It is all but confirmed that Gogo will be purchasing one of its only two real competitors in the race for business aviation global broadband supremacy – Satcom Direct. Here is what Oak Thorne (CEO) had to say about the company back as a competitor in 2021 and 2023:

“Satcom is a reseller of other satellite companies products. So they are a very good service organization and we have a lot of respect for them. But again, they’re sort of at the high end of the market… and we would cohabitate sometimes with Satcom Direct installs.” (2021)

“Satcom Direct has a deal with OneWeb as well as we do, we don’t see a lot of progress from them on that front. They seem to be pushing some of their other projects more heavily. We always have to take them seriously, they are a good competitor.” (2023)

Revisiting Gogo

As a refresher, Gogo is the leading provider of in-flight connectivity for business aviation customers. Founded in the 90s, the company provided air-to-ground (ATG) connectivity for both commercial and business end-markets. The company sold off its commercial aviation (CA) business in 2020, opting to focus on its more profitable business aviation segment and deleverage its balance sheet.

Frankly, ATG is no true competition to satellite-based internet in the CA space – ATG has limited bandwidth relative to satellite solutions, so as more passengers opt to use the internet an ATG provider works to limit their usage in the form of higher (absurd) prices. There was and continues to be no long-term viability in ATG as a solution to commercial IFC because of this key misalignment.

Starlink

The first question I’m always asked is: “What about Starlink?” and rightfully so. Without a doubt, Starlink is the only true competitor for Gogo in business aviation. Despite management brushing off the company as consumer-grade equipment repurposed for aircrafts, the business continues to make headlines in the commercial and business aviation segments. 

I must note the difficulty it is to attempt to objectively analyze this business due to some irrational share price fluctuations. Elon Musk has this ability to make markets move at will when it comes to the companies he runs. Unlike Tesla, SpaceX is not publicly listed. However, that hasn’t stopped competitors from moving off his successes. For example, last month Hawaiian Airlines & Air France – remember, these are commercial airlines – announced that they would be installing Starlink antennas to service their flights. Shares in Gogo were down 5%+ on release of the news about a business they sold off four years ago. While any aviation win for Starlink can be viewed negatively for Gogo, I believe some of the daily moves witnessed in the past few months have made little sense. Nonetheless, Starlink is still a formidable competitor in heavies today and will be in the small-mid segment when they do eventually come up with an antenna to service them.

So then, why do I continue to believe the stock has a high probability of being mispriced? First, the organizational structure and depth of support matters to what is a demanding end-customer. Gogo first and foremost is a service organization that serves business aviation customers and has done so even before the Starlink project was announced to the world in 2015. This extends to Gogo’s relationships with OEMs and dealers. The latter of which was largely ignored by Starlink until it realized that to succeed the company required a strong after-market presence (after all, MROs have capacity for 500-600 jets per year; in comparison to estimated new jet shipments in the 700s). 

Starlink sales & support staff numbers in the dozens not the hundreds of a traditional player like Viasat. The result was Viasat keeping Starlink at bay in commercial aviation – until it wasn’t (partly due to faults in Viasat’s own satellite solution). You don’t require all too deep a relationship in the commercial segment relative to the business segment, especially once you get to small/mid jets. You can imagine that these fliers will demand support for their >$200k product. Gogo knows this and is structured to do so; Starlink on the other hand lags behind on this front.

Additionally at present, Starlink is not line fit at any of the major OEMs and perhaps the most well-known of business aviation OEMs (Gulfstream) has actively stated antagonism to the Starlink STCs that have been approved by the FAA (for the G650 model). In a Maintenance & Operations to all Gulfstream operators the company stated its reservations noting concerns over the structural integrity with respect to antenna installation on the model’s fuselage. As a result, Gulfstream may not be able to provide in-service support with the installation without additional costs. Gulfstream also noted that its structural warranty may not apply to affected areas of an installation based on the STC. While Gulfstream’s disapproval of the STC does not mean Starlink can’t be installed on any of its aircraft, it does bring some level of validation to Oak’s criticisms of the Starlink product for general aviation purposes.

I also believe that Gogo isn’t dead money due to Starlink due to the size of the total market. Per Jetnet there were 24,123 business jets in the world in 2023, of which I estimate 70%¹ were North American (16,886 jets). Importantly, these numbers exclude an estimated ~8,500 turboprops that Gogo often includes in its estimate of its total addressable market.

