Boeing-Lockheed Launch Alliance Gains FTC Clearance

By | October 9, 2006 | Uncategorized

The Boeing Co. [BA] and Lockheed Martin Corp. [LMT] won unanimous 5-0 Federal Trade Commission (FTC) permission to form a joint space launch alliance, Boeing, Lockheed and the FTC announced.

That green-light to close the planned United Launch Alliance LLC (ULA) comes with qualifications outlined in a consent order that both firms agreed to, according to separate press releases issued by the firms and agency.

The FTC intervened in the matter because agency leaders were concerned that without those provisos, there might be a damaging diminution of competition between the only two U.S.-based companies that provide medium to heavy lift services. Even with the provisos, there will be some lessening of competition, a loss that military leaders say will be offset by national security benefits of being able to use two different rockets, according to the FTC.

The FTC action is the final step in the government’s regulatory process and brings the ULA closer to the goal of meeting the government’s need for reliable, lower-cost launch services for national security, civil and scientific payloads, according to Boeing.

The company expects remaining requirements will be successfully resolved to enable the transaction to be completed and ULA operations to begin.

Issues that should be resolved before the alliance is completed include cross lawsuits that Boeing and Lockheed filed against each other in prior launch-business-related disputes, and a question as to reimbursement to Boeing for its investment in the Delta IV rocket.

Once the alliance is formed, Boeing and Lockheed Martin have agreed to dismiss all civil litigation against each other related to a previous competition for launches under the Air Force EELV program, according to Lockheed.

ULA first was announced on May 2 last year as a joint venture that combines the production, engineering, test and launch operations associated with U.S. government launches of Boeing Delta and Lockheed Martin Atlas rockets.

The ULA mission will be to produce cost-savings to the government by combining facilities, eliminating duplicative capabilities and streamlining rocket manufacturing and launch processing, according to Boeing.

The Alliance In Focus

Michael Gass, vice president and general manager of Lockheed Martin Space Transportation, will become ULA president and CEO, according to Lockheed.

Dan Collins, vice president of Boeing Expendable Launch Systems, will serve as chief operating officer, Lockheed announced. These leaders will report to a six-member board of directors, each company appointing three directors.

ULA headquarters will be in Denver with most engineering and administrative activities consolidated at Lockheed Martin’s Space Systems Co. facilities, according to the company. Major assembly and integration operations will be located primarily at the Boeing manufacturing and assembly facility in Decatur, Ala.

As part of the joint venture, the companies’ launch facilities at Cape Canaveral Air Force Station in Florida and Vandenberg Air Force Base in California will provide flexibility for meeting launch requirements on East and West coasts, Lockheed stated.

ULA is expected to have about 3,800 employees at sites in Colorado, Alabama, Florida, California and Texas.

The FTC Complaint, Provisos

The FTC intervened in the proposed ULA formation, issuing a complaint.

It alleges that by combining the only two suppliers of U.S. government medium to heavy (MTH) launch services, the joint venture as originally structured would have reduced competition in the markets for MTH launch services and space vehicles.

In settling FTC charges, the agency said that Boeing and Lockheed must take the following actions:

*ULA must cooperate on equivalent terms with all providers of government space vehicles. This could include, for example, a firm such as Northrop Grumman Corp. [NOC], a maker of satellites that ULA might place in orbit.

*Boeing and Lockheed space vehicle businesses must provide equal consideration and support to all launch services providers when seeking any U.S. government delivery in orbit contract

*Boeing, Lockheed and ULA must safeguard competitively sensitive information obtained from other space vehicle and launch services providers.

The Commission worked closely with the Department of Defense (DOD) at each stage of the investigation of ULA and in fashioning the relief in this case.

An interesting facet here is that the FTC finds there would be a loss of direct competition between the two firms, which also are the two largest defense contractors. But the FTC doesn’t use that fact to oppose formation of ULA.

The FTC noted that its “proposed consent order does not attempt to remedy the loss of direct competition between Boeing and Lockheed Martin in [medium to heavy] launch services because [DOD] has concluded that ULA would improve national security and that the unique national security benefits from the joint venture would exceed any anticompetitive harm.

“Therefore, the proposed consent order addresses the ancillary competitive harms that [DOD] has identified as not inextricably tied to the national security benefits of ULA.”

The FTC noted that ULA “is designed to consolidate manufacturing and development of the companies’ expendable launch vehicles (ELV).

“The sale of launch services to the U.S. government also will be merged into ULA. While Boeing and Lockheed will not exchange cash in the transaction, each party’s contributed businesses are valued at more than $530.7 million.”

In its intervention, FTC defined two relevant product markets: government medium to heavy launch services and government space vehicles.

For both product markets, the FTC determined that the relevant geographic market is the United States, as federal law and national security imperatives require that the government buy launch services and space vehicles from domestic companies.

Boeing, the world’s largest aerospace company and second-largest supplier to the DOD, is based in Chicago. Lockheed, based in Bethesda, Maryland, is the largest defense contractor in the United States and the largest supplier of government space vehicles.

Boeing provides launch services to the government with its Delta II and Delta IV launch vehicle.

Lockheed provides such services with its Atlas V launch vehicle.

In its complaint, the FTC alleged that as originally proposed, ULA would have violated federal rules on competition.

If ULA had formed as initially proposed, it would have meant “substantially lessening competition in the U.S. markets for government [medium to heavy] launch services and government space vehicles.

“Both of these markets are highly concentrated,” according to the FTC.

In the U.S. market for government launch services, Boeing and Lockheed are the only competitors.

In the U.S. market for space vehicles, three firms, Boeing, Lockheed, and Northrop Grumman Corp. [NOC] account for the large majority of sales.

Consolidation of the nation’s only two suppliers of government medium to heavy launch services is likely to cause significant anticompetitive harm, according to the FTC.

In its analysis of the transaction, however, the commission noted that national security issues also are central to a complete consideration of the proposed joint venture.

As the primary purchaser of government MTH launch services and space vehicles, as well as the government agency responsible for the security of the United States, DOD views on ULA were particularly significant, according to the regulatory watchdog agency.

And DOD informed the FTC that creation of ULA will advance national security by improving U.S. ability to access space reliably.

Therefore, the FTC decided that because DOD considers access to space essential to the military, maximizing the reliability of launch vehicles is of paramount importance to the military.

According to DOD, ULA will improve launch vehicle reliability through a single work force that will benefit from an increased launch tempo and because ULA will integrate complementary Boeing and Lockheed technologies.

DOD concluded that national security benefits of ULA would exceed the anticompetitive harm caused by the transaction. To allow the United States to obtain the national security advantages offered by ULA, the proposed FTC consent order does not attempt to remedy the loss of direct competition between Boeing and Lockheed Martin under these unique circumstances.

Rather, the order is designed to address the ancillary competitive harms that DOD identified without interfering with the national security benefits of ULA, the FTC explained.

Consent Order Provisions

The order first requires ULA to cooperate on equivalent terms with all providers of government space vehicles. This will ensure that ULA cannot give an unfair advantage to the space vehicle businesses of its parent companies during the DOD space vehicle procurement process.

Next, the space vehicle businesses of Boeing and Lockheed must provide equal consideration and support to all launch service providers when seeking any U.S. government delivery in orbit contract.

This provision will prevent Boeing and Lockheed from discriminating against nascent government launch services suppliers in order to protect the ULA monopoly status.

Finally, Boeing, Lockheed, and ULA are required to safeguard competitively sensitive information obtained from other space vehicle and launch services providers.

The order will be subject to public comment for 30 days, until Oct. 31, after which the FTC will decide whether to make it final.

A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Live chat by BoldChat