What's an IFE&C journa-blogger to do when asked by an industry insider to re-run the numbers on the Connexion by Boeing math formula posted last week? Tell the industry insider "hell yeah". I love to have as much food for thought as possible. Don't you?
So here is the new equation care of said industry insider, and some reasoning behind why voice calls may turn Ku-band into a profitable venture. Whatcha think?
The number of passengers who used Connexion in the first two years is completely irrelevant, says our source. "The number was low for many reasons: slow introduction (they had 200 planes only at the END of the period), airlines started marketing actively only after a few planes were installed, lousy marketing, poor branding etc."
The right calculation should be how many people SHOULD have used it: So take 200 planes X 600 seats a day (this equates to 200-seat planes operating 3 flights a day or 400 seat widebody operating 1 ½ flights a day) X 320 operational days a year X 0.8 load factor = 31 million passengers a year.
Take the usage rate Gogo is getting (good estimate) of 10% and that equates to 3.1 million passengers a year! - significantly more than David Friedman's 250,000 per year.
Also, the 2-year period makes no sense - NO ONE expects to cover capital costs in 2 years - 5 years is much more reasonable.
NOW if you multiply 5 years X 3 million users X $10 per session = you get $150 million which is much, much better compared to the capex of $100 million (which was a good figure for Connexion)
However, as you did mention, there are some "small" operating costs which amount to about 65% of the revenue - leaving only $50 million to cover $100 million investment.
So bottom line - calculation was flawed but result is same (even though not so extreme).
The answer of course is: 1) cheaper systems than those of Connexion - the new generation should not be more than $350K per plane and 2) Utilizing the system for phones too.
To be profitable on a KU system - Wi-Fi is not enough. There must be revenue from phone calls. (Sidenote from moi - note that Panasonic sees voice playing a big role in its eXConnect offering).
The additional investment for making phone calls from planes is relatively low - not more than $100K per plane, infrastructure is identical, and revenues will probably be at least twice or three times as large as Wi-Fi revenues
Eureka - a losing business becomes a profitable one!
on June 30, 2009 3:01 PM | Reply
My favorite quote from above.
"The right calculation should be how many people SHOULD have used it"
on June 30, 2009 4:39 PM | Reply
I too thought that was a gem.