Business Models Evolve with New IFEC Technology
Commercial airlines are constantly looking at how to evolve the business models they use for monetizing connectivity services. With new onboard technology, ATG and satellite IFC networks coming into the market, the business models used by airlines for connectivity will continue to evolve.
Every airline has multiple factors to consider when establishing a business model around the way they distribute cabin-based in-flight access to the internet for passengers. Does the operation fly regional routes only, or internationally? How many passengers on average will actually use the system? In recent years, there have been variations of three different business models used by commercial airlines to manage internet access for passengers. First, a wholesale model where the airline pays the internet Service Provider (ISP) and connectivity then provides access to internet services for passengers with a custom user interface. This wholesale model is either charged with tiered access to certain internet services and speed levels or is given to passengers for free, which is what JetBlue does with ViaSat.
Second is the service provider control model, where carriers allow the ISP to manage everything associated with cabin-based access to internet including the price charged for access.
Third is a hybrid of these two models, where the airline structures access to the internet based on the type of aircraft, type of service and length of flight as well as services that the passenger is going to access. What ultimately influences an airline to go with wholesale, passenger payment or hybrid models? It really depends on who you ask.
Should Passengers Pay?
“The Australian domestic market is extremely competitive and we think free Wi-Fi adds to our competitive edge. Qantas’ in-flight Wi-Fi is free and every benefit of Wi-Fi will be included in the price of the fare,” said Rob Marcolina, group executive for strategy transformation and Information Technology (IT) at Qantas Airways.
After several months of performance testing with ViaSat, Qantas is beta testing the Wi-Fi on a single in-service Boeing 737, where Qantas provides an in-depth overview of the service and how it works, and then allows passengers onboard the 737 to use the service free of charge, which will be their chosen model going forward.
Qantas has had the advantage of seeing what other carriers have done all over the world as well. Marcolina said Qantas chose ViaSat’s Sky Muster Ka-band because it “represents a big improvement over previously deployed Ku-band satellites” and has speeds fast enough to “stream movies and live sport, in addition to browsing the internet and sending emails.”
“This will allow us to get more data — both our own and from customers — on performance, ahead of installing the system on 80 of our domestic 737 and A330 aircraft from mid-year. So far, we have been pleased with the system’s overall performance including speeds over 12mbps,” said Marcolina.
JetBlue, which also uses ViaSat’s Ka-band satellites for its service, also provides the service free of charge to passengers, and recently detailed how its agreement with ViaSat works within their 10-Q quarterly report filed for the first quarter of 2017. According to JetBlue, its ongoing service provision agreement with ViaSat is largely driven by its $400 million sale of LiveTV to Thales in 2014.
“Prior to the sale of LiveTV, JetBlue had an agreement with ViaSat through 2020 relating to in-flight broadband connectivity technology on our aircraft. That agreement stipulated a $20 million minimum commitment for the connectivity service and a $25 million minimum commitment for the related hardware and software purchases. As part of the sale of LiveTV, these commitments to ViaSat were assigned to LiveTV and JetBlue entered into two new service agreements with LiveTV pursuant to which LiveTV will provide in-flight entertainment and connectivity services to JetBlue for a minimum of seven years,” JetBlue notes in the statement.
Delta Airlines is another example of a commercial carrier that equipped its aircraft with IFEC several years ago, and is now going through a technology refresh to deploy newer and faster connectivity. The international carrier’s service provider is Gogo, and Delta allows free in-flight access to newly released movies, television shows and content from premium channels such as HBO, as well as a wide variety of podcasts, music, and even visual novels for free. Similar to American Airlines and other carriers using Gogo, though, Delta offers pre-flight purchasing of internet access for $16 per trip, $49.95 per month and $599 per year for an annual pass. These are all for domestic flights only; internationally, Delta uses a different model.
“Delta partners with Gogo to manage the back end and coordinate our pricing strategy. Our focus is on providing the best Wi-Fi product and experience to our customers, which includes competitive pricing. As Wi-Fi technology improves and drives costs down, we are able to pass these savings on to our customers,” said Lisa Connell, general manager of Delta’s on-board product division.
Connell notes that currently 1,100 Delta aircraft are equipped with in-flight Wi-Fi service, offering access to more than 400,000 customers per day. One way that Delta optimizes pricing and access as well as its business model is through quality assurance, according to Connell.
