Dollars and Sense: Government Space Programs And The Looming Budget–Is The Commercial Side Headed For Trouble?

by Christopher Mecray

A quick examination of key government space programs yields an overwhelming impression of a long-held maxim in this area: Nearly all programs have massively exceeded budgets, many are delayed and performance visibility remains dim going forward. While this is not the first ink to be spilled to lament this fact, we would raise a more pressing question in regard to the forward picture. What impact would a plateau in defense funding around the FY06 period have on the commercial aerospace arena, which relies on government procurement opportunities, regarding the myriad semi-troubled existing space programs and those just in the beginning stages? While the answer to this question is highly subjective, we believe the overall budget picture could impact space planning more severely than many other program categories.

In assessing the overall impact of potentially trimmed budget plans, we start with the base assumption that the areas having seen the greatest boost in recent years may also be most vulnerable to cutbacks when the budget axe is wielded. As an aside, there is no guarantee that budgets will not continue to grow. We agree with the consensus that ballooning federal deficits will likely hamper continued growth much past this year’s budget round, with the ultimate impact heavily dependent on the rate of economic rebound and resulting tax receipts. Still, the areas of the defense budget that have seen massive increases in the last several years include aircraft (mostly United States Air Force fighters), missile defense (including some space-based programs) and key space satellite programs. As many other categories, such as shipbuilding or munitions, have remained broadly stable in the period, we assume the opportunity for "give-back" in these is diminutive. For space, however, this $18 billion (all-inclusive figure with procurement, research, development, test and evaluation, and operations and management elements) budget slice is slated for significant increases. For acquisitions and testing alone, the Defense Department (DoD) plans to double spending from FY04 levels of about $3.5 billion to roughly $7.5 billion by FY08.

The list of program difficulties and budget busters in space, however, is far too extensive to detail here. Recent rebaselined programs, such as SBIRS-high (missile radar tracking satellites), which has seen costs double since program inception to more than $4.4 billion while completion timing has slipped by years, continue to face technical issues and budget concerns that virtually guarantee additional backing and filling. Peter Teets, undersecretary of the Air Force, recently noted in congressional testimony that the next tranche of Evolved Expendable Launch Vehicles will likely see costs rise 20-50 percent from prior buys. Other development programs such as Advanced Extremely High Frequency communications satellites and Space Training and Surveillance System (STSS)–an infrared detection of missile launches and space tracking–also face technical and cost hurdles, with ongoing uncertainty on precise launch timing. Meanwhile, concept stage programs slated for major funding later in the decade are beginning to see initial funding for design work, such as the Space Based Radar program with awards coming in this April worth up to $411 million for initial work.

What will become of government space throughout the next few years? Our best estimate is that program cost over-runs will absorb much of the planned increases, crowding out some of the new programs such as Space Based Radar and Transformational Satellite for Broadband Communications. These will, therefore, be "pushed to the right" while existing development programs will possibly take longer to complete, in part due to possible lower funding applied in out-years from FY06-08.

In the end, the DoD will be forced to prioritize between program areas, which will help determine these budget impacts. Almost invariably, new advanced programs lose out in this process to existing projects, though these too must feel the pinch to adequately address funding constraints. We note that SBIRS and STSS will be particularly sensitive to the election, as President Bush has placed far higher priority on missile defense than his predecessors, translating to uncertain impact if he loses this year’s presidential election. Another key question will be whether the DoD will stand by its line of the last three years that space is truly instrumental in achieving its military transformation goals. If it is, then other program categories may face some harsh cuts in the event of a defense budget cap. In either case, we should expect the resolution of ongoing space program funding deficiencies to have a real impact on the ability to cover costs of expected concept programs within the decade.

Christopher Mecray is a research analyst with Deutsche Bank Securities Inc. The following comments should not be considered a recommendation concerning the purchase or sale of any security mentioned herein.