06.02.10

Guaranteeing a competitive future for MSS

Posted in Aeronautical, Broadband, Financials, Globalstar, Handheld, Inmarsat, Iridium, Maritime, Operators, Services, VSAT at 2:57 pm by timfarrar

So Iridium has finally announced the contract to build its NEXT satellites, which was won by Thales Alenia Space (TAS) with the support of a stunning $1.8B loan package which will be 95% guaranteed by COFACE, the French Export Credit Agency (ECA). By the sound of it, Lockheed had been confident of winning the contract, but the US Ex-Im Bank simply couldn’t match the level of support offered by COFACE.

Even Iridium appears surprised by the $1.8B Promise of Guarantee, given the suggestions in their March 2010 results call that the company would need to raise additional unsecured or subordinated debt in the public market. We had expected Iridium might need to raise $300M or more in backstop financing, based on Iridium’s April 2010 investor presentation which stated that the company was “seeking support for a[n ECA] facility of approximately $1.5B”. COFACE’s additional support therefore clearly appears to have tipped the balance in favor of TAS, because it removes the risk that Iridium would have faced in trying to tap the public markets at this point in time.

We now expect Globalstar to point out that Iridium has received an even more favorable financing package than Globalstar did last year (when Thermo was required to provide additional backstop funding as a condition of the $586M COFACE-backed facility) and potentially to seek a $200M+ extension of its current facility. This would provide funding so Globalstar could exercise its option to purchase the last 24 second generation satellites, allowing them to add more satellites to their constellation before NEXT becomes operational (and before radiation problems are expected to start impacting their 8 first generation spares in about 2015). Such a facility could also give Globalstar more firepower to market its new second generation services in 2011 and 2012, without the risk of eating into the contingent equity and debt service reserve accounts previously established by Thermo.

The next stage in this war of the Export Credit Agencies may then come in the shape of Inmarsat’s upcoming Ka-band constellation, which we expect to involve 3 or 4 dedicated Ka-band satellites (costing at least $200M each including launch and insurance), providing oceanic coverage to complement and extend its existing FleetBroadband and SwiftBroadband services. With Inmarsat’s new satellites expected to be deployed between 2013 and 2015, an order could well come as soon as this summer, when Inmarsat announces its investor guidance for the next five years. More details of Inmarsat’s plans and our expectations for their future Ka-band revenues were given in the March 2010 report, available to subscribers to our MSS information service.

The competition to build Inmarsat’s new satellites appears once again to be shaping up as a US vs European battle with TAS, SS/L and Astrium all bidding for the contract. Will ECA financing once again prove to be a key factor in the decision, even though Inmarsat has much less need for a guarantee than Iridium and Globalstar? Certainly Inmarsat has not been reluctant to seek cheap government-backed funding when it is available, as seen in its recent European Investment Bank loan to fund the Alphasat project.

In summary, its clear that ECA financing is now going to play a very substantial role in supporting the MSS industry. As a result, the prospects for a long awaited consolidation of the sector appear to be diminishing. That is certainly good news for end users of MSS, as well as service providers and distributors, who will be able to take advantage of an increasing range of competitive alternatives. This is particularly true in the maritime and aeronautical markets, where Iridium is really the only potential MSS competitor for Inmarsat. Indeed Iridium’s ability to serve these markets gives it a much more sustainable long term position than some other systems, because most maritime and aeronautical opportunities are much less likely to be undermined by the buildout of terrestrial wireless systems.

Nevertheless, it also seems hard to justify the $8B+ of capital investment that has been committed by Iridium, Globalstar and all of the other players (Iridium NEXT, Globalstar 2, Inmarsat 4, Orbcomm, ICO/DBSD, SkyTerra and TerreStar) in an industry sector which only generated $1.1B in wholesale service revenues in 2009, and though growing healthily, doesn’t appear poised to breakout from the 8% annual growth rate seen in recent years. Unless new sources of value appear (spectrum monetization being the obvious option for several players) it appears unlikely that all of the MSS operators will be as successful as they and their investors hope.

