ATG Beyond the Pandemic Boost

Demand for Inflight Connectivity (IFC) is at an all-time high, with growth outpacing the general aviation sector's recovery from the COVID-19 pandemic. The pandemic heralded two fundamental changes in IFC demand. First, passengers developed more hunger to stay connected while onboard, emulating behavioral patterns learned at home at the peak of the pandemic-induced work-from-anywhere and stay-on-social media trends. Second, corporate and leisure travel moved to business aviation as organizations and wealthy people invested in private travel to reduce infection risks and mitigate the impact of travel restrictions. In fact, NSR's Aeronautical Satcom Markets, 10^th Edition, finds that demand for IFC in business aviation at the end of 2021 exceeded pre-pandemic levels on the back of the surge in private travel.



While satellite solutions quickly come to mind when one thinks of the IFC market, Air-to-Ground (ATG), the industry's alternative solution to satellite, has significantly benefited from the surge in private travel. ATG-based solutions leverage cell towers to provide connectivity to aircraft. They have lightweight antennas and less expensive onboard equipment than satellites but are unsuitable for long-haul and over-the-ocean routes, making them excellent for business aviation. NSR estimates that ATG accounted for 46% of the total number of IFC-enabled aircraft in 2021, excluding L-band solutions. In 2021, ATG in-service units grew by 18.2% to 7,445 units, with business jets accounting for 83% of the total units. Most ATG units are in the U.S, with Gogo's ATG terminals onboard about 7,303 commercial and business aircraft in the U.S in 2021. The second commercially available ATG solution is the European Aviation Network (EAN) hybrid network with S-band, spearheaded by Inmarsat and Deutsche TeleKom, which grew its installed base to 270 units in 2021.

Overall, both Gogo and EAN recorded a wonderful year in 2021 across crucial growth metrics, leading ATG's market share of total IFC retail revenues to jump from 20% in 2020 to 33% in 2021. Moreover, the resilience of the business aviation segment turned a pandemic headwind into a tailwind for ATG operators. For instance, Honeywell estimates that business aviation traffic surged by nearly 50% in flight hours in 2021 versus 2020 and roughly 5% above 2019 (pre-pandemic). In addition, the unprecedented demand for connectivity in business aviation boosted Gogo's average service revenues per aircraft online (ARPU) for ATG units in 2021 by 10% to $3,238 and is still growing in 2022.

Is There Still Room for Further Growth?

Q1 2022 shows that momentum is still high for connectivity demand in business aviation. Gogo recorded $92.8 million in total revenues during the quarter, a 26% increase YoY, with an underlying 52% jump in equipment revenues. The growth in ARPU and double-digit growth in shipments year-on-year guarantee sustained service revenues in the mid-term, given 3-5 contract durations. In addition, Gogo provided a solid growth outlook across all crucial financial metrics, with an expected 15% compound annual growth rate in revenues until 2026. Gogo is confident that its existing ATG offering AVANCE and 5G deployment will drive this outsized growth, excluding planned global expansion with LEO broadband service.



While Inmarsat did not publicly provide mid-term guidance on EAN's mid-term growth prospects, recent progress in the network and NSR's market data suggest enough room for growth. With IAG as an anchor customer, EAN currently provides connectivity on all British Airways' short-haul fleet, with installations ongoing on Iberia, Vueling and AEGEAN. In addition, EAN's partnership with Tampnet augments the network's capability to serve the coastal and high-density routes in Northern Europe, further making ATG more competitive in Europe's domestic travel IFC market.



NSR's Aeronautical Markets Satcom report, 10^th Edition, finds that ATG penetration rate reached 31% of the global business jets and 11% of commercial aircraft. NSR believes ATG can capture 47% of the 28,714 business jets and 12% of the 33,119 commercial aircraft globally by 2026. NSR sees 5G upgrade, ATG suitability and satellite complementation as core drivers of the forecasted growth numbers.

