The Launch Industry: Growing By Small Leaps And Rebounds
After completing one of the slowest years for commercial launches in recent history, the world’s launch vehicle operators are busy introducing new, more capable launchers to a market that is flat at best and trying to fend off more serious trouble. The lack of progress on new satellite systems proposed in the 1990s has softened the need for new launchers. And, and while the launch business appears to be on the rebound from 2001’s sluggish pace, other symptoms of trouble, such as an ongoing price war that has sent prices to rock bottom levels, has made it difficult for service providers to earn profits.
The number of commercial geostationary payloads that were launched dropped by 50 percent in 2001 from the previous year. “Two-thousand-and-one was one of worst years since the early 1960s with respect to the number of launches around the world,” says Clayton Mowry, president of Arianespace Inc., the U.S. arm of the Evry, France-based launch operator.
Roughly 16 commercial satellites were orbited last year, depending on what is included in the count, a big drop from the 25 or more usually orbited by the four most active launch service providers: Arianespace, International Launch Services (ILS), Boeing Launch Services (BLS) and Sea Launch according to figures from Futron, Euroconsult and the service providers.
U.S. rocket operators conducted only three commercial missions according to a report from Futron. The drop-off appears particularly acute when compared to the jump in 2000, when 30 satellites were launched, up from 22 in 1999.
Two-thousand-and-one’s slow launch rate was due to reliability problems, extra testing on satellites and the July mishap that took Ariane 5 out of service for the remainder of the year.
Stéphane Chenard, Euroconsult’s chief analyst, expects to see the industry attempt to conduct more than 30 launches this year just on the commercial side, not counting space station and other government missions. “It should be a very hot year,” Chenard says. “Challenging, but it’s been done before.”
Futron forecasts eight U.S. and eight European commercial launches carrying a total of 20 commercial geostationary payloads in 2002.
But Phil McAlister, director of Space and Telecommunications Division for Futron, is increasingly skeptical that the U.S. companies will pull off that number. “There appears to be a lot of jockeying for position for EELV launches. The irony is that everyone is jockeying for the second or third position–nobody wants to be first. Once the first couple launches occur, the Delta 4 and particularly the Atlas 5 should be very competitive offerings,” he says.
But the launch market between 2003 and 2005 is likely to remain flat. “We are seeing very little growth in the satellite area,” says Jim Simpson, director of international sales for BLS, which markets the Delta and Sea Launch vehicles. “We are seeing a supply-driven economy, and this affects competition, price and launch rates. It’s a very tough market.”
Managing launch operations is made even more complicated when the satellites that are firmly scheduled to fly are not delivered on time, a problem that created chaos on the manifests of several launch service providers last year. Jim Maser, president of Sea Launch, the U.S.-Ukrainian-Russian-Norwegian launch system that is sold under the BLS umbrella, says management attention this year will be focused on working with the customers to “maximize our flexibility to put their satellites in orbit when they show up at the door and our flexibility to gain business if gaps in the schedule appear.”
The New Vehicles
But the most exciting 2002 phenomenon, one that the industry has been working toward for years, is the introduction of the Atlas 5 and Delta 4. The new launchers will expand the number of heavy lift vehicles on the market, and the current large launchers, Ariane 5 and Sea Launch, both will introduce performance upgrades this year to stay ahead. Atlas 5, with a 8,700 kg to Geostationary Transfer Orbit (GTO) capability, is scheduled to conduct its first flight in May, and the Delta 4, designed to carry up to 13,200 kg to GTO, is slated for its inaugural launch in July.
These new launchers, developed under the Air Force Evolved Expendable Launch Vehicle (EELV) program, are designed to provide lower cost transportation for commercial and military satellites. The Air Force invested $500 million in each and signed on as an anchor customer. The contractors behind them–Lockheed Martin for Atlas and Boeing for Delta– also invested large amounts into the program. Simpson says Boeing’s commitment is more than $1 billion.
With a payload range of three to 13 metric tons, Simpson says Delta 4 covers the “sweet spot” of commercial and government markets. “It is designed for simple production and high reliability, and this affects the costs. The Delta 4 is highly producible,” Simpson says.
Boeing has 21 EELV launches for the Delta 4, plus one additional contract to demonstrate the launch capability of the heavy lift variant, which is scheduled for early 2003. ILS currently has seven to nine EELV missions on the books for the Atlas 5. The first military EELV launch is scheduled to be a Defense Satellite Communications System 9 (DSCS) communications satellite in Fall 2002 on a Delta 4. The U.S Air Force requires the operator to have a successful first launch of a non-government mission before launching a military payload. Therefore, should an anomaly occur, the military has funded integration work for its DSCS satellite on an Atlas 5 if needed. EELV, like Sea Launch and Ariane 5, was designed to address the trend toward larger spacecraft.
