November 09, 2011 at 11:22 AM EST
Airlines’ Latest Lure: In-Flight Wi-Fi
Numerous carriers have introduced or are rolling out paid in-flight wireless Internet to attract customers, help boost ancillary revenue.

With monster fuel bills and growing customer unrest over higher fares and baggage fee hikes, airlines are desperately seeking value-added services that passengers desire enough to pay for. Enter in-flight wireless Internet access, or Wi-Fi.

The idea is airline passengers — particularly the industry’s highly coveted business travelers — want to be just as connected at 35,000 feet as they are on the ground. There’s been rising growth of in-flight Wi-Fi over the past year, both in passenger usage rates and the percentage of airline fleets where wireless broadband service is available, according to market research firm In-Stat. In fact, in-flight Wi-Fi revenues are forecast to exceed $1.5 billion by 2015.

That’s great news for airlines like Delta (NYSE:DAL), American (NYSE:AMR), US Airways (NYSE:LCC), Southwest (NYSE:LUV), JetBlue (NASDAQ:JBLU) and United Continental (NYSE:UAL), all of which have been pressured by razor-thin margins. While airline stocks have bounced in recent weeks, they still are down on the year — a good measure being the Guggenheim Airline ETF (NYSE:FAA), which is down more than 36%.

Since Google (NASDAQ:GOOG) subsidized Wi-Fi access onboard select Delta, Air Tran (now part of Southwest) and Virgin America flights last holiday season, the share of passengers using Wi-Fi has grown from 4% to 7%.

Smartphones and tablets are becoming passengers’ devices of choice. In-flight providers also are rolling out new passenger services like streaming video that could further boost revenue for the industry. Most airlines that offer Wi-Fi price it at $11 to $49 for computer devices and $4.95 to $19.95 for mobile devices, according to the Airport Wi-Fi Guide. Southwest, however, has been promoting the service at a $5 introductory price.

But there’s a battle brewing among in-flight Wi-Fi vendors. United Continental has tapped Panasonic’s (NYSE:PC) Avionics unit to install satellite-based Wi-Fi on more than 300 aircraft in its domestic and international fleets. Continental had not offered wireless Internet before the merger, but United had used privately held Gogo LLC’s Gogo air-to-ground system.

Gogo, which earlier this year raised $35 million in preparation for an IPO, publicly criticized UAL last week for switching to Panasonic. “United’s announcement that they’ve selected Panasonic Avionics Corporation is a disappointment,” the company said on its website. “As the leader in the domestic marketplace, with more than 1,200 commercial aircraft installed, Gogo is the here and now, and we believe our current Air to Ground service is superior in many ways to Ku satellite technologies.”

The air-to-ground vs. satellite debate is not likely to end anytime soon. AirTran, which uses Gogo, was the first U.S. airline to roll out Wi-Fi fleet-wide. Southwest, which is completing its merger with AirTran, uses satellite-based Wi-Fi from Row 44. Gogo still provides in-flight wireless service to American, Delta, US Airways and Virgin America, while JetBlue is partnering with ViaSat to deploy a broadband satellite-based system on its fleet beginning in 2012.

Bottom Line: If there’s any reasonable way to enhance ancillary revenue — particularly without enraging passengers — airlines are likely to give it a go. Consider that even Amtrak is extending Wi-Fi availability to a dozen new markets. And if Wi-Fi becomes another thing about a train that’s magic, it might shift the competitive playing field just enough to make in-flight Wi-Fi a necessity instead of a novelty.

As of this writing, Susan J. Aluise did not own a position in any of the aforementioned stocks.


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