As you can see the majority of the private jets are either light (9,792) or heavy (9,463), as medium sized jets (4,868) grew at a rate of 1.37% over the last 18 years versus the total fleet ‘s growth of 3.33%. Using these numbers, I attempted to estimate the total size of the business aviation market – specifically, the recurring services revenue. Here’s what I found using some conservative estimates:

In the U.S. alone I estimate the total TAM to be ~$800 million. I make the following assumptions to get to that number: (1) The ARPA of a light jet is $3k, $4k on a medium, and $5k on heavy jets (2) All business jets are assumed to have some IFC system installed. Given the level of conservatism embedded into these numbers, I believe the market is large enough to accommodate both Starlink and Gogo. Even if the industry splits 60-40 in favour of Starlink’s IFC solution there would still be ~$320 million of service sales flowing to Gogo’s top line and this excludes the equipment revenue made along the way. This is only an example to illustrate the level of safety I see in the terminal value of Gogo’s business.

I spend a lot of time thinking about Starlink purely because I believe that is the only impediment to the success of Gogo. If Oak and team are able to execute and not cede the entire business aviation market to Musk, I have no doubt that the stock will eventually work. 

Execution

Winston Churchill once remarked, “no matter how beautiful the strategy you should occasionally look at the results.” Each passing day the importance of execution to the story continues to grow. The company noted that a few customers churned to Starlink in the second-quarter and it’s fair to say the market was unamused. Fortunately, Gogo’s HDX antenna (designed for small-to-medium sized jets) will be the first to be shipped at some point this year with the FDX antenna expected to launch in early-to-mid 2025. I wouldn’t be too surprised if Starlink does end up swaying some more customers until the FDX antenna is commercially available.

With that being said, onto the Satcom acquisition…

The Satcom Acquisition

There are a few things I like and dislike about this deal. I’ll start with what I like. The company bought a competitor that compliments its existing business well. This allows Gogo to truly get a foothold in the larger jet market and global presence through Satcom’s sales and support staff. To compete against Starlink, Gogo must really focus on what Starlink is unable to do as well as it does (given its size and focus). Despite Satcom being a reseller of GEO satellite capacity – what Oak himself has referred to as a dying technology – its current footprint (of ~5k jets, with ~1.3k being heavy jets), will enable Gogo to have an edge versus Starlink in the inevitable switch from GEO solutions to LEO solutions.

In the M&A announcement call, Oak noted that at the high-end of the heavy jet market there is a need for redundancy (having alternative service providers in case of some failure). This probably holds true in the short-term but over time, non-geostationary satellites will dominate the market.

Now for the negatives…  At closing Gogo’s net leverage ratio will shoot back up to 4x, the company will issue 5 million shares and will have to deal with integration. This comes off the back of Oak stating earlier this very year that “organic growth is the right place for [Gogo] to invest capital… and that [it] is less risky than M&A. To me this suggests that Oak feels it is necessary to arm the company with extra arsenal to compete with Starlink in the heavy-jet market despite his remarks over the product direction and quality of Starlink. 

Some other areas of concern that I have with the deal include the possibility of integration diverting attention away from execution. Gogo is not in a position in which it can continue to be off the ball with Starlink already getting installed on heavy jets. 

Overall, I am begrudgingly in favor of the deal despite its highlighted drawbacks as I believe it will allow Gogo to keep a sizable number of aircraft away from churning to Starlink. Speaking of Gogo as an investment, I think it makes sense for me to continue holding shares as the launch of its LEO products are about to hit the market. There are still questions to be answered such as the company’s 5G antenna – which I now view as optionality for the company that is likely to be cannibalized by its own LEO offering. This deal will only magnify the downside and doesn’t really make a dent in the upside in my opinion.

The inflection point in free cash flow I wrote about is slowly approaching for the company. I believe it only makes sense to watch how the company’s products are received and whether its competitive position is capable of creating value for shareholders. My analysis based on the incentives and motivations of industry participants (see below for an industry map) suggests the company can do as much, it is now whether or not the market or I have misjudged the competitive dynamics.

1. I estimate 70% to be North American jets using globally wholly-owned jets in operation per geography as a percent of its total – a different number to historical fleet size, reported by Jetnet.

EDIT (Dec, 10): I have since reduced my position in Gogo by ~35% in part due to the change in the company’s management team (incentives cannot line up as strong as they were with Oak although he still remains in the fold as Exec Chair + GCTR) and deterioration in fundamentals of the business (as noted in the write-up above). The chief reason is the probability the company overpaid in the transaction given the uncertainty of achieving what they’ve guided for. From what I’ve seen and read of the company – that probability of an inflection in FCF is very real and likely (why I still hold as much as I do) but how much of the benefits they’ll reap for spending $375mm in what could be a very expensive distribution deal relatively? That, I do not know…