“We gather survey data on a continuous basis and use learnings to guide improvements to the experience. We’re currently installing 2Ku, Gogo’s next-generation, high-speed Wi-Fi technology, to provide customers with the “at-home” experience they’re accustomed to. We’ve seen significant improvement in customer satisfaction since 2016 and are seeing this positive trend continue into 2017,” said Connell.
Service and Supplier Perspectives
One of the biggest factors influencing connected aircraft business models for airlines is obsolescence, and trying to offer differentiation in cabin connectivity speed and experience over the life span of an airframe which averages 20 to 25 years. Due to the way aircraft are operated, when a carrier makes a purchase decision on a new in-flight Wi-Fi product, the installation of their servers, transceivers, antennas and antenna control units is not going to occur until up to a year after the purchase actually occurs. Realizing this, suppliers are starting to introduce new technology to address the obsolescence issue that has dominated in-flight Wi-Fi equipage over the last five years.
At the 2017 Aircraft Interiors trade show, Panasonic Avionics launched its NEXT IFEC platform, which Jon Norris, senior director of corporate sales for Panasonic, refers to as the “flying backbone network” for a connected aircraft that airlines can continuously upgrade and customize over the life span of the airframe. NEXT includes hardware, core software, operating features and functionality, and the ability to modify Wi-Fi price points.
“We have enough flexibility in our system where you can have a different model for different classes of travel so it could be a premium service in first class for example, a different service in business, and a paid access model in the back of the plan. We provide airlines with the option of enabling features and to suit their customer base and the business model that they prefer to operate within,” said Norris.
Suppliers of connected aircraft components to systems integrators are also evaluating how they can help airlines optimize their business models. Kontron, a supplier of embedded computing technology is currently doing this in partnership with Lufthansa Systems, the IT service division of Lufthansa. Lufthansa Systems is using Kontron’s A100 Cabin Wireless Access Point (CWAP) as the wireless connectivity platform for its innovative testbed on Lufthansa’s FlyingLab flights. Lufthansa initiated its FlyingLab flights to give passengers the ability to test and familiarize themselves first-hand with the latest technologies and services being developed for use on airlines as well as to showcase new stimulating types of live content and digital trends. FlyingLab allows Lufthansa to introduce new technology and collect feedback in a real-world aircraft environment.
Andy Mason, vice president of system and program management at Kontron said his company focuses on optimizing the cost of establishing an in-flight Wi-Fi network infrastructure.
“In any technical area when you roll out a new technology, the first time it costs more, and once you have general adoption of that technology, the equipment becomes cheaper over time. You get some momentum going and it allows you over time to reduce cost of the equipment and the service. The performance is getting better from the technical point of view and the cost per megabyte is also going down. So this has the benefit to both the service providers and the airline and end customers that you would expect the cost to the passengers will have a trend going downward over time,” said Mason.
Future Connected Business Models
Business models used by airlines to provide in-flight Wi-Fi services are still evolving. Over the next five years, a significant trend to watch will be how much control operators continue to take over the cost of providing access to the internet for passengers. The first operators to equip their aircraft with internet connectivity relied primarily on the service provider setting the price and managing end user access to the service.
“At the airlines that have taken control of the pricing, whether that’s Southwest or United, the prices there are a lot lower than when the service provider sets the price. Typically those airlines have come to a conclusion that the right price is about $5 an hour. Whereas Gogo is finding that its revenue maximization strategy sets the price at about $10 per hour,” said Tim Farrar, a technology analyst and president of TMF Associates.
Service providers themselves will also continue to introduce new technologies, especially those that help to increase the speed and reliability of in-flight connections for passengers. These include a continued increase in demand from passengers for faster speeds enabled for their mobile device connections; the variety in the mixture of the types of devices people use onboard will continue to increase; and an increase in the number of airline passengers connecting to in-flight Wi-Fi, said Don Buchman, vice president and general manager of commercial mobility at ViaSat. “We’re moving toward Terabit per second satellites. Bandwidth is going to increase and the cost charged to airlines will to establish the connection on their aircraft will continue to come down. Airlines don’t want to buy 2017 technology and be paying for 2017 rates in 2025. You want to have the device that’s going to continue to grow and not have to change it every two to three years. We want to have the equipment available and the type of performance and reliability that allows airlines to consider and establish the best business model that works for their particular operation,” said Buchman.