Industry Predictions Vary for Post-Budget Cut Military Market Environment

Critical military space capabilities such as missile warning, satellite communications, launch and space situational awareness should be protected in the Pentagon’s 2013 space program budget to ensure continued support to warfighters and space operations around the globe – if all goes to Air Force Undersecretary Erin Conaton’s plan.     
   Conaton and other Air Force leaders recently convened to develop strategies in sustaining and modernizing capabilities supporting the U.S. Department of Defense’s new strategic guidance that was released in January. The plans that came out of these meetings, however, may sound familiar to the commercial satellite sector. “Our acquisition strategy will see the Air Force continue with its Efficient Space Procurement program, which includes block buys of satellites, fixed price contracts, continued investment in research and development and a modified funding profile through advanced appropriations over multiple years,” said Conaton.    
   Conaton said the government had several reasons to assign priorities to the U.S. space program, despite reducing overall funding levels for its fiscal 2013 program budget. “A lot of our programs have moved out of the developmental phase and are in production at this point. Obviously, that has a different funding profile,” said Conaton. “Our partners in Congress were incredibly generous in helping to robust the Wideband Global Satellite (WGS) communications program, which meant that we didn’t have to fund additional satellites in that program this year.  
   Congress’ decision to terminate the military’s Defense Weather Satellite System program gave the Air Force breathing room in making its own budget decisions on what areas could be scaled back or cut from the space program, according to Conaton. The Air Force also is making an effort to deal with increasingly expensive launch services for its satellites. “The Air Force, along with our partners in the National Reconnaissance Office and in NASA, are committed to finding a way to get the best deal for the taxpayer, recognizing that launch continues to be at the core of what we do in the space business,” she said.  
   So, how did space industry analysts react to the military’s plans? A Euroconsult report issued in February showed that the commercial satellite markets are set for a 10-year period of modest growth, but the analysis firm’s predictions for the government markets included a stagnating growth period for government spending that is expected at least through the middle of the decade.
   According to Euroconsult President of North America Steve Bochinger, the lengthy stagnation phase follows several years of continuous expansion during the last decade. “Government investments in satellite systems are cyclical, driven by the procurement of operational systems in large space countries,” said Bochinger. “Following stimulus funding allocated to space projects to support national economies and innovation, most governments have returned to more stringent budget spending. This has already resulted in cutting non-priority budget items including space programs.”    
   Government space funding levels were $71.5 billion in 2010. Bochinger predicts government space budgets to begin a gradual decline of at least 1 percent per year on average by 2015. “In the most optimistic scenario, this would result in a stabilization of approximately $70 billion for the next five years,” said Bochinger.    
   While total U.S. defense spending is expected decline 22 percent from its peak in 2010, other analysts predicted that military satellite and space spending would fare much better than the budget as a whole. Raymond James Analyst Chris Quilty said he has confidence in this prediction, given the fact that the United States’ dominance of space is expected to be a key discriminator on future battlefields. 
   “The Pentagon emphasizes in the report that space systems are ‘critical to our surveillance, communications, positioning, and networking capabilities,’ and that funding will be ‘protected’ for needed upgrades to the GPS, SBIRS, and AEHF programs,” said Quilty. “Aside from the cancellation of the Global Hawk UAV program, which has experienced severe cost overruns, the Pentagon actually intends to increase spending on UAVs to support a minimum of 65 combat air patrols.” 
   UAVs represent a major source of satellite communications demand from the government sector. A a single Global Hawk aircraft consumes 500 Mbps, which is five times the total bandwidth used by the U.S. military during the first Gulf War. While the defense budget does not spell out exactly which programs will receive additional spending, Quilty suspects that certain electronic warfare and communications satellite programs are likely to benefit. 
   “U.S. Special Operations forces are amongst the heaviest consumers of satellite communications, including satellite phones via Iridium and flyaway terminals,” Quilty said. “While the Pentagon inexplicably states that it intends to make substantial reductions in commercial satellite imagery, the document cryptically indicates that the military intends to substantially increase coverage beyond the current capability.” 
   The policy change seems to represent a major rebuke to DigitalGlobe and GeoEye, which were awarded a combined $7.3 billion, 10-year contract to supply imagery to the U.S. National Geospatial Intelligence Agency in August 2010. That contract has recently been placed on the endangered list for targeted programs. “Both stocks have been cut roughly in half over the past year, reflecting what we believe is an expectation that EnhancedView program will be slashed by 20 percent to 30 percent,” said Quilty. “While such an outcome is possible, we believe the eventual impact to both companies could be less than anticipated.”