The Air Force Fails Rocket Science

A plan to create a joint venture for the production of heavy-launch rockets is a bad deal for taxpayers

By Stan Crock

When the Air Force finds that it has painted itself into a corner, it sometimes comes up with an odd solution: It keeps on painting. That's how I see United Launch Alliance, a proposed Boeing-Lockheed Martin joint venture that industry sources expect the Pentagon and Federal Trade Commission to approve shortly. And that could be a mistake for the industry and for taxpayers.

The proposal, which the FTC is currently investigating, would merge the Evolved Expendable Launch Vehicle (EELV) programs of the two defense giants. The monopoly on EELV production that the deal would produce would continue to make two families of heavy-launch rockets: the Boeing Delta IV and Lockheed Martin Atlas V. But the venture would consolidate some facilities and lay off some workers to shave overhead costs. That, at least, is the theory, and it sounds good. But a glimpse at the program's history puts this all in a quite different light.

Back in the mid 1990s, when the EELV program started, the Air Force was going to choose just one winner in a competition to build a launch vehicle. That would provide the typical benefits of competition: lower prices and greater innovation. Then the Air Force got antsy. It wanted to assure access to space, and the Air Force fretted that if the winner had a defect that grounded the entire fleet, access to space would be halted until the booster was fixed.

INSIDE INFO.

  The solution: a backup. So the Air Force decided it would have two winners, which would split launches in a series of competitions. The winners were Boeing (BA ) and Lockheed Martin (LMT ), and the Air Force anticipated that a booming commercial-launch market would help cover some of the fixed costs, from developing the rockets to building and maintaining launch pads, control rooms, and the rest of the infrastructure. The Air Force would just pay for launch services.

In 1998, the service gave 19 launches to Boeing and 9 launches to Lockheed Martin at roughly similar prices, in the $72 million to $73 million range.

Too similar, it turns out. Before the contracts were awarded, Boeing got its hands on about 25,000 pages of Lockheed Martin pricing data. Boeing had hired a Lockheed Martin employee who's alleged to have brought proprietary information with him. And Boeing was able to set its bids low enough to win the vast majority of the launches.

In 2003, when the Air Force found out the extent of the wrongdoing, it shifted seven of the Boeing launches to Lockheed Martin, which the Air Force valued at a total of $1 billion -- double the original tab. The Justice Dept., which has indicted two Boeing employees, continues to investigate the matter.

SKYROCKETING COSTS.

  Earlier this year, the Air Force decided price competition was unrealistic. One reason, according to a March, 2005, internal Air Force memo, is that Boeing had too much information about Lockheed Martin's internal costs. Another reason was that the commercial launch market had collapsed, and the Air Force said it feared for "the companies' continued viability."

If either bowed out, it would leave in tatters the policy of assured access to space based on two boosters. Giving all the launches to Lockheed Martin apparently wasn't an option because the company relied on a Russian RD-180 engine. There was a widespread assumption that Congress wouldn't tolerate depending on Moscow as the sole means for access to space.

That was the corner the Air Force was in. What did it do? It not only kept both companies on board for launches but it also decided to give them more than $13 billion in no-risk, cost-plus-fee contracts to subsidize their ground operations. The combination propelled the total cost of the program to $31.8 billion, from $17.3 billion, and the cost per launch to $230 million in 2004 dollars, up from $95 billion (in 2004 dollars) in 1998.

The final move: the merger. The companies have pledged to cut $150 million a year in costs if the merger is approved, which may shave about $15 million off each launch. But Lockheed Martin spokesman Thomas Jurkowsky says the full savings won't occur for 5 years. "You're not going to get $150 million in savings right off the bat," he says.

FOREIGN TOES.

  The bailout, ironically enough, is coming just as the commercial market is starting to see some signs of life. While no one expects gonzo growth in the near term, Bethesda (Md.)-based aerospace consultant Futron Corp. expects a doubling of launches in the next decade. And the Federal Aviation Administration says total commercial payload weight posted a record last year.