“Satellites are getting bigger. It’s a good thing for the satellite manufacturers and transport service providers to follow that movement,” Chenard says. But all new launches are chasing the same stagnant market, with the result, as Chenard notes, that “there is the question of clearly too many vehicles. It’s been two to three years now, everybody has been saying there are too many launchers, some have to go. Still no one has dropped out.”
The reduction in earlier market forecasts for new satellites was needed after new Ka-band satellites and other speculative satellite systems did not get financed or built. The consolidation of operators and the bottom falling out of the broadband market has lowered the number of required launches to roughly 25 to 30 per year, down from a few years ago when launch providers thought companies like Skybridge, Astrolink and Teledesic would be launching much larger constellations.
Interestingly, the launch operators claim they are not much bothered by the flat market. “It’s fine with us. We think we are positioned to compete very effectively and it’s a win situation for the customer,” Maser says. “There are a large number of choices at competitive prices.”
Mark Albrecht, president of ILS, says, “We’ve all settled into the market reality that arrived after the LEO constellation bubble burst and the hoped-for broadband constellation bubble began leaking. The general consensus is that there is demand for 20 to 30 launches a year worldwide. That’s pretty stable.” He adds it’s enough to support two to three players.
The Market Factors
Demand can support two to three, but on the supply side, there are four, with five launchers among them. That is in large part because launch providers bought the claims of satellite manufacturers and operators that they would build new constellations of broadband and numerous Asian satellites, using those plans to justify investment. All the new satellites did not materialize, Chenard points out. However, he adds, the satellite industry is still in fairly good shape. Launch rates are driven by satellite orders, and 2001 saw about 24, a moderate level that represents a big drop from the 42 satellites ordered in 2000, Euroconsult says in its report, “World Satellite Communications and Broadcasting Markets Survey: Prospects to 2010,” which was issued in February 2002.
“Operators’ revenue, operating profit, transponder loading–everything looks good. At the end of 2000, satellites were 81 percent full, as full as they’ve ever been. Revenue from transponder leasing increased nine to 10 percent,” he says. While telecom bankruptcies are occurring, there remain hundreds of millions of Internet users, increasing long distance telephony consumption, a growing amount of telephone trunking over satellite, and thousands of new satellite TV channels. “This doesn’t depict a world in crisis,” he says. “As with so much of the telecom industry, the demand is in fact growing quite robustly, but not as wildly as suppliers have built for.”
Chenard says the launch operators are at the bottom of the low point in a cyclical industry. “The upturn will be in 2005-6 in terms of launching. This means two to three years of waiting patiently,” he comments.
But the Futron report says the reduced market size is going to pose serious problems for launch operators, even with the government satellites providing a guaranteed base, because the commercial missions often mean the difference in profitability for a service provider. Futron says the U.S. launch industry was slow to respond to the trend toward bigger satellites. In the early 1990s, 70 percent or more of all the satellites were 2,000 to 5,000 lbs., or medium-size, which fit well on the older Delta 2 and Atlas 2 rockets. But as the decade went on, large satellites became more popular. U.S. launch providers responded with the Atlas 3 and Delta 3 as interim steps towards a heavy lift launcher, but neither vehicle was able to get a significant market share, according to Futron.
Now, “the U.S. launch providers are poised for a substantial comeback with the introduction of the EELVs,” says Futron, adding, however, that the Atlas 5 and Delta 4 also are under tremendous pressure to succeed immediately. “If one of the EELVs experiences a failure in one of the early flights, it could prove very damaging.”
The mix of satellites continues to include smaller spacecraft such as the ones Panamsat is buying from Orbital Sciences and the older Boeing-Hughes 376 model. Mowry says these smaller satellites will make up more of the market. “You can get these satellites quickly. The cost is relatively affordable. Financing is easy to do. You can fill them with capacity and put them up quickly, so there are advantages from a service provider’s standpoint in a tight financial market,” says Mowry.
And these days, launch prices are relatively cheap as well, due to a price war that started two or three years ago. Launch suppliers do not publicly quote prices but they will tell you that the prices hit rock bottom last year. One provider says pressure has pushed prices about 20 percent below their price a year ago. The price war began with the serious marketing efforts to introduce the EELV. Competitors tend to blame Boeing and Sea Launch for the lowest prices. Boeing will not discuss pricing at all, and Maser responds that his company makes money on its launches, but the competitors say they do not see how that’s possible at the going rates.
