Inmarsat and Hughes first started to talking about a potential In-Flight Connectivity (IFC) collaboration in North America over a year ago. This week, the companies announced a deal that Inmarsat CEO Rupert Pearce calls a major statement of intent for Inmarsat’s ambitions in the global IFC arena. The service, GX+ North America, is the next stage of the operator’s strategy to remain a force in IFC, and tap into the North American IFC market. GX+ North America service will combine capacity from Hughes’ Jupiter High-Throughput Satellite (HTS) constellation across North America with coverage from Inmarsat’s Global Xpress (GX) HTS satellite network. The service will be ready for rollout on prototype flights later this year
Speaking about the deal with Hughes, Pearce talks about how the deal plays into Inmarsat’s global ambitions, the future for IFC in a difficult COVID environment, the deal-flow for the rest of the year with airlines, and why he is still optimistic that there is a bright future for satellite-based connectivity on aircraft.
How did this collaboration with Hughes come about? Given Inmarsat’s strength in IFC, why did you feel the need to partner with Hughes?
Pearce: Firstly, we need to provide the uniqueness of wide area coverage and global coverage. We have been very successful, particularly where coverage is key. If you look inside North America, coverage is not key. What is key is capacity, throughput and speed. So, what we have here is a marriage between the coverage, resilience, and reliability of Inmarsat and our aviation heritage married with the extraordinary depth of capacity that Hughes brings with its Jupiter series. We are also bringing significant capacity to the aviation market. GX-5 will enter service shortly, bringing in a huge step change in capacity across Europe and into the Middle East. We have the I-6s arriving next year. We have three more next-generation satellites arriving in 2023 and 2024. All of this will be integrated with Global Xpress. This is just way one way of doing it.
Pearce: More than a year. It is not something that has been influenced by the pandemic, it hasn’t been accelerated or delayed by the pandemic. In our business, we have to make very long-term decisions around our infrastructure. We have been looking at the right way to get into North America for awhile. We certainly didn’t want to wait until the mid-2020s when our next generation of capacity comes along. It seemed like a perfect marriage of two organizations that have been very close over the years.
Pearce: We look at the long-term health of the industry. We think it will bounce back. It may take two to three years to bounce back, and when it does, passengers will want more connectivity than ever before. We are already seeing that in Europe with our European Aviation Network (EAN), which is setting records for data consumption.
From a long-term perspective, it’s a sensible time to do this. A lot of carriers are looking at their fleets right now, looking to optimize their fleets. Part of that is about retiring older aircraft and bringing in newer, more efficient aircraft. That gives them a chance to rethink their communications strategy and what the next generation of IFC looks like — not just for passengers but for the era of connected aircraft, but also automation and the smart aircraft that can go with that. So, I think this is a good time for us to come with a brand-new offering. For example, it can allow the big carriers to pivot to high quality free Wi-Fi, which is something passengers say they want, and I believe them.
Inmarsat has a lot of experience with this. For example, we have had a very successful collaboration with Air New Zealand with a free Wi-Fi proposition. More than a million sessions have already been deployed by Air New Zealand over their long haul carriers with our service. I think it is a good moment for this pivot point in our industry.
Pearce: The trajectory might look different, but I still think we will get there. I don’t think it has altered the two things that will get us to that number — the first being appetite and demand from the industry. The demand will be there. I think within a few years we will be seeing the resurgence of the aviation industry. We are in a golden age of air travel and there will be tremendous growth in the developing world. I don’t think it will fundamentally change, but it may shift it out two to three years.
The other side of it is about our ability to capture market share. I might argue that has increased to some extent as we are a resilient, diversified business. We are not just a single player within aviation. We have successful businesses elsewhere that allow us to maintain our trajectory. All of our innovations will keep us at the forefront of service offerings in the industry are fully funded and will roll off the production line in the next three to four years. We are in a very strong position to grow our marketshare ambitions from where they were.
Pearce: I wasn’t really surprised by it, we have seen Intelsat do downstream before. Intelsat General is a very successful example of going downstream into a specialist market. We have seen them edge toward managed service offerings as well. They are becoming more than just a purveyor of bandwidth captive to their EBITDA margins. I am not surprised in that sense. We also believe it is very important to be close to market as well. We have benefited from having a direct and indirect model to market in the markets that we focus on. I give a thumbs up to that strategy.