Competition, Satellite Complementation, and ATG Emerging Markets

ATG appears to have the most significant barriers to entry compared to satellite solutions. Up to eight major service providers and dozens of value-added resellers currently offer satellite solutions in the IFC market. In contrast, Gogo remained the primary provider of ATG service in the U.S and EAN in Europe. While Gogo's closest competitor SmartSky Networks has reached significant milestones and is nearing a commercial launch, it took years of R&D and about $100 million in investment to get to that point. SmartSky recently announced two major customers and crucial regulatory approvals, making its solution a market reality. Can the U.S aviation market accommodate an additional player? Yes, at least in the mid-term. Gogo alone cannot serve the demand activity at a 1,300 record shipment total by year. NSR's penetration rate and total addressable market data suggest room for growth. While SmartSky's margins and path to sustainability are still elusive, given its early stages, Gogo's historical performance and outlook show that ATG commands higher margins compared to satellite solutions.

Outside the U.S and Europe, China presents another market with high momentum for ATG deployment. Chinese telecom giant ZTE, in partnership with China Telecom, is deploying 5G base stations for ATG connectivity in the country. With the success of China in 5G deployments, this development was not unexpected. In addition, another ATG provider, SkyFive, with Nokia's ATG assets, is also in the running to provide ATG in China. SkyFive plans to deploy ATG in Australia, New Zealand and parts of Southeast Asia and the Middle East, with a subsidiary that is focused on the Chinese market. While these emerging ATG providers are still in the early stages, NSR believes they form a critical piece of the IFC future. Particularly in China, where the participation of local giants such as ZTE can help to accelerate inflight connectivity adoption. While Panasonic is seeing tremendous success in China on the back of the APSTAR-6D launch with Hong Kong-based APSTAR, ATG is expected to unlock the Chinese domestic IFC market.

How Can ATG Compete Against Satellites?

Given Gogo's plans to adopt OneWeb's LEO satellite capacity for global expansion, market observers wonder if the legacy ATG provider sees a long-term future with satellite. NSR sees Gogo's LEO broadband announcement as a hedge against the emerging competition in the U.S and a potential opportunity to capture markets abroad. Gogo budgeted $65 million in CAPEX in 2022, with $50 million earmarked for Gogo 5G. Gogo's historical investment in 5G and continued CAPEX show ATG is still primarily its future. In fact, NSR believes Gogo's managed services approach to LEO broadband with a revenue-share agreement presents less downside risk and higher upside should LEO competition becomes strong.

NSR maintains that LEO solutions have lower entry barriers in business aviation, given lower IFC penetration, comparatively less stickiness and the ability to serve some regions with incomplete constellation deployment. Hence, ATG faces competition across three fronts, GEO, LEO and L-band. However, Gogo's performance shows that ATG offers better unit economies than satellites. As a result, ATG is expected to dominate the business aviation market, while L-band will rescind to primarily cockpit operations and smaller general aviation aircraft. Intelsat’s exclusive right for Gogo ATG for commercial aviation is a trend to watch as Gogo sets to launch its 5G IFC network in late 2022. The big picture question is - can Intelsat adopt the 5G solution at scale as a suitable alternative for domestic travel in NAM? This could solve the latency (against LEO) and capacity constraint (against GEO competition) if the 5G network proves commercially viable.

The Bottom Line

• NSR estimates that Satcom solutions will dominate the global inflight connectivity market, accounting for 84% of the total IFC retail revenues by 2031, up from 67% in 2021.

• However, ATG still has enough room to thrive. NSR estimates that ATG solutions will reach approx. 16,238 in-services units by 2031, with associated cumulative retail revenues of $8 billion throughout the decade.

• With satellite solutions dominating the commercial aviation segment, business aviation will remain the largest segment for ATG.

• China stands to become the second-largest ATG market after the U.S, helping to unlock IFC adoption in the domestic Chinese aviation market.