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Boeing Aims To Clear Insurance Cloud

By | September 20, 2004

      Boeing Satellite Services of El Segundo, Calif., is looking to rebound after building six flawed 702 model satellites that ultimately may lead to insurance payouts of more than $1 billion.

      The high-profile flaws with the early-generation Boeing 702 model satellites affected PanAmSat [SPOT] and XM Satellite Radio [XMSR] (each suffering two problem in-orbit birds) as well as one each for Thuraya Satellite Communications and Telesat Canada. Reports have surfaced that the insurers of the Thuraya satellite that provides voice services to customers in the Middle East are going to pursue reimbursement from Boeing for the estimated $250 million in claims that they paid out. The underwriters reportedly are in the process of pursuing arbitration through the Paris-based International Chamber of Commerce. However, Joe Tedino, a Boeing spokesman, said last Thursday his company had yet to receive any such arbitration request.

      The problem with the six 702s that faltered in orbit was caused by solar-array concentrators used with the intent of making the satellites more efficient; instead, they reduced the life of those satellites. Dave Ryan, president of Boeing Satellite Systems, told Satellite News, “We have not flown those concentrator designs for several years and we will never fly them again.”

      He continued, “The issues of the past are resolved. They were design issues that have been removed from our satellites over the past several years. The reliability of our satellites launched in the past few years has been excellent.” One huge lesson learned by Boeing in recent years is never to fly a new technology until it is tested sufficiently.

      With worldwide satellite manufacturing overcapacity, satellite operators have been able to press spacecraft builders to accept increasingly large amounts of financial risk to gain orders. Sometimes the level of financial risk that the manufacturers have needed to bear has been “too high,” Ryan said. Insurance-industry officials indicate that, today, the specific losses incurred by particular spacecraft and launchers now are given heightened weight in setting rates than in the past. Reduced insurance underwriting capacity also is pushing the price for coverage and forcing such cost-conscious companies as Sirius Satellite Radio [SIRI] and EchoStar Communications [DISH] to set aside reserves as a form of self-insurance.

      The previous in-orbit problems on commercial satellites have caused that marketplace to become more conservative in its acceptance of new technologies, Ryan said. The procedures Boeing previously had in place were followed and the problems with the 702s were shared with the company’s clients as information became available.

      “We did find that new technology can have subtle problems with it,” Ryan said. “We are evolving our product line, particularly the 702 line, to take an incremental step in technology. We only use tried and true technology that is flight-proven.”

      Back In The Game

      Boeing is showing signs of recovering its lost luster, receiving an opportunity to prove past problems truly are fixed when DirecTV, the largest U.S. satellite-TV services provider, earlier this month chose Boeing to build three spacecraft to provide a range of advanced video services that include high-definition television (HDTV). The deal was somewhat surprising because Boeing has been a favorite of the government sector, winning higher-margin defense satellite contracts typically awarded to domestic companies, and it hasn’t done much business on the commercial side lately.

      Despite Boeing shifting its satellite manufacturing business mix from two-thirds commercial to one-third commercial in recent years, with military and other government spacecraft accounting for the balance, that trend was more a reflection of reduced orders from the private sector generally than an intentional change in strategy by Boeing, said Boeing’s Ryan.

      “We were never really looking to get out of the commercial marketplace,” Ryan told Senior Editor and Senior Analyst Paul Dykewicz. “It has been Boeing’s strategy to have a balance between commercial and military/government business. Our satellite manufacturing business is no exception to that.”

      Boeing will build the DirecTV 10 and DirecTV 11 satellites that are due to launch during early 2007. The satellite manufacturer also agreed to construct a third new satellite for DirecTV as a ground spare.

      The in-orbit satellites will be among the largest and most powerful Ka-band spacecraft ever built and launched, the company said, and they will incorporate DirecTV’s advanced transmission techniques and video compression technology to deliver national HD programming. They also will be capable of supporting spot beams carrying local HD broadcast channels in all 50 states.

      (Marta Newhart, The Boeing Company, 562/797-2718)

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