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American Airlines Could Simply Be Negotiating With Gogo…Or It Might Be More Serious

GOGO, AAL | February 16, 2016

According to an 8K released Tuesday by Gogo Inc (NASDAQ: GOGO), American Airlines Group Inc (NASDAQ: AAL) filed a lawsuit against Gogo indicating that it has found a much faster connectivity provider.

Under Gogo's contract with American, “American Airlines can seek to get out of its air-to-ground relationship with GOGO if it can prove that there is a superior competing solution and that the lack of offering is hurting business,” said Evercore ISI in a flash note out Tuesday.

Gogo's contracts are notoriously difficult to break, and the one in question stipulates, however, that if a complaint is filed, Gogo has the opportunity to rectify the situation.

What Does The Lawsuit Mean?

Analysts Jonathan Schildkraut and Robert Gutman of Evercore ISI hypothesized upon the meaning of this lawsuit, proposing that it may be an indication that American is actively seeking out a competitor to replace Gogo, or, it may just be a negotiation tactic.

“Regardless, while the risk around this particular contract clause has long been highlighted – the potential negative consequences of losing such as significant consumer will likely be an overhang on shares until more clarity is provided.”

The analysts examined the specific rhetoric of the lawsuit, the 8K and the 10K, attempting to gain additional insight into the possible motivations behind American's lawsuit.

The report elaborated, “According to GOGO, American Airlines took the first step in delivering a notice that it sought to enact this contractual provision. GOGO claimed the notice was insufficient – which is why American Airlines is seeking a declaratory judgement.”

Following the filing, Gogo has a month and a half (45 days) to propose a solution to the complaints raised. The analysts stated that Gogo plans to propose such a remedy that would include a 2Ku solution, which the analysts believe “is as-good-as or better than competitor technology.”

Evercore currently has a $25 valuation on Gogo. As anticipated by the research firm, and others on the Street, Gogo has been trading down around 30 percent on the day.