How AT&T Just Fired a Huge Shot At Gogo

This story has been updated from 8:27 am EDT to include analyst commentary and stock price changes.

NEW YORK (TheStreet) - AT&T (T) announced on Monday that it was building a high-speed 4G LTE-based in-flight connectivity service for airlines and passengers in commercial, business and general aviation.

AT&T's new service will directly compete with Gogo (GOGO), an in-flight connectivity and wireless provider currently used by a several U.S. and international commercial airlines including Delta Air Lines (DAL), American Airlines, Virgin American, Japan Airlines and others. Gogo also has more than 6,300 business aircraft outfitted with its communication services. The service is expected to be launched in late 2015, AT&T said in a press release.

Shares of Gogo were plummeting 21.6% to $14.39 on Tuesday, while AT&T shares were rising 0.91% to $35.40.

"We think it's validation on what a great business Gogo has created that some of the largest businesses in the world want to be a part of it," Gogo spokesman Steve Nolan said in an emailed response Monday evening. "To compete in this business, we believe you need to be global and have global solutions and that's what we are focused on right now.

Nolan added that the Itasca, Ill.-based company is "confident that our GTO/2Ku technologies will compete with anything here both domestically and obviously globally."

AT&T's service will be capable of providing in-flight broadband for customers including "fast, reliable Wi-Fi and onboard entertainment," the company said. Following the launch, aviation customers can also expect "improved connectivity solutions such as cockpit communications, maintenance operations and crew services."

AT&T is building an "air-to-ground network" in the continental United States to deliver the new service. It will be based on global 4G LTE standards, to provide fast speeds and efficient utilization of spectrum already owned by AT&T, it added.

"Everyone wants access to high-speed, reliable mobile Internet wherever they are, including at 35,000 feet," said John Stankey, Chief Strategy Officer at AT&T, in the release. "We are building on AT&T's significant strengths to develop in-flight connectivity technology unlike any other that exists today, based on 4G LTE standards. We believe this will enable airlines and passengers to benefit from reliable high speeds and a better experience. We expect this service to transform connectivity in the aviation industry - we are truly mobilizing the sky."

AT&T plans to work with Honeywell (HON) to provide hardware and service capabilities to deliver the in-flight connectivity solution.

AT&T, with more than 116 million wireless subscribers, more than 16.5 million total broadband subscribers, said it sees an opportunity to deliver an innovative and high-performing in-flight connectivity and entertainment service, and "will build on existing relationships within the aviation industry to deliver a better customer experience than what is available from others today."

The company plans for its in-flight connectivity service to support both business aviation and commercial airline customers at launch. It will provide information on pricing and availability prior to launch.

Wall Street analysts weren't overly concerned about the effect AT&T's plans on Gogo -- at least in the near term.

JPMorgan analyst Philip Cusick wrote in a note Monday evening that he expects AT&T to "have a number of challenges in getting into the in-flight business, not dissimilar to its challenges and delays of getting into home security," according to a research note. Cusick kept his "overweight" rating on Gogo, but cut his price target by $5 to $23.

UBS analyst John C. Hodulik says that Gogo has "first-mover advantage" in the commercial aviation (CA) business and that switching costs for airlines would be high. "Gogo has over 50% of the market under contract (avg. term of 10 years) and only 15% of the market remains up for grabs. Gogo's first few planes do not come off contract until 2018 and switching costs are high based on the downtime required to re-equip an entire fleet. In addition Gogo's suite of technology solutions and end-to-end service should continue to serve as a point of differentiation," Hodulik writes in a note. "Gogo's GTO service will launch in 2014 and offer speeds of 70Mbps, helping alleviate concerns about competing speeds from alternate solutions such as AT&T's." Hodulik has a "neutral" rating on Gogo and a $26 price target.

However, where there could be competition is in business aviation (BA) once AT&T launches its in-flight connectivity plans because customers are generally not subject to long-term agreements, Hodulik wrote. "BA is the hidden jewel of Gogo, generating incremental margins of ~85%," the UBS note stated. "Gogo has seen dramatic growth in uptake of its ATG systems and service, as it has been the only operator of this kind of network, which has significant cost and capability advantages vs. competing satellite-based providers. Based on AT&T's plan and its 4G capabilities, Gogo may have more competition in this segment starting in 2016."

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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