Gogo Lawsuit Brings 80% Market Share Into Question, Analyst Says

Gogo Inc GOGO announced that a lawsuit was filed against the company last week by American Airlines Group Inc AAL. The 8k indicated that due to the lawsuit, Gogo is now considering competitors for inflight connectivity services for approximately 200 aircraft.

Macquarie sees this situation as likely to negatively pressure Gogo “as investors will question the defensibility of its North American business.”

Related Link: American Airlines Lawsuit Pushes Gogo Shares Down 30%

Likely Impacts

The analysts highlighted three issues that arise from the lawsuit and ensuing actions:

• Pricey Replacement Costs For Gogo: As approximately 15 percent of Gogo's revenue comes from American Airlines, taking into account the 200 at-risk aircraft, Macquarie estimated the cost switch to a competitor will ring at $25 to 30 million USD in revenue and $5-10 in adjusted EBITDA (a decline of 5 and 20 percent, respectively).
• American May Be Just Taking Its First Step: According to the report, Gogo's contracts are “notoriously difficult to break,” and therefore, American's actions may indicate something more “ominous... [W]e think the filing likely indicates that American is positioning itself ahead of its first contract expiration in 2018.” Furthermore, the action may hint at other airlines (such as Virgin Media and United) possibly positioned to follow suit.
• ViaSat's Exede Service May Be A Vicious Competitor: “According to the filing, American filed a suit declaring it had found a faster connectivity provider relative to Gogo's Air-to-Ground service,” Macquarie analysts said. “The competitor was likely ViaSat's Exede service – our channel checks indicate it was aggressively marketing to both American and Southwest over the last year, promising significant speeds at lower costs.”

What It All Means

Based upon this situation and the surrounding concerns, Macquarie stressed that Gogo is due for some near-term pressure, and ultimately, the lawsuit “brings into question whether 80 percent market share in N. America is sustainable.”

The analysts concluded that Global Eagle Entertainment Inc ENT shares are preferred over Gogo at this time.

At time of writing, Gogo has seen a significant drop in price, trading down 30.5 percent on the day at $9.65.