“I would argue easily that Sea Launch offers the best value to the customer,” Maser says. “We are flight proven, fully operational and established as a reliable heavy lift provider. I can say unequivocally we have been underbid by every competitor out there.” The others offer “introductory pricing,” and special prices to fill in gaps in manifests and sometimes just to gain market share, he says. “We are not losing money on any launch,” he insists.
To protect its market share, Arianespace has reduced its pricing. “We’re going to be aggressive in the market and compete but it will be difficult for anyone to make money if these prices are sustained over the long term. There’s not a high enough launch rate for anyone to capture significant numbers and make money,” Mowry says.
Albrecht says ILS is able to defend against the downward price creep because its next generation Atlas and Proton versions were designed to have fewer parts and simpler operations, thus becoming easier to produce and less expensive. ILS sometimes opts out of a competition if the only criterion is price.
The question of who makes money by launching satellites is not an easy one to answer. Arianespace, the only launch provider that discloses its financials, is not. The company is expecting a loss in 2001 of 50 million Euros (U.S.$44 million) on revenues of 800 million Euros (U.S.$701 million). That was down from the 242 million Euros (U.S.$212 million) loss reported in 2000. The losses were due to costs to develop the Ariane 5 and simultaneously operate Ariane 4, thus keeping two launch complexes open. In addition, Arianespace invested in a new satellite preparation building and took charges to cover operating losses expected on the first batch of Ariane 5s. With that largely behind it, Arianespace expects to break even in 2002.
“If anyone is making money,” comments Chenard, “it will be by standards of the aerospace industry, with very thin margins: at best in the two to three percent range. It can’t be better in the launch industry.” Those are dismal figures but Chenard says the point is not to make money as much as to have access to space.
Sometimes price is a secondary consideration. The service providers try to differentiate themselves on those points. Arianespace prides itself on service quality. It has tried to edge out its competitors by offering financing, but after a few years only a handful of customers, such as Wildblue, were funded by Arianespace Finance. “We are looking for opportunities to expand, but it’s a difficult market,” Mowry says.
Ariane 5 and Sea Launch have been able to claim an advantage from their larger lift capability and 5-meter fairings. ILS, for its part, claims as its primary differentiator the mutual back-up capability between Proton and Atlas to offer schedule assurance. Boeing tries to set Delta apart by offering augmented services, says Simpson, citing financing, a risk mitigation plan and having an effect on the business case of the customer as examples of such services.
Customers, especially the well-established ones like Intelsat, usually select their launch service based on reliability, schedule, insurance and service quality. “On the technical side, Intelsat prefers launch services providers that use a mature launch vehicle with an established record of launch successes. Programmatically, Intelsat wants to have appropriate flexibility to adjust the launch schedules to be compatible with the needs of the spacecraft program. For contractual matters, Intelsat strives to obtain terms and conditions that protect Intelsat’s interests while being fair and equitable to all parties,” says Terry Edwards, Intelsat’s director of launch services. “And of course, the financial aspects of the launch services are very important as well. Intelsat makes its final selection by evaluating which launch services offer provides the best combination of these various factors.”
The Road Ahead
Differences aside, all the operators have goals for 2002 that will keep them extremely busy.
Arianespace, the market leader with 60 percent of the business, will gain strength with the return to operations of Ariane 5. The launcher’s capability will increase significantly in August when the cryogenic upper stage, called the HM-7B, from the Ariane 4 is introduced on the Ariane 5. The more capable Ariane 5 will be able to place 10,000- 10,500 kg into GTO. “This new upper stage really improves the ability to dual manifest larger class satellites,” Mowry says, a capability important to both operations and profitability. A payload belonging to the French space agency, CNES, will share that ride with one of Eutelsat’s Hot Bird satellites.
Arianespace won 13 contracts in 2001 out of 25 open to competition. It has 42 commercial satellites in its backlog of orders, and several flights to carry cargo to the International Space Station. However, 90 percent of its business remains commercial, with a much smaller percentage of flights devoted to government missions than the percentage dedicated to U.S. operators.
Arianespace plans 12 launches in 2002, but that agenda depends on on-time deliveries by the satellite manufacturers. “We have an aggressive mix of Ariane 4s and 5s,” says Mowry. “We could do a new record number of launches, 12 or 13, if the satellites are delivered on time. But it’s a real fuzzy science. All you need is one satellite component that requires extra testing and it can change the whole manifest.”
