Boeing Braces For Weak Rebound

Boeing [NYSE: BA], the world’s largest satellite manufacturer, is bracing for a weak recovery from the current drought in new satellite orders.

The lackluster outlook was offered by Jim Albaugh, president of Boeing Integrated Defense Systems. Satellite manufacturers and launchers have been “overtaken” by those who lay cable and operate wireless systems, he explained.

“And we should have seen it coming,” Albaugh lamented.

While the satellite industry was working on multi-billion dollar, space-based systems, it failed to notice terrestrial point-to-point voice services that were improving quality and reducing costs. A realistic view of future satellite demand shows little reason for optimism about a recovery.

“I don’t see any new killer applications that are going to drive the market,” Albaugh said. “Even high-definition television (HDTV) will not generate many new satellite orders. I look for basically a replacement market, and about 12 to 15 satellites per year.”

With five global commercial satellite manufacturers, that weak level of demand heightens the prospects for consolidation.

Only three commercial satellite orders were placed industry-wide last year, said Albaugh, who offered his dim outlook during a Sept. 23 speech in Long Beach, Calif., before the American Institute of Aeronautics and Astronautics (AIAA). This year about a dozen satellites will be ordered worldwide. “Quite frankly, I don’t see us ever getting back to the 25 to 30 GEO-satellite orders a year that we enjoyed in the late 1990s,” Albaugh said.

The problem is that “an enduring human need for communications that is better, faster and cheaper simply is not always best addressed by satellites,” Albaugh said.

‘Gold-plated’ Failures

“Looking back at what happened to Globalstar, Teledesic, Iridium, ICO and all the rest, I am reminded of a scene from the movie, “Raiders of the Lost Ark,” Albaugh said. In that movie, the character Indiana Jones is confronted with a bearded giant who, in warming up for battle, provides a tremendous display of swordsmanship that involves flashing an impressive-looking gold saber, he added.

“Everyone is impressed – except for Indiana Jones,” Albaugh said. “Before the giant can strike a blow, Jones pulls out a simple pistol and shoots him dead.”

The moral of the story is that high-cost satellite systems may appear awe-inspiring initially but all too often have been beaten by cable and wireless alternatives, Albaugh said.

“We were working on complex, space-based systems that would take billions of dollars and many years to build,” Albaugh said. “And we failed to take notice of all the developments that were lowering the cost and improving the quality of terrestrial point-to-point voice systems.”

The latest downturn in satellite manufacturing also is due to an “extraordinary meltdown” in the commercial telecommunications sector, Albaugh said.

Richard DalBello, executive director of the Satellite Industry Association, is a bit more upbeat about the outlook for new commercial satellite orders. Whereas Albaugh is projecting 12 to 15 new commercial satellite orders a year, other forecasters expect a recovery to put annual demand in the 15 to 20 range, DalBello noted.

The SIA chief, who called the differences of opinion a “healthy debate in the community,” described the forecast from Albaugh as conservative. Reasons for optimism that demand could rise higher include the expected growth of HDTV, satellite Internet and Ka-band services, he explained.

Optimistic Counterpoint

“We see a more optimistic scenario,” DalBello said. “He [Albaugh] is conservatively optimistic and I am a little more bullish on the industry. If you look at the replacement market, plus the new sources of demand, there is reason to be optimistic about the future of satellite manufacturing.”

David Logsdon, executive director of the U.S. Chamber of Commerce’s Space Enterprise Council, agreed with Albaugh’s downcast view, calling it “right on the money.”

Logsdon explained, “The health of the commercial satellite industry can be directly attributed to the demand for the services. It was projected that there would be a huge demand for the services but when this did not come to fruition, the bottom dropped out of the market.”

Without any “killer applications,” there does not appear to be a catalyst to drive demand in the market,” Logsdon said. However, weak demand does not suggest the industry does not have staying power, he added.

“Enough niche markets currently exist to predicate the need for commercial satellites,” Logsdon concluded.

–Paul Dykewicz

(Walt Rice, Boeing Integrated Defense Systems, 314/234-2149; Richard DalBello, Satellite Industry Association, 703/739-8357; David Logsdon, executive director, U.S. Chamber of Commerce’s Space Industry Council)