by Chris Mecray
Two of the major U.S. satellite launch providers, Boeing and Lockheed Martin, have just completed $1.5 billion in investments in upgraded launch vehicles (not including government development funding), and with great fanfare, recently completed their first missions, successfully delivering satellites for Eutelsat to designated orbits. When I mention to investors that the expected return on this $3 billion investment, based on current launch forecasts throughout at least five years is, well, zero, their eyes grow wide. How can this be? The answer is inexorably tied to the fortunes (or travails in this case) of the broader launch market, as well as overly optimistic viewpoints of the market in the 1997 time frame. The state of the market today remains quite precarious, with direct government support providing the finger in the dike, as all market participants hopefully eye prospects for commercial demand resurgence. A review of the current, and somewhat dire, business case for launch providers may provide perspective on the weakened financial position and risks for the market over the long term.
For historical perspective, it is useful to recall that the current slate of launchers, including the recently ignited Evolved Expendable Launch Vehicles (EELVs), reflects the rose-tinted mid-'90s market prospects that basked under the sheen of wildly optimistic mobile telecom and broadband growth expectations. Thus, the financial quandary now facing launch providers for at least the next decade or so (a nod to painfully long aerospace development cycles) is both a tribute to the over-optimism of the technology-hyped '90s, as well as the still-hazy forward looking prospects of commercial space business models. Essentially, the genesis of the current duplicate vehicle structure between Lockheed Martin and Boeing on the heavy launch side was a poorly conceived demand model from seven years ago, which must now be supported by our tax dollars to avoid massive waste for either player. The problem is that status quo here, though providing some hope for a breakeven return throughout a decade or more, also guarantees that no market participants will see even close to reasonable returns.
Early global investments in launchers, meanwhile, also are showing mixed results. Arianespace is facing a possible crisis after the failure of its newly up-rated Ariane 5 rocket in December. The otherwise cleanly performing Proton rockets also suffered a failure in late 2002, while planned investments in the Japanese H2A rocket (batting 2-2 after a long string of failures with the original H2) have been put on ice due to budget constraints, though the basic rocket will remain a competitor on the smaller payload range. In spite of this spotty competitive picture, overcapacity is still the prime factor in the global market, and this less-than-happy state is assured by ongoing government support.
The nature of government aid seems to fall into the category of "making whole" the misguided commercial-focused investments in EELVs, while Europe seems to aim to cover basic costs before any incremental profits from commercial demand. Interestingly though, we believe this subsidization could come with a time limit, particularly on the U.S. side, where two providers is a crowd in both current and likely prospective market conditions. Though the U.S. Air Force suggested firm support throughout three to five years, the picture beyond that could depend on the revival of broadband models, which today certainly seems akin to calling a date for the second coming. Suffice to say we are not on the corner selling pencils with any conviction. In Europe, meanwhile, the reaction to the recent Ariane 5 failure has yet to fully play out, but subsidy support from ESA, envisioned at $150 million per year or so, incrementally over prior year levels, may be at risk unless the causes can be elucidated and fixed.
With this somewhat fuzzy outlook for demand (forecasts are essentially flat after picking up slightly from a 2001 bottom), and possibly limited unemployment checks from the relevant states, it is apparent that any long-term future for the industry requires potential major changes. These can come either from a demand pickup (again, current forecasts are not bright), or alternatively, a large new investment to further lower access costs to space or fix the overcapacity status. Without these, more painful consolidation may be inevitable. On the point of new investment, recent studies under the Space Launch Initiative suggested a new architecture utilizing reusable launch vehicles (RLVs) in conjunction with EELV boosters could be a workable solution to budget constraints preventing a unique two-stage to orbit RLV. We find this solution to be particularly attractive due to its ability to both increase crew safety and reduce launch costs. It could be an intriguing way to sustain two EELV providers in the absence of a commercial resurgence, by effectively adding human space-launches as a Space Shuttle follow-on.
Near-term, stay tuned for the impact of the recent mixed success on heavy launcher order share, and pay careful attention to broadband prospects as either the savior or final coffin nail of future launch prospects. In the meantime, launchers need to count their blessings for the subsidized support of the governments to ensure they do not get burned in the wake of their own duplicated rocket plumes.
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.