Indeed the main story of the next decade is likely to be the competition between Iridium and Globalstar, as they both strive to be the second biggest player in an MSS market that will continue to be dominated by Inmarsat, while other providers may fall by the wayside. If Iridium can grow from its current 19% share of wholesale service revenues to about a 25% market share, or Globalstar can grow from its current 5% share to 15% or more (based on its lower cost satellite system), then that should be sufficient to achieve an attractive return on capital for either company. However, with Inmarsat holding a more than 60% market share today, it appears unlikely that both Iridium and Globalstar could achieve this level of success simultaneously.

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06.15.09

The race to provide in-flight WiFi

Posted in Aeronautical, Services, VSAT at 10:56 am by timfarrar

So how many passengers will be willing to pay for in-flight Wi-Fi service on domestic routes? We’ve always agreed that there is “‘there is zero proof’ that a significant number of passengers are willing to pay for in-flight Wi-Fi service on domestic routes”, as noted in a recent NY Times article?

Certainly airlines are “rushing to install Wi-Fi” but its far from clear that they are “banking on a viable market” since it is rumored that Aircell is funding most if not all of the cost of installations. Instead its clear that airlines see very positive passenger reactions to WiFi availability and want to gain a competitive advantage, especially amongst high revenue business travelers. It appears that airlines are receiving a share of revenues, but unless a substantial part of these payments are being held back until the equipment costs have been covered, then the number of planes needed for Aircell to reach break even may be even higher than the 2000 planes previously indicated.

Current usage largely reflects take-up confined to this business traveler segment, with Virgin America reporting that “20 to 25 percent of its passengers use it on the San Francisco-Boston route, heavily used by business travelers” with an across the board “average of 12 to 15 percent”. That’s slightly better than our experience of 15%-20% take rates (20-25 users) on cross country daytime flights between San Francisco and Washington DC with only a handful of users on short West Coast flights, and its not clear if Virgin America is including night flights in its overall estimate. Although WiFiNetNews suggests “that’s not a bad ROI”, even if 25% of the revenue goes to covering the installation costs it will still take at least a couple of years before these have been covered, and Virgin has by far the best selection of routes (about 50% of flying hours cross country) and airplanes (all with at-seat power) and this ignores the fuel cost of flying the equipment around.

For Delta, it remains far more doubtful whether a fleet-wide installation makes economic sense (although it appears the risk is likely to be borne by Aircell rather than Delta) given the prevalence of short flights in most network carriers’ schedules. Indeed, Aircell is now experimenting with lower prices on these short flights ($5.95 on one recent flight we took from San Diego to San Francisco) in an attempt to stimulate demand. As a result, as the NY Times highlights, incremental revenues from Internet-enabled smartphones may be important to closing the Aircell business plan. However, we remain skeptical as to whether it will be possible to attract substantial usage from the average consumer, unless through consumption of video entertainment, which would likely overload the Aircell network, and its far from clear what is the compelling reason to consume sports or movies, which are already available from the entertainment system built into Virgin America’s planes.

Even if it proves difficult to generate a return on its original investment, Aircell is likely to dominate in-flight communications in North America, simply because its capex is a sunk cost and it is going to be installed on 1000+ commercial aircraft in the next 18 months. We hold out far less hope for VSAT-based services such as Row44, which believe will struggle to gain critical mass and justify their rather more expensive terminal installations. The most interesting airline to focus on will be Southwest, which is currently trialling the Row44 solution. Will it decide to proceed with fleetwide installation of in-flight WiFi, and if so will it decide to switch to the much lower cost AirCell solution?

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05.18.09

No longer full speed ahead for miniVSAT

Posted in Inmarsat, Maritime, VSAT at 7:22 pm by timfarrar

In January 2009, we questioned whether KVH and Viasat could afford the investment needed to complete their 2009 coverage expansion plans, as shown below.

Now the planned coverage expansion shown on KVH’s website has changed, with the South Pacific coverage expected in Q4 2009 dropped (at least for now), and the East Asian expansion delayed. Is the current economic slowdown beginning to impact miniVSAT demand, or is it just that with other parts of KVH’s business suffering, the company is now trying to be more cautious with its investment?

Although Inmarsat has not yet seen any impact from the downturn, we should find out in the next few months how widely the current economic pain is going to be felt in the maritime satcom market. Given the high capital cost of maritime VSAT equipment, it wouldn’t be surprising if VSAT suffered more than Inmarsat from any slowdown in maritime communications spending.

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