American Airlines (NASDAQ:AAL) has announced that it will equip its entire two-class regional fleet with inflight internet. This is excellent news for its service provider, Gogo (NASDAQ:GOGO), which already provides internet service onboard 70 regional aircraft operated by American and its partner regional airlines. The additional internet-equipped aircraft will give Gogo a chance to serve passengers during the entirety of their travel, thus improving value, particularly for customers with daily and monthly passes. Two-class aircraft comprise only part of American's large regional fleet; however, all new deliveries are two-class, and the older, single-class aircraft are being phased out. Eventually, Gogo may cover American's entire regional network.
The Two-Class Regionals
For simplicity, American Airlines uses the term "two-class" regional jet. Two-class regional jets for American Airlines are generally the Embraer 175 (ERJ) and the Canadair 700 and 900 series. All of the new regional jets being purchased by American Airlines are two-class. Older aircraft are being phased out not because of the lack of premium seating, but concerns over fuel efficiency. Newer, large, regional jets offer fuel savings, which is important, even with $60 oil. American has an agreement with Embraer to purchase 60 ERJ-175s, which will be placed with its regional carriers. The airline also has options for an additional 90 ERJ-175s. American also operates 47 Canadair 700s and 8 Canadair 900s, with its wholly owned subsidiaries, Envoy and PSA. Additionally American has contracts with several regional providers such as SkyWest (NASDAQ:SKYW), to provide regional flights.
The Good News
Although the press release from American was unclear about the cost of installation, it is likely American Airlines is paying most or all of the cost of installing internet in the new aircraft. Any increase in Gogo's network is good for business, for obvious reasons. Internet service on shorter flights might not be cost-effective for travelers, but for longer regional flights such as Miami to Pittsburgh (2+ hours,) there is an opportunity to pick up new customers. The real benefit to adding regional internet may not be individual sales, but rather daily or monthly internet passes. A passenger with multiple flights might find Gogo's service of value if they can use it during the entirety of their airborne travel, not just while on the mainline flight. Additionally, there is an opportunity here for American to bundle the internet service with other options such as premium seating. Even if sales on regional flights are limited, it is one more opportunity for Gogo to advertise, and the expansion shows a vote of confidence from American.
The Bad News
In the interest of being objective, the downside should be considered along with the good news. Because Gogo derives most of its revenue directly from customers, installing internet in aircraft is not enough; passengers need to utilize the service. One of the main issues for Gogo has been customer reluctance to pay for inflight internet. Although regional aircraft are flying farther now than they did 20 years ago, the average regional flight is still relatively short. FAA and airline restrictions still prohibit the use of laptops and some other portable electronics during taxi, takeoff and landing. Because regional flight tends to be shorter, the time that passengers may use the service with the larger devices will be quite limited (about 45 minutes on a one and a half hour flight.) That being said, the new two-class regional jets have better range than their predecessors and may take over many of the flights currently flown by MD-80s and Boeing 737s (NYSE:BA). Those flights will be longer than the traditional regional flight and the internet service will be important to passengers looking to stay connected.
The implementation of internet in the entire two-class regional fleet will take time, and some of the non-internet (one-class) regional planes will continue to be operated for a few more years before they are completely phased out. However, the expansion across AA's regional fleet helps solidify Gogo's position as the internet provider for AA. Adding inflight internet to additional aircraft by itself will not bring Gogo's profits into the black, but it does provide an opportunity to build its customer base and increase market share.
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