Shares of in-flight broadband service provider Gogo (GOGO 3.21%) closed Thursday's trading session down by 23%. The company disclosed an amendment to its contract with Delta Air Lines (DAL 2.17%), splitting the airline's in-flight network offerings between Gogo and one or more unnamed competitors.
Under this amendment, the agreement to provide so-called 2Ku high-speed satellite network services to Delta's various aircraft will expire in a staggered fashion, starting in November and running through July 2022. Delta previously had the right to terminate the entire contract if a "materially improved" alternative emerged; the amendment removes that right. Instead, Delta is now free to phase in replacement service providers gradually. The two companies will continue to discuss further developments, and Delta may agree to extend some or all of the proposed expiration deadlines based on Gogo's technical and financial arguments.
This change was hardly a shocker since Delta has been suggesting that it wanted a multivendor solution since March and most of Gogo's airline clients already work with several in-flight broadband services. There's even an upside to Delta's move because it's a precursor to the airline providing free in-flight network services at some point. That would be a dramatically different business model where Gogo's royalty payments for the right to access Delta's aircraft would be replaced by Delta paying Gogo for connectivity services. The hardware installation costs would also move from Gogo to Delta.
"We further believe that Delta's move to free service will be a catalyst for other airlines to provide free service, thereby driving more demand for our product, and more revenue and cash flow for Gogo," said CEO Oakleigh Thorne in March. The idea is still in play.
"We are also very pleased to see Delta's continued focus on providing free Wi-fi despite the impact of COVID-19 and view that as a positive for the in-flight connectivity industry as it will drive demand," Thorne said in Thursday's prepared statement.
Potential rivals that could take some of Delta's business away from Gogo include Viasat (VSAT 3.11%) and Boingo Wireless (WIFI). However, investors didn't interpret Thursday's news as a big win for either of them. Both stocks fell on Thursday, roughly in line with the general market as renewed pessimism drove the S&P 500 index nearly 6% lower. Gogo's stock has now fallen by 64% year to date while archrival Boingo is up by 15%. Oh, and Delta fell 14% on Thursday for reasons completely unrelated to the amendment of its deal with Gogo.