A Business Getting Lost in Space

Arianespace fights to boost revenue as its market shrinks

The liftoff was picture-perfect. On June 9, an Ariane 4 rocket blasted off from Arianespace's launch complex in equatorial French Guiana, boosting a 4.7-ton communications satellite into orbit. Yet there was nothing uplifting about the financial results that Arianespace reported on June 12. The French company, which handles more than 50% of the world's commercial satellite launches, lost $228 million last year on $1 billion in sales.

When the Paris Airshow kicks off on June 16, one of the hot topics of conversation will be what Arianespace and other launch companies can do to fire up their performance. Not long ago, the industry looked set to soar, with new ventures such as Iridium LLC (IRIDQ ) and Globalstar (GSTRF ) promising to lift dozens of satellites skyward each year. Anticipating the boom, launch companies beefed up their capacity.

But Iridium and Globalstar have fallen to earth with a thud. That leaves launch companies fighting over an average of 32 launches annually over the next decade, nearly 40% below the figure that was forecast in 1999. After booking 16 launch contracts in 2000, Arianespace has signed only three this year, though the company says new ones will be announced at the Paris Airshow. No surprise that Jerome Paolini, Arianespace's vice-president for international affairs, predicts that by 2005, customers will be paying an average of $15,000 per kilogram of payload, versus nearly $30,000 five years ago. "That hurts," he says.

For Arianespace, the squeeze could hardly come at a worse time. The company, owned by a consortium of European aerospace manufacturers, is spending hundreds of millions on a new generation of rockets. And while it relies almost entirely on commercial launches, rivals Boeing (BA ) and Lockheed Martin (LMT ) get a steady flow of military and space-program orders that are off-limits to non-U.S. companies. Meanwhile, the Americans are nibbling away at Arianespace's market with ventures that use cheaper technology from former Soviet rocket majors.

To fight back, Arianespace is pushing ahead with its new Ariane 5 rocket, first successfully launched in December, 1999. The Ariane 5 can carry six tons--more than any rocket now in commercial use--allowing Arianespace to cut costs by loading several payloads onto the same launch. Now, the company is developing another model that will carry 12 tons. Boeing and Lockheed Martin plan bigger rockets, too. But, Paolini says, "we already have a proven launcher. Theirs are still on paper."

Arianespace has a backlog of 46 orders, worth $3.8 billion. With the bulk of the Ariane 5 startup spending behind it, the company expects to break even this year and turn a profit in 2002. Since it isn't publicly listed, there's no pressure from the markets. Its ownership consortium, including the giant European Aeronautics Defence & Space Co., still supports Arianespace, and the European Space Agency provides subsidies.

SURVIVE OR THRIVE? Still, some industry watchers wonder how long Arianespace can keep its edge. The company has few foreign joint ventures outside Europe, leading some to question whether its stakeholders--all of which sell equipment and services to Arianespace--are more interested in protecting their turf than in seeing the company thrive.

With little growth in its core market of heavy telecom satellites, Arianespace needs to find new sources of revenue. One example: It recently struck a deal with AeroAstro, a Herndon (Va.) company that plans to piggyback miniature satellites--carrying everything from remote-sensing devices to university science projects--onto the Ariane 5. That gives small customers a cheaper ride into space and allows Arianespace to fill up excess capacity. Marco A. Caceres, director of space studies at Teal Group, an Alexandria (Va.)-based consulting firm, applauds such innovation, but adds: "Arianespace has invested so much in traditional technology, they're not going to make the change quickly." Arianespace knows how to be big. Now, it has to learn to be nimble.

By Carol Matlack in Paris

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