The use of seven Ariane 4s in 2002 will leave Arianespace very close to depleting the Ariane 4 inventory, with the last of that highly successful launcher version flying in early 2003. Then Arianespace will be completely dependent on Ariane 5, a strategy aimed at reducing the company’s fixed costs.
Much attention in 2001 and early 2002 was focused on correcting the problem that caused Ariane Flight 142 to put its satellite into a lower-than-needed orbit. Arianespace took extra time to modify a test stand in Germany to replicate the problem in the engine. “It was determined that there were traces of water in the MMH feed lines that caused the high frequency problem in the early part of the ignition sequence [which led to the anomaly], degraded engine performance and resulted in the satellite not getting to proper orbit,” Mowry says. To fix it, Arianespace is instituting additional engine drying and testing procedures as well as a helium purge to soften the ignition process. The theory is that the water was left in the systems after construction tests of the lines.
ILS will inaugurate its Atlas 5 in May with a Eutelsat Hot Bird 6 satellite as its cargo. The other ILS workhorse rocket, the Proton, introduced its new version called Proton M, with upgraded engines and guidance last year.
ILS won 12 orders in 2001, and carried out six launches, with four on Atlas and two on Proton. ILS had hoped to launch 10 times in 2001 but four satellites, including Intelsat 903, were not delivered on time, interfering with the schedule. ILS’s new orders are for large satellites, primarily for geosynchronous orbit, Albrecht says. The company has a $3 billion backlog of 40 missions to take it through 2004.
“We continue to enjoy market success,” says Albrecht. “Our unique feature of mutual back-up provides our customers with schedule assurance. And even though the satellite operator market is consolidating, in the long run, as these companies grow larger, the more things like reliability and schedules factor into their buying decisions.”
BLS plans three Delta 4 flights in 2002 and nine launches for the Delta 2 vehicle. Eutelsat is the first customer for the new launcher, and besides the Air Force DSCS satellite, Delta 4 is scheduled to launch an Estrela do Sul satellite for Space Systems/Loral. In 2003, five more military missions are on the Delta 4 manifest. Delta 3 will return to flight in 2003 with two missions scheduled then and another five in 2004, although five of those seven are for ICO Global, a company that was bought after bankruptcy and has some financing hurdles to overcome. Boeing’s attention for now will be on Delta 4.
“In 2002, the most critical thing for us is the Delta 4 inaugural launch. Delta 4 made significant milestones in 2001,” Simpson says. “The Delta 4 factory was in full operation, the liquid oxygen-hydrogen engine completed certification and the first stage had its static firing,” Simpson says, declaring that Delta 4 was ready to start operations.
Sea Launch, the Russian-Ukrainian supplied rocket that is launched from a shipboard platform in mid-Pacific, plans five missions in 2002, starting with the Galaxy 3C satellite in May. By year-end, Sea Launch will increase its lift capability to 6,000 kg, from 5,250 kg, by reducing excess weight and making more efficient use of propellant. Maser says the market for 6-ton-class satellites is growing and that Sea Launch has four contracts for satellites in excess of 5.5 tons. It won seven new orders in 2001 and has 17 missions manifested. In 2001, the company launched twice, bringing the total number of missions since Sea Launch entered operation in 1999 to seven.
“We’re looking to capture six to seven launches per year for the next few years. This is consistent with our business plan and shows us as fully profitable. Indications are we are on track to achieve that,” Maser says.
While 2002 will be frenetic for the mainstream launch industry, entrepreneurs who are promoting advanced launch ideas are not likely to make much progress this year. Futuristic launch vehicles have been trying to raise money and push ahead with development for a decade or more. Entrepreneurial ideas generated by companies like Kistler Aerospace and Beal in the 1990s are stalled for lack of financing. With the market so flat, even government-backed efforts by the Japanese and Chinese to win commercial business are not terribly active, according to their U.S. and European competitors. Some of these players could be strong competitors if U.S. export laws allow them into the business, but the fact that huge amounts of money are needed to develop the technology and build the systems may be an insurmountable barrier for now.
Thus the launch industry finds itself taking small steps rather than huge leaps. Incremental improvement should put the new launchers in operation by year end, giving customers more confidence and more choices as they shop for the right launch vehicle for their satellites. As for the launch industry, it has a chance to regain stability in 2002.
Theresa Foley is Via Satellite’s senior contributing editor.