Just how rough is it going to get?

The news that Aircell has started reducing its staff has not come as a big surprise to many insiders and experts in the in-flight entertainment and connectivity (IFE&C)) industry.

Ron LeMay.jpg

Indeed, back in July, when Aircell’s long-standing president and CEO Jack Blumenstein assumed chairmanship from Ron LeMay (pictured), who in turn took the role of president and CEO, I started receiving tips that Aircell was looking to trim its ranks. My conversation with Aircell went like this:

QUESTION FROM MARY: I’m writing an article about Aircell’s new announcement that Jack is becoming chairman and LeMay is becoming prez and CEO. I know Jack has been working exceedingly hard for many years to bring Aircell to the position of dominance that it finds itself in today. Is today’s announcement essentially saying that Jack is ready for someone else to take on the day-to-day operational challenges while he looks at the broader picture and plans strategy? I’m trying to wrap my head around it so any help would be appreciated.

In what may or may not be related, I do have another question (which may be a bit sensitive). I’m hearing that a shakeup is in the works at Aircell, which could stand to be a bit leaner (cutting costs while coming to terms with the fact that there are 300-plus people handling the commercial side and you really only need about 75). Can you comment?

ANSWER FROM AIRCELL: Just to quickly follow up our phone conversation yesterday, as you pointed out, Aircell has been through a period of extremely rapid expansion over the past few years. We are now entering a new phase of the company’s lifecycle – transitioning from a start-up organization to an operating company. Ron’s extensive experience with companies in high growth phases like Sprint Long Distance and Sprint PCS makes him the perfect fit for president and CEO.

And as I mentioned yesterday, I don’t know who your source is or how they came up with those figures but how many rapidly growing companies do you know that could cut 75% of their staff and still be a going concern?  Ridiculous.

I am not suggesting that Aircell was misleading. But I am kicking myself for not phrasing my question to Aircell in a different way.

So what now for Aircell? As mentioned in my Flightglobal article, Aircell is not confirming the number of employees being let go, nor has it disclosed whether management is affected (guess we’ll be checking LinkedIn profiles in the coming months).

However, the company has assured that it’s got new financing coming in October. It has also applied for government stimulus funds.

But do the Aircell staff cuts spell a deeper problem in the industry? Some experts say many IFE&C firms are now suffering. We are, after all, in the midst of a global economic recession. Consultant Tim Farrar in his latest blog adds some of his own perspective. Here it is in full: 

