Mobile satellite communications is soaring to new heights
Every major satellite fleet operator is positioning itself to win the aeronautical broadband connectivity business, and every major airline is doing the same.
It’s a match made in heaven — for now. Some industry players are already seeing the beginnings of a price war among satellite operators and in-flight-connectivity service providers.
Consolidation has already started with aeronautical service providers looking downward to purchase maritime players. It’s likely to continue once the clouds part, perhaps in 2017 or 2018, following the next big round of airline service contract awards. Will acquisition-hungry SpeedCast not want to look skyward anytime soon?
For the satellite fleet operators, mobility is one of the few real bright spots in their current portfolios.
SES, which has three high-throughput satellites set for launch in 2017, has $1.6 billion in available cash that the company has said could go to a geostationary-orbit HTS system or a mixed GEO-MEO fleet using SES’s just-acquired O3b Networks.
For the first six months of 2016, SES’s mobility revenue was up 50 percent compared to a year ago, even before the integration of O3b. SES said that one service provider alone, Global Eagle Entertainment (GEE), has increased by fivefold the amount of capacity it has booked on the SES fleet since early 2015.
For Intelsat, aeronautical and maritime mobility markets are of crucial importance. The company’s Epic satellite fleet, now being fielded, is designed with mobile markets as a priority. Eutelsat, in addition to a still-not-concluded joint venture agreement with ViaSat on consumer and mobile broadband connectivity, has made a big bandwidth sale to Panasonic Avionics in-flight connectivity in the Pacific Ocean region.
Panasonic has also purchased capacity from Telesat, which on its own is tinkering with the idea of a global low Earth orbit constellation that surely would have aeronautical applications.
The OneWeb network of low-orbiting satellites has struck agreements with, and attracted investment from, Intelsat and EchoStar Corp.’s Hughes Network Systems to make it possible for aeronautical broadband customers to switch back and forth between OneWeb and Intelsat satellites. Gogo, a customer of Intelsat and SES, has already expressed interest in OneWeb.
With so much demand popping up among airlines — first for passenger connectivity, and ultimately for “connected aircraft” solutions for maintenance and cockpit purposes — no fleet operator can afford to be out of the game.
Yahsat of the United Arab Emirates recently concluded an agreement with Panasonic on a possible network over the Middle East.
And China? It’s unlikely that the nation with the fastest-growing air-traffic network would remain on the sidelines. Fleet operator APT Satellite Holdings of Hong Kong, backed by China Aerospace Science and Technology Corp., in July announced a joint venture to build a network of satellites for aeronautical and maritime connectivity.
ViaSat Chief Executive Mark Dankberg likes recounting the story of two campers being chased by a bear. One laces his boots to prepare to run. The other says: “What are you doing? You can’t outrun a bear.” The response: “I don’t have to. I just have to outrun you.”
The bear is consumer demand for bandwidth, which can never be satisfied. ViaSat’s job is to provide more raw bandwidth than the competition. The company’s playbook for terrestrial consumer broadband is now being applied to in-flight connectivity.
ViaSat’s ViaSat-1 satellite, launched in late 2011, is carrying the bulk of the company’s Exede in the Air traffic, which as of June 30 had been fitted onto 509 commercial aircraft. The company says the service currently provides close to 100 megabits per second of throughput to each plane, in all phases of flight.
The $600 million ViaSat-2, with two or three times the ViaSat-1 throughput, is scheduled for launch in early 2017.
ViaSat-2 will “support substantial growth in the residential network plus, say, in the range of 2,000 or more aircraft at service levels as good as or better than we deliver now,” Dankberg told investors in August.
But the bear keeps coming, which explains ViaSat’s $1.4 billion, three-satellite ViaSat-3 project, is designed to produce 1 terabit per second of throughput each. The first two satellites are scheduled for launch in 2019 and 2020. The third, which will be needed to offer global coverage, is not yet under contract.
ViaSat’s pitch to airlines is that no one can offer as much bandwidth over North America — and with ViaSat-3, to Europe, the Middle East and Africa as well — as ViaSat.
“The alternative systems have five or six beams available to serve the entire U.S. market, and each of those five or six beams has a total throughput capacity of about 50 megabits to a few hundred megabits… when those bandwidths are delivered to an aeronautical mobile terminal,” Dankberg said.
“Imagine a network with only five or six spot beams trying to support even say 1,000 planes…. When those aircraft congregate in high-demand markets up and down the East Coast or at hub airports, there will be beams with hundreds of aircraft in them. Even if an individual airplane could process 100 megabits per second, the amount of bandwidth per beam divided by the number of airplanes per beam will often result in single digit megabits per second available per plane, which is about the same amount that’s currently delivered by the air-to-ground networks.
“[T]he failure mode here is not that the bandwidth is so expensive; it’s that there’s just not enough of it — too much demand chasing too little bandwidth resulting in congestion, slow service, limited number of passengers per plane and limited online activities,” Dankberg said.
“Right now, competitive intensity in the aeronautical mobile market is really high, but in the long run, to the extent that passengers behave in the air as they do on the ground, we believe the battle will be won based on bandwidth productivity.”
