Since 2006, a joint venture between Lockheed Martin (LMT) and Boeing (BA) has had a monopoly on launching the biggest U.S. military and spy satellites into space. Now, at the urging of Congress, the U.S. Air Force is laying the groundwork to open the business to competition.
There's big money at stake. The Air Force is projected to spend $9.9 billion from fiscal 2012 through 2016 on its Evolved Expendable Launch Vehicle program, which covers medium- and heavy-class satellites, according to service figures. That's $3.5 billion, or 54 percent, more than a projection made last year for the same period. "We have seen a cost trend that we feel needs to be turned around," Air Force Under Secretary Erin Conaton said in an interview. "One of my goals is that, in a year from now, we don't see the same trend lines."
The Air Force is working with NASA and the National Reconnaissance Office, which manages spy satellites, to develop common certification requirements for possible new entrants such as Space Exploration Technologies (SpaceX) of Hawthorne, Calif., and Orbital Sciences (ORB) of Dulles, Va. As NASA's space shuttle program winds down, the Obama Administration is keen to develop private-sector alternatives to ferry astronauts and equipment to the International Space Station and for other missions.
To bring down satellite launch costs, the Pentagon blessed the creation in 2006 of a joint venture between Lockheed and Boeing, called the United Launch Alliance. It also kicked in money to develop a new generation of commercial rockets. Boeing has received at least $2 billion in contracts since fiscal 2006 under the program and Lockheed at least $3.5 billion, according to data compiled by Bloomberg.
Nonetheless, the joint venture has failed to drum up enough nongovernment business to achieve targeted launch costs of $150 million to $170 million, says Marco Caceres, a senior space analyst at the Teal Group, a defense and aerospace market analysis firm in Fairfax, Va. According to Caceres, expenses have escalated to between $240 million and $270 million per launch, depending on the type of rocket used. Joint venture spokesman Chris Chavez says in an e-mail, "the Air Force and ULA have identified numerous opportunities to deliver more efficient launch costs."
SpaceX, which is headed by PayPal (EBAY) co-founder Elon Musk, plans to enter the defense market with the Falcon Heavy, a 227-foot, 27-engine rocket scheduled for a demonstration flight in late 2012. The rocket's cost per launch will run between $80 million and $125 million, according to Adam Harris, vice-president for government affairs at SpaceX. The company already has secured more than $3 billion in contracts from NASA and commercial companies such as Iridium Communications (IRDM), mostly for the smaller Falcon 9 rocket that completed two test flights last year. "We know what it takes to do this," says Harris. "We don't understand why others are making it cost so much."
The Air Force plans to bid out several launches, beginning with the National Oceanic and Atmospheric Administration's Deep Space Climate Observatory satellite, scheduled for fiscal 2012, which begins on Oct. 1. The service would open bigger payloads to competition under the EELV program later this decade. "We have at least one player, perhaps more, who are saying, 'We would like to compete for that business,'" says Conaton. "Our attitude is, 'Show us what you can do.'"
The bottom line: Lockheed Martin and Boeing may lose from the Air Force's plan to open the $9.9 billion satellite launch business to competition.