This article was updated Feb. 17 to reflect analyst commentary on developments in the Gogo/American Airlines partnership.
Shares of onboard Wi-Fi provider Gogo (GOGO) are down 28% since Friday, after Wall Street weighed the financial implications of American Airlines (AAL), a major client, switching to its principal rival.
It appears many passengers, and American's management, have been growing unnerved with the availability and quality of the Chicago-based company's onboard entertainment streaming, which recently touted the inclusion of Netflix (NFLX).
According to Macquarie analyst Andrew DeGasperi, American constitutes 14% to 15% of Gogo's annual sales, and the Wi-Fi provider stands to lose about 200 of its serviced aircraft to rival ViaSat (VSAT).
"American filed a suit declaring it had found a faster connectivity provider relative to Gogo's Air-to-Ground service, which has speeds of 3-10 Mbps/flight depending on the antenna," he said in an investment note. "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 cost."
ViaSat reflected its confidence on last week's earnings call as well, highlighting its ability to build its order backlog, DeGasperi said.
But Gogo has not necessarily lost its major client, as its existing contract suggests it can still remedy the situation if able to demonstrate comparable service to ViaSat, Evercore analysts wrote in an investment note.
"Regardless, while the risk around this particular contract clause has long been highlighted - the potential negative consequences of losing such a significant customer will likely be an overhang on shares until more clarity is provided (which could take months)," analysts Jonathan Schildkraut and Robert Gutman wrote.
Meanwhile ViaSat, a much larger company whose major clients currently include JetBlue (JBLU) and United Airlines (UAL), jumped as investors considered the value of a potential American Airlines partnership. ViaSat traded Tuesday with a $3.4 billion market cap, vs. about $800 million for Gogo.
Even before American Airlines' announcement it seems Gogo has been in rough financial shape, posting $567 million debt last quarter, up 84% year over year, and a net loss of about $98 million over the trailing four quarters.
Meanwhile, ViaSat has actually been managing to turn a profit (booking more than $29 million over the past four reported quarters), with debt of $937 million up roughly 14% year over year. (ViaSat shares are up 9% over the past 12 months, while Gogo is down 43% over the period.)
"We have received certain inquiries regarding a declaratory judgment action filed against Gogo by American Airlines last Friday," Gogo said in a SEC filing Friday. "We have no comment on the merits of this litigation, but we would like to note that American is a valued customer of ours and that we look forward to resolving the disagreement regarding contract interpretation that led to this declaratory judgment action."
In short, shareholders should take a page from American's book and consider hopping onboard with ViaSat; after all, it's not clear whether Gogo will have a reliable parachute if it gets booted.