Inmarsat, the mobile satellite services provider, refers to in-flight connectivity as “the big one for the future” in the company’s most recent meeting with investors.
First, the promise: Inmarsat said in August that airlines have issued outstanding requests for information or actual bid requests for in-flight connectivity on a total of 2,800 commercial aircraft.
“Pretty much every major airline on the planet is developing or implementing a connectivity strategy,” Inmarsat Chief Executive Rupert Pearce said in August. “It’s hard to believe that within five or six years, I suspect, it will be the norm to be on a connected aircraft.”
Inmarsat’s Global Xpress Ka-band service is targeting multiple commercial and government markets, with aviation as a core piece and military and other government users also a major market. Three satellites are in service, providing near-global coverage. A fourth, originally intended as a spare, is being readied for launch — perhaps over western China, but most likely over Europe, Pearce said.
“If I was a betting man right now, I would say it would go up over the mid-Atlantic,” Pearce said in August. “We’ve seen some very exciting opportunities there in maritime and in aviation to serve growth markets. There are opportunities elsewhere, west of China and around China itself.”
Airline partner Lufthansa is expected to begin Global Xpress trials this year on its aircraft.
Inmarsat is all-in on aircraft connectivity and is going Gogo, but in reverse: a satellite network first, and then what Inmarsat calls its European Aviation Network (EAN) of terrestrial towers to augment capacity in the dense European air routes under a European Commission license.
The company is building an S-band payload to fly on a satellite co-owned with Arabsat and tentatively scheduled to launch in early 2017. The idea is that Global Xpress customers would switch to the EAN network when in European airspace.
But getting in position to take advantage of this opportunity is costing Inmarsat in profit.
“Operating costs of the business are rising,” Chief Financial Officer Tony Bates told investors. “EBITDA is falling away despite higher revenue. This is the cost of the [aero mobility] team. It basically doubles, as we expected. In the first half [of 2016] it was running at $10 million per quarter, versus $5 million per quarter in the previous year. It’s all about bringing onboard the people who are doing these deals and starting to put in place the capability to deliver.
“Even with these numbers, we still have significantly less people chasing these deals than do either Gogo or Panasonic,” Bates said. “So directionally, we’re coming out of the year with the operating cost in aviation running at something like $50 million a year.”
Pearce said Inmarsat’s 30-plus-year history in providing narrowband aeronautical communications to aircraft cockpits is not much help when it comes to sealing passenger-connectivity commitments from commercial airlines.
Inmarsat and the other airline-connectivity service providers continue to struggle with the wide range of possible business models — wholesale, as is done with most of Inmarsat’s narrowband business, and a full-service model that some airlines may prefer but will find Inmarsat paying for third-party charges including Internet service provider costs in addition to financing and installing the hardware.
Global Eagle Entertainment’s $550 million purchase of maritime broadband connectivity provider Emerging Markets Communications, which closed in July, is already helping GEE with its airline connectivity business.
Los Angeles-based GEE said it was satellite bandwidth leased by EMC, centered over Latin America, that clinched a recent in-flight-connectivity contract with Avianca Brasil for at least 40 aircraft.
“Operating near the equator, there are going to be [satellite beam] skew issues which we believe we have overcome by having enough coverage on satellites that we need to have in place, with EMC,” GEE Chief Executive Dave Davis said. The company is using its current-generation aircraft antennas for the Avianca Brasil contract, he said.
The EMC purchase balances GEE evenly between the aeronautical and maritime connectivity businesses, with each accounting for about 40 percent of GEE’s expected pro forma 2016 revenue of $660 million. The remaining revenue comes from terrestrial-based services.
Davis says the airline connectivity business is growing faster, at about 20 percent per year against 15 percent for the maritime side.
Unlike some of its competitors, GEE has invested in both Ku- and Ka-band satellite capacity. It has booked Ku-band bandwidth from several major satellite fleet operators, and is a customer for EchoStar Corp.’s Hughes division’s EchoStar-19/Jupiter-2 satellite scheduled for launch in November.
Davis said GEE has begun adding Ka-band to its antenna-development program and expects to certify the antenna with air-traffic regulators by early 2017. The company has already embedded the Ka-band antenna in its bids for airline contracts, he said.
GEE added 30 aircraft to its installed fleet in the three months ending June 30, a record for the company, bringing its total to 736 planes. Davis said the installation rate should increase further during the rest of 2016.
Davis has said among the synergies to result from the EMC acquisition are about $40 million in annual savings on satellite bandwidth as the merged company rationalizes its bandwidth purchases.
Fleet operators SES and Intelsat will be closely watching how GEE handles this, and whether the company will prefer to pay early-termination penalties rather than to continue leasing what it views as redundant capacity.
Also interesting will be to see whether GEE is able to wrestle price cuts from either of the two fleet operators as a condition for keeping the business.
Gogo Inc., the in-flight airline passenger connectivity pioneer, is ramping up investment in Ku-band satellite bandwidth over air routes, financing the manufacture of its 2Ku aircraft hardware and, in some cases, paying for the installation on customers’ aircraft.
