Could protracted uncertainty in the inflight connectivity (IFC) market push airlines towards operating their own systems and networks, throwing a curveball for service providers trying to find their feet?

Integrating connectivity services would give airlines even more control over the customer experience, and guard them against disruption as IFC providers struggle to turn a profit in a sector many analysts deem unsustainable.

It is a trend that started around 18 months ago but is only now beginning to really boil, according to David Bruner, CEO of Aviation Communications Advisors.

Bruner is the former head of connectivity for IFC provider Panasonic Avionics and left in March to set up the consultancy practice after 15 years with the company.

“There’s already a move towards this with Delta Airlines (NYSE:DAL) with their inflight entertainment, but I know there’s at least a couple of airlines who are looking at this from a standpoint of IFC as well,” he told SatelliteFinance. 

“This could be a really interesting movement in the business and flip everything on its head.”

Delta stands out from US-based peers for its strong commitment to seat-back video screens, particularly when it comes to domestic flights.

It recently installed seat-back video screens on the 600th plane in its fleet, offering a platform called Delta Studio that provides services that include films, music, games and free messaging.

Meanwhile, US rivals United Airlines (NYSE: UAL), American Airlines (NASDAQ:AAL) and Southwest Airlines (NYSE:LUV) have been transitioning towards the use of personal devices on domestic flights.

But providing robust connectivity is an increasingly important requirement they all share amid soaring demand from passengers. A London School of Economics study funded by IFC player Inmarsat (LSE:ISAT) said the inflight connectivity market will be worth US$130bn by 2035, contributing US$30bn to airline revenue compared to about US$900m today.

Amanda Fish, Delta’s onboard products general manager, underlined how concerned airlines are about the problems plaguing IFC providers at World Satellite Business Week in September.

“Should something catastrophic happen, we will feel the effects of it,” Fish warned.

The airline was unable to comment further before the press deadline.

According to Bruner, large airlines that have been running IFC services the longest are more likely to bring the capability in-house. They could use existing alliances with other airlines, as well as equity partnerships, to band together for more buying power.

This would help them gain more satellite capacity to service rocketing demand, as “not nearly enough is being planned and invested in by the big operators”.

Capacity pricing pressures have been weighing on satellite operator businesses and their stock, creating a lull in GEO telecoms orders that has added to the market’s uncertainty.

A step too far?

While airlines are increasingly looking to be more involved in the passenger experience, there is a big difference between controlling the retail model and true upstream infrastructure vertical integration, according to Josh Marks, who became CEO of IFC provider Global Eagle Entertainment (NASDAQ:ENT) in April.

Unlike its rival Gogo (NASDAQ:GOGO), which provides connectivity for Delta, GEE offers airlines a white label service that they can incorporate into their own brand and choose the onboard pricing.

“I can’t think of a single airline in the world that’s actually thinking about building their own systems and networks,” Marks told SatelliteFinance.

“It’s a completely different capex profile, a different skillset, it doesn’t make sense to implement it for a single carrier. Yes, if you could get groups of airlines together then you would see a captive service provider, but that’s not so dissimilar to the way that service providers have divided the industry today.”

There is value in driving competition in the industry and having service providers that need to innovate on technology to win market share, Marks said.

“If you bring that in-house you lose the leverage on the investment side, whether it’s R&D or sourcing.”

It is also unclear whether airlines would want to assume liability and be accountable for safety.

Oakleigh Thorne, who became Gogo’s CEO in March, pointed to the inherent complexity of the market and the importance of scale and highly skilled engineers.

“Airborne IFC providers operate at the confluence of three industries – mobile telecom, satellite and aviation; each of which is complex on its own … when you combine all three the task is monumentally complex,” Thorne said via email.

The wild card

Another potential shake-up could come from countries that have long subsidised their national airline champions as they also consider taking more IFC control.

“There are at least six or seven of them that I can think of,” Bruner said.

“They probably do not have the scale right now for this to make sense but they have a political body that is subsiding their efforts to move out and be an IFC player.”

“It’s another little twist that goes against the other grain of a few really big players – small players that really just want to address national fleets based on governmental objectives.”

Helping to drive a potential sea change in the service provider structure is the sizeable portion of IFC contracts installed today that are set to turn over in the next 24 months.

About a third of the market is currently installed in aero, and Bruner said there are orders that could bring this up to around 50%.

That of course also leaves a sizeable chunk of the market that is unspoken for if IFC providers are able to seize the opportunity effectively.

China and the Asia market in general is starting to take off, and Bruner said more business could help stabilise existing players and help them recapitalise.

Despite its challenges, the IFC market has huge potential, Bruner said, adding that its issues really stem from “the fallacy from day one” that saw service providers subsidise equipment in their thirst to gain scale.

“Every conference I go to airlines complain about how much the equipment costs, but in fact it’s been subsidised at irrational levels since the beginning of this business,” he said.

“When they start to see the real costs of these systems, and they’re going to have to bear those costs, I think that could be an interesting moment for many of these CEOs – especially the largest airlines.”