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GRAPHIC-Rocket science: will Inmarsat's wi-fi in the sky pay off?

* Inmarsat shares down around 60 pct in 2 years

* Capacity worries hit satellite sector

* Inmarsat has heavy capex and rising debts

LONDON, March 29 (Reuters) - A satellite company wants to bring reliable internet to airline passengers worldwide. But some investors don't seem to be buying it.

Inmarsat's mission to bring wi-fi to passenger jets did instill great faith in some fund managers. But competition has become fierce as cheap financing funded an explosion of new capacity in the sky, and the worry is the project will not be as lucrative as once hoped.

It is also difficult to model the payoff from Inmarsat's big investments. Broker Berenberg put the firm's spend in recent years on four of its Global Xpress high-bandwidth global mobile network satellites at about $1.6 billion.

Inmarsat, established in 1979 to enable ship-to-shore communication and distress calls, has reduced its dividend to plow money into wi-fi for the world's airlines.

Its shares have slumped some 60 percent in the last two years - more than rivals SES and Eutelsat - to their lowest since late 2008.

The company promises higher quality broadband internet than its competitors and seamless connectivity, convinced that far more passengers will sign up if they get what they've paid for - a connection that stays strong and doesn't cut out.

But skeptics note free wi-fi is now commonplace on the ground - from coffee shops to airports - and consumers could expect the same for in-flight connectivity (IFC) once the novelty wears off.

It would not be the first time a communications company spent heavily on infrastructure only to see the promised returns evaporate because of weak pricing power.

"They never get off the treadmill of capex," said Eric Moore, an income fund manager at Miton. Moore looked at Inmarsat lots of times but says he has always been "a bit phobic."

The bullish case for Inmarsat lies in its focus on mobility.

When Inmarsat's equipment aboard a moving plane goes out of range of one of its satellite beams, it quickly finds the next. Some services can struggle to provide a smooth handover.

Inmarsat's Chief Executive Rupert Pearce said on March 9 that the company had about 30 percent of the IFC market, with systems on 1,300 aircraft due to go into service over the next two years.

"We have established a strong presence from which to move forward and become the market leader," he said as the company presented annual results.

More than 80 airlines offer in-flight wi-fi, said Routehappy, which provides information on flight amenities, in January.

On some aircraft, Turkish Airlines offers free wi-fi to certain customers - those flying in business class, for example. Passengers in economy class pay $9.99 per hour for the service, or $14.99 for a 24-hour package.

Emirates offers 20 MB of wi-fi for free. On Norwegian , free wi-fi is available on many flights.

HARD TO QUANTIFY

Morgan Stanley, in a March 13 research note, pointed to an Inmarsat document on illustrative cash flows from a typical IFC agreement with airlines. The document forecast negative cash flow for at least three years, worsening in the second and third year, before turning positive in "Year X."

"However, management did not comment on when Year X will materialize," the broker said.

Jonathan Sinnatt, a representative of Inmarsat in London, said the company would not comment on a broker's note.

There are few European equities that appear to divide investors' opinion like Inmarsat.

Simon Murphy, who runs the Old Mutual UK Equity Fund, exited the stock late in 2016. Allianz Global Investors' UK Mid Cap fund sold its position last year. Neither Murphy, nor the co-manager of AllianzGI's UK Mid Cap fund, Matthew Hall, are tempted to get back in.

Their concerns partly relate to the level of capacity in the satellite industry.

Views differ even within Allianz Global Investors itself. Its chief investment officer for UK equities, Simon Gergel, has gradually added to an existing Inmarsat holding in his Allianz UK Equity Income Fund, saying its optimized mobile communications network sets it apart and there was "tremendous demand growth" to fill the new capacity.

"They've got 1,300 aircraft (signed up) and each of these is expected to pay about $150,000 a year, so you're talking about 200 million of revenue annualized at some point in the future," said Gergel.

Despite the dividend cut, Inmarsat's leverage - net debt to earnings before interest, taxes, depreciation and amortization - is still rising, Morgan Stanley said. The broker does not see the rebased dividend covered by free cash flow until 2021.

The satellite industry is a tough area to map out. Demand can change completely in the several years it takes to build a satellite, put it into space and get a network going. Launch failures are mostly insured against, but can add complications.

Tech firms are scouting around for new satellite ventures or alternative airborne communications projects.

Softbank invested in low-altitude satellite company OneWeb, Google's Project Loon is exploring communications balloons and Facebook is pushing solar-powered telecom drones for remote regions.

Inmarsat cut its final dividend for 2017 to 12 cents a share, giving a total payout for the year of 33.62 cents - down from 54 cents in 2016. The dividend for 2018 will be 20 cents.

"The fear is that other people are trying to launch satellites to produce (a) global network but saying one thing, having the capital to do it and having the timeframe to do it, means that Inmarsat have got the first-mover advantage in terms of their global infrastructure," said David Smith, who manages the Henderson High Income Trust, which holds Inmarsat shares.

(Reporting by Tricia Wright editing by Tom Pfeiffer and Alexandra Hudson)