strengths: Gogo’s spectrum ownership, high margins, and low capital intensity position it as a cash flow machine. The 10-15 year growth runway, driven by rising penetration and data consumption, is compelling.
• Risks: The SmartSky lawsuit, while unlikely to halt 5G, introduces uncertainty. Starlink’s potential entry could pressure GBB margins, though Gogo’s ATG moat remains intact. Cyclicality in OEM deliveries is a concern, but aftermarket flexibility mitigates this.
• Opportunities: GBB’s global expansion and 5G’s speed advantage could capture share from geo satellites, particularly in large jets. The shift to younger, tech-savvy customers ensures long-term demand.
• Weaknesses: Reliance on OneWeb for GBB introduces partner risk, and global expansion may dilute margins compared to ATG’s ~75%.

Conclusion

Gogo’s business aviation IFC model is a rare blend of digital infrastructure and subscription-based economics, leveraging a unique spectrum asset, high switching costs, and a scalable platform to dominate the U.S. market. With a 10-15 year growth runway, high FCF margins, and strategic moves like 5G and GBB, Gogo is well-positioned to capitalize on rising connectivity demand. However, competition from Starlink and litigation risks warrant caution. The company’s ability to maintain its moat while expanding globally will determine its long-term success.