Aircraft Wi-Fi Company Gogo Cuts Debt as Interest Rates Rise

“For those of us who have lived through many cycles, we’re very sensitive about not being over exposed in that regard,” said Mr. Rowan, referring to rising interest rates.

Moody’s

in March upgraded Gogo’s corporate rating from B3 to B2, which is subinvestment grade, citing the demand for its services and the company’s declining leverage.

Broomfield, Colo.-based Gogo, best known for its in-flight Wi-Fi, for years burned cash and levered up as it competed for business from major airlines. A failed equipment upgrade prior to the pandemic dented Gogo’s revenue after the company took on debt to finance the investment.

The company at the end of 2018 began refinancing its debt load, which included dropping the interest rate on its senior secured notes the following year to 9.875% from 12.5%. It also used the $400 million in cash from the sale of the commercial business in December 2020 to pay down its outstanding debt, replacing its notes with a $725 million term loan that carried a lower interest rate.

Gogo sold the commercial aviation business to Intelsat SA, a satellite company. “That $400 million enabled us to pay down debt and create the strategic and financial flexibility that would serve as the foundation for the business going forward,” Mr. Rowan said.

Meanwhile, private-equity firm GTCR LLC in April 2021 converted into equity $105.7 million in Gogo’s debt issued in 2018, giving the firm about a 29% stake in Gogo at the time. Earlier this month, all remaining debtholders converted $103 million of Gogo’s remaining outstanding notes into equity, reducing the company’s leverage.

Gogo’s net debt declined to $666 million at the end of the first quarter, down from $858 million at the end of 2018. Its leverage ratio—measured as net debt divided by earnings before interest, taxes, depreciation and amortization—fell from just over 12 times at the end of 2018 to under four times as of this month.

Gogo’s commercial division lost around $100 million a year prior to the divestment, according to Mr. Rowan. It accounted for 64% of Gogo’s revenue in 2019, the year prior to the sale, with business travel—now its sole focus—making up the rest.

At the root of the financial woes in Gogo’s commercial-aviation division were a series of operational setbacks and hurdles. The company owns a network of about 250 cell towers across North America that transmit broadband service to aircraft flying over land. To provide internet service to large commercial planes and on overseas flights, Gogo contracted with satellite providers, including Intelsat. Those contracts ended up being a drag on the business because the company had to buy a fixed amount of capacity that often exceeded customer demand, according to Mr. Rowan.

Gogo four years ago discovered the new equipment it put in place to receive satellite internet service needed to be repaired because it leaked when airlines sprayed their planes with deicing fluid in the winter. Meanwhile, to win contracts from airlines including

Delta Air Lines Inc.

and

American Airlines Group Inc.,

Gogo subsidized the cost of the equipment and installation, hoping to make back its money on service. But consumer demand for its Wi-Fi—at times spotty—was weak, and airlines historically took a cut of the company’s revenue, analysts said.

The company assumed travelers would pay more for in-flight Wi-Fi than they ended up paying, said

Lance Vitanza,

managing director at investment firm

Cowen Inc.

Following the sale, the company’s finances appear to be on more solid footing. Gogo focuses exclusively on business aviation—a category that includes corporate jets, chartered planes and personal aircraft. Gogo this month boosted its revenue guidance for the year to a range of $390 million to $400 million, representing an increase of nearly 20% from 2021, citing a strong market for private travel.

The company reported a $22.2 million profit during the first quarter compared with a $7.7 million loss a year earlier. Total revenue rose 26% to $92.8 million. The total number of aircraft for which Gogo provided air-to-ground internet increased 11% from a year earlier to 6,526.

Gogo’s stock price on Tuesday closed at $18.98, up 58% from a year earlier.

Write to Kristin Broughton at Kristin.Broughton@wsj.com