The goal, according to Chief Executive Michael J. Small: line up enough committed customers and installed planes before the competition, on the assumption that when the current frenzy of airline demand eventually stops, not all service providers will survive.
Chicago-based Gogo recently closed a $525 million high-yield-bond offering to retire existing debt and to direct some $200 million more into the 2Ku effort.
Small dismisses competitor allegations that the company’s focus on market share has come at the expense of profit, and that a recent win against competitors Panasonic Avionics and Inmarsat was due simply to superior value-for-money considerations.
Aware that its air-to-ground WiFi network is no longer satisfactory to many consumers, Gogo has set itself ambitious goals for its 2Ku technology. Ten planes were equipped as of June 30. The total should be 75-100 by year’s end, and 350-450 by the end of 2017.
Gogo said its backlog of committed aircraft awaiting installation stood at more than 1,200 for Delta, American Airlines and IAG.
By sometime in 2017, Small said, all major commercial airlines and aircraft types will have been certified for 2Ku use.
Also by late 2017, upgrades including no-need-to-touch-the-plane software improvements will have brought 2Ku’s available bandwidth to each plane to more than 100 megabits per second.
Small told investors in August that 100 megabits per second is enough for almost all airlines, and that higher speeds will not be viewed as important enough to change suppliers.
“With our clear visibility to go north of 100 megabits per second per plane, we’ve taken the issue off the table,” Small said. “You can talk about higher numbers. I don’t think it’s going to matter to anybody for any practical purpose. We’ve hit the bogey that is going to matter.”
Gogo’s competitors are circling over this point of per-aircraft bandwidth. When Gogo said it bested London-based Inmarsat’s Global Xpress for an airline contract, Small said it was obvious that Global Xpress’s 50-megabits-per-plane performance does not make the grade.
Inmarsat’s response: Our advertised bandwidth is a realistic per-plane figure. Your 100 megabits will collapse once hundreds of planes are equipped with 2Ku and competing for bandwidth in a crowded environment over major airports.
Small said early results from 2Ku are promising. “We see a revenue lift every time we bring more bandwidth to the plane. Based on [second-quarter 2016 results]… we achieved a two- to three-year payback on our 2Ku installs.” It costs between $250,000 and $300,000 to equip a plane with 2Ku, a figure unlikely to drop much until the equipment is line-fit onto airframes.
Will Gogo need to purchase huge new quantities of Ku-band satellite bandwidth to maintain its per-plane performance? That’s not clear, but if it does, the news is good on the satellite pricing front. Gogo said it’s paying 70 percent less per megahertz of satellite capacity now than it did just a year ago, and that prices are likely to continue falling.
Panasonic Avionics has been warning that the rush to serve the large airline-connectivity market is forcing service providers to perform unnatural acts of corporate investment.
Too much satellite bandwidth purchased too far in advance of the start of service and revenue, overly generous deals with airlines on buying and installing satellite gear — it may come to a bad end, Panasonic Vice President David Bruner has said.
No one seems to be listening yet, and Lake Forest, California-based Panasonic must admit that its competitors are doing what Panasonic has done as well. The company has become a big customer for satellite fleet operators SES, Intelsat, Telesat and, for Pacific Ocean coverage, Eutelsat as well.
Most recently, Panasonic signed a memorandum of agreement with satellite fleet operator Yahsat of the United Arab Emirates to design a constellation that could be in service “within the next three to five years.”
Panasonic, which has been a firm and public advocate of the merits of Ku-band over Ka-band for airline, appears even to be considering other frequencies, juding from the joint Yahsat-Panasonic statement of their intentions.
“The companies will explore a wide range of factors including the type of frequency to be used, the coverage and capacity needed to serve flight routes in this [Middle East] region, the type of antenna and radome to be used, and the certification requirements of such a solution.”
Panasonic was an early consolidator of what’s expected ultimately to end up in several companies with large maritime and airline fleets, buying ITC Global for its maritime connectivity business.
The company has hinted that it wants to go beyond leasing capacity on high-throughput satellites being built by others, to designing its own payloads on future spacecraft.
Panasonic refers to this new capacity as “extreme high-throughput,” or XTS for the densest air routes over North America, Europe and East Asia. Panasonic produced a map showing where XTS would operate, but the company has been vague about in-service dates and has not publicly announced any hosted-payload agreements with a satellite operator holding frequency and orbital-slot rights in the desired regions.
Over East Asia, Panasonic has increased the amount of capacity it is leasing from Eutelsat at 172 degrees east, reaching from North America’s West Coast to the Asian landmass and as far south as Australia and the Pacific islands. The company is Paris-based Eutelsat’s anchor customer for the 172B satellite scheduled for launch in 2017.
For the Chinese market, Panasonic is testing service with partner China Telecom Satellite for commercial airlines operating in Chinese airspace.
Panasonic has signed partnership agreements with China Eastern Airlines, Xiamen Air, Hainan Airlines and China Southern Airlines. It is unclear what these airlines’ installation rate will be of the Panasonic service.