In-flight broadband: follow the money

It seems that people are now coming round to the view, which we’ve expressed since 2006, that there won’t be enough paying users of in-flight broadband for both network providers and airlines to make a profit on the costs of deploying equipment and running a network (as Boeing found out after spending somewhere between $1B and $2B on Connexion). Our view was that only airlines who are interested in offering a differentiated service would be able to justify the costs involved. However, to date the leading service providers (Aircell and Row44) have apparently not only been installing the equipment for free, but have also been offering a cut of revenues to the airline. Its no wonder that this “no lose” proposition has led to fleetwide installation commitments from most of the major US airlines. In comparison, installations of Inmarsat equipment for in-flight cellular services on aircraft in other parts of the world have slowed dramatically over the last 18 months, as most airlines no longer have the money to pay for fleetwide upgrades (with the possible exception of Ryanair, which we suspect may have a similarly attractive deal from OnAir).
Lost in the noise of Southwest’s commitment to install Row44 service across its entire fleet of 540 aircraft was the footnote that there isn’t “a solid timeframe for [installation]” because “certain specific details concerning the cost and financing of equipage are still being worked out”. From what we’ve heard, Row44 needs to raise a lot more money very soon in order to move forward with full-scale deployment (pretty obviously, since fitting equipment on 500 planes at $250K+ each would cost $125M), and presumably Southwest’s announcement was timed to help them secure that funding. However, with Southwest also demanding “control [over] the price point that our customer sees”, it seems a pretty unpalatable deal for potential investors if Row44 must front the installation costs and pay for the network and then let Southwest set the pricing to maximize its own return (probably more dictated by customer loyalty) rather than Row44′s revenues. Similarly unreasonable expectations appear to have been the reason why the oft-mentioned return of Connexion service on Lufthansa (who refused to provide any revenue guarantee to the network provider but wanted to make the provider liable for any future equipment deinstallations) has not happened to date.
What is the solution to achieving a sustainable business model for in-flight broadband? Whether it lies in airlines providing connectivity for free as a differentiator for their customers, or airlines using the link to the aircraft as a means to reduce their own operating costs, what we’re ultimately going to have to see is a change in the direction that the money flows. Instead of airlines getting the equipment for free and receiving a share of the service revenues, the airline is going to have to pay for the equipment and maybe in some cases even offer a revenue guarantee to the network provider (particularly on long-haul international routes where the cost of providing Ku-band coverage is much greater).
How palatable will in-flight connectivity be then to airlines that are currently losing hundreds of millions of dollars a year? At the very least we’d expect them to be a lot more discriminating in deciding whether to provide connectivity or not (who needs it on a one hour shuttle flight?). Perhaps its only if one of the providers goes bust that we’ll see a return to rationality in pricing (of course, it would be very unlikely for the service itself to disappear completely as Connexion did, because the costs of operating either Aircell or Row44′s networks domestically aren’t that high). Until that point is reached, expect airlines to continue to scramble to get something for nothing with their in-flight connectivity installations. In the meantime we’ll be watching carefully to see if the discussions over “cost and financing of equipage” between Southwest and Row44 get resolved and if investors are willing to put more money into in-flight connectivity providers.

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4 Responses to Just how rough is it going to get?

  1. Klaus Hergeschiemer, from G Section September 22, 2009 at 12:06 pm #

    This is a very interesting write up RunwayGirl. It might just be me, but lately when I see you get a quote from Aircell, it seems like you are getting a very irritated response. Would you agree?

    My sources tell me they had upwards of 100 people let go, and there is talk of a second round. This may be heresay, but I am sure you have yourself networked well enough to get the straight story.

    From a person who has tried the service a few times (and one of the foolhardy few who have actually paid for it) this is how I see it…

    How do they expect to make money when they give it all away for free?
    -In recent weeks, any time I get off a Delta flight, I have someone shoving free wifi coupons in my face. I have 4 coupons in my pocket right now.
    -My favorite is going on Gogo and seeing whatever price they are testing that day, and knowing everyone around me has free coupons so what does the price matter? Do they even need a pricing person over there?

    It doesn’t take a rocket scientist to do the math on this one. Spending lots of money + no revenue coming in = No future.

    A good idea/product doesn’t automatically equate to a successful operation. And, as for the “transition” from start-up to operating company-I wouldn’t make that statement just yet.

    K

  2. Mushroom September 23, 2009 at 6:56 am #

    I take a similar bearish view on this powder puff idea of wifi in the sky.

    Slicked up presentations and video demos can only satisfy a certain number of investors. After that it’s all about the cash flow. Handing out free coupons on a system installed on more than 500 aircraft isn’t the greatest indicator of belief in your own business model.

    And this “right sizing” is yet more positive spin on a sad situation. The people losing their jobs dont care for “right sizing to be stronger for the future”

    Lehman Brothers also “right sized” themselves a year ago…

  3. Turtle wins the race?? September 23, 2009 at 9:45 am #

    I wonderif when the dust settles LiveTV may be the dominate wifi provider? Their wifi is free (albeit on one airline) and their mantra has always been that the wifi market demands it be “free”.

  4. Mary Kirby September 23, 2009 at 9:48 am #

    What do you think of LiveTV’s exploration into Ka-band connectivity?

    http://www.flightglobal.com/articles/2009/09/22/332616/in-flight-internet-over-ka-band-satellites-could-fly-in-10.html