Indeed, according to Futron, the market is looking attractive enough that Japan's Rocket Systems Corp. is aggressively marketing its H-IIA booster, China may reenter the market, and India is thinking of dipping its toe in. And Boeing plans to bring its Delta IV back into commercial service.

How much Boeing and Lockheed Martin can benefit from the resurgence is unclear because their costs are so bloated. The Russians and Ukrainians are among the foreign launchers whose quality is quite high and prices are lower than their U.S. competitors. The issue may be less that there's no market than that the big U.S. companies aren't competitive. By Stan Crock

WORST OF BOTH WORLDS.

  So the Air Force solution is to have one company make two rockets. Beyond the benefits of a monopoly, there are other reasons the companies might want a deal.

If the merger is approved, Lockheed Martin would drop its lawsuit against Boeing over the theft of data, which could have cost Boeing a tidy sum, estimated by some at hundreds of millions of dollars. And Lockheed Martin and its Russian partner won't have to worry about being beaten out by all-American Boeing.

Those issues aside, some outside experts think the deal makes sense. "The country shouldn't have to pay the price of maintaining two totally separate production lines and engineering forces," says John Logsdon, director of George Washington University's Space Policy Institute. Loren Thompson, COO of the Arlington (Va.)-based Lexington Institute, adds that if demand for launches continues to be slack, "there isn't much alternative" to the merger.

But I have to side with the skeptics. John Pike, director of Globalsecurity.org, an Alexandria (Va.) national security Web site, argues that the current proposal stands on its head the argument for the previous two approaches.

With the merger, "We get the 'benefits' of high costs from two production lines and the 'benefits' of high costs from having a monopoly supplier," he says. "If you want to imagine the least efficient way possible of doing it, this is it." Adds David Williams, vice-president for policy of the watchdog group Citizens Against Government Waste: With one supplier, "there's really no hope for the taxpayer."

UNFAIR ADVANTAGE?

  Industry players are concerned as well. Northrop Grumman (NOC ) is worried that it could get the shaft because both Lockheed Martin and Boeing make satellites that compete with Northrop Grumman while they will control launches in concert. "If there's no mechanism to insure that competition is allowed to flourish on what's launched, then the merger to monopoly doesn't serve the industry well," a Northrop Grumman spokesman says.

Others, such as space startup Space Exploration Technologies (SpaceX), fear that the merged company will have an additional edge: the subsidies for launch infrastructure (see BW, 12/12/05, "The Final Frontier at Costco Prices"). "They've turned assured access into assured profits," gripes Lawrence Williams, the SpaceX vice-president for international and governmental affairs (see BW Online, 8/15/05, "Billionaires Blasting Off").

Capitol Hill isn't enamored of the Air Force approach either. In a 2005 report, the House Appropriations Committee noted soaring costs of the EELV program and questioned the need to rely on two families of launchers. Though the panel was concerned with two separate companies, its logic would apply to the venture with two rocket lines.

"The Committee believes it is wiser to invest in launch reliability than launch back-up," the report said. Lawmakers feared that keeping two rocket lines going would prompt contractors to cut corners in a way that would undermine launch reliability.

SINGLE CHOICE.

  What's more, the backup notion ignores the fact that payloads are designed for specific boosters. The Appropriations Committee notes that it can take several years to get a backup booster ready. And it takes time to reconfigure the satellite for the new launcher. Is that much different from the time it would take to fix a rocket with a defect? Does the backup idea make all that much practical sense?

So what should the Air Force do? What it wanted to do at the start: Pick one company and fully fund it. Otherwise, the EELV program will eat up so much of the space budget that other programs will suffer irreparably. It may not be easy to choose between a Boeing that cheated and its all-American Delta IV, which has few launches under its belt, or a Lockheed Martin Atlas V that relies on Russian technology but has five successes to date.

But, hey, that's why they pay the brass the big bucks. The Air Force also should leave open the possibility that new, lower-cost entrants, such as SpaceX, could compete for launches in the future. The best way to safeguard both reliability and taxpayers is to rely on competition and make a choice. Crock is a correspondent in BusinessWeek's Washington bureau

Edited by Phil Mintz

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