Pearce: It is hard to know at the moment how many players this market will sustain. There are all sorts of tensions going on structurally. You have the question mark on whether a reseller can really exist in between satellite operators and the airlines. Buying bandwidth and selling it at a markup will probably be a difficult business to sustain, simply because the airlines will want to eliminate it unless there are a lot of value-added services along with it. This may mean we see a reorientation between what the connectivity providers do and what people do at the edge of the network to drive that extra value with airlines. That would mean a delayering of the channel, it would also mean that the channels would key off each other more powerfully.
Then you have the simple question of how many people can exist in this market when it hits maturity. That is also a function of how integrated those models will be. You also have other equations like the hardware and software, network sharing, and so on. It is very early to call whether there will be two to three providers, or 10 providers. My guess is we would be looking at no more than three to four global providers, with potentially two to three local providers who have a specific offering for a specific market.
Pearce: I would characterize the overall pipeline as much weaker than it was a year ago. That is not shock news as airlines are fighting for survival. A lot of our discussions with them are about how we can play our part in helping to ensure their survival. But, as I said before, people recognize that not only is passenger connectivity here to stay, but that it will be a very important component in their recovery. They look at it very positively in terms of the recovery phase, not just getting much closer to passengers to recapture their interest, but also to monetize them. There is so much passengers can gain from airlines during this time of COVID. Services like getting passengers to their seat through connectivity, even queueing for the toilets can be done remotely, and clearing customs and immigration, services to support the idea that air travel is safe.
Fundamentally, we are looking at a lot of aircraft on order. We are looking a big change out in the global fleet as older aircraft are retired with more efficient aircraft that will carry next generation connectivity. Ironically — because Inmarsat was a bit of a laggard in coming to market with Global Xpress, long after Gogo and Panasonic — we are actually going to benefit from that over the next few years because we have a next-generation capability, and an ability to keep it fresh.
People can see our commitment to better services. I think this puts us in good shape for linefit procurements. We will see a more rapid migration from retrofit to linefit because of that shift. The nature of the pipeline will change. We are already seeing that. We have already picked up several wins this year, and we are confident of picking up another couple by the end of the year. By, the end of the year, it will not have been a bad year, but not an exceptional year either.
Pearce: For IFC, this is a statement of intent that we intend to be a fully global player. I don’t think you can be truly credible in this industry, unless you have a North American strategy, because it is such a big part of the global aviation market. Clearly we can play in North America, but we can help North American carriers fly elsewhere in the world. So, yes, it is a very strong statement of intent. We intend to be the leader in IFC globally.
We are a confident, forward-looking company that is not in survival mode. We are in growth mode. Our maritime business is doing great, it has just gone through 10,000 Fleet Xpress installations. Our government businesses, both globally and in the U.S., are performing ahead of budget. Our enterprise business is also doing well in areas like logistics and transportation. We have a diverse aviation business. We are leaders in business aviation, which is bouncing back far quicker. We are in the cockpit of a lot of air transport and cargo planes, which are also bouncing back much quicker. We feel very confident about the future. We are doing our next five-year plan and it is a growth plan. We have a strong balance, and four very large new shareholders with a lot of financial firepower behind them. We are very free cash flow generative. A lot of that is going back into investment into our new satellites. Within 24 months, we start to generate more cash flow as our capital expenditure falls away, giving us more options. We have had to take stock of COVID. We had to make sure our liquidity was really strong. We had to help customers and channel partners though this the best we can. That has reset us. But, we are very much back on the front foot now. We are looking to invest, looking to grow.
Pearce: They are very different businesses. Maritime is a very mature business. It is about migrating our customers up the bandwidth curve from narrowband to broadband. That is going very well. The business is now turning the corner and starting to grow modestly. So, it is a very large business with tremendously powerful cash flow characteristics. But, it won’t grow at double-digit rates because it is so mature. Aviation is much smaller, but at the beginning of a very exciting journey to become what I hope is will be at least as big of a contributor to free cash flow as our maritime business. It is nice as a business to have several shots on goal. Also, don’t forget our government businesses. We are number one in the U.S. We serve 60 other governments. There are some very big growth opportunities there as well.
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