Will Galileo Become Spacebus?

Europe’s Galileo satellite navigation project was launched with great fanfare earlier this decade by the European Union (EU) and European Space Agency, and the first testbed satellite began transmitting signals in early 2006. But something has gone wrong with the project.

Four groups initially bid for the contract to develop and operate Galileo. The two finalists eventually merged, forming an unincorporated consortium that includes the European Aeronautic Defense and Space Co. (EADS), France’s Alcatel-Lucent and Thales, Spain’s Aena and Hispasat, the U.K.’s Inmarsat, Germany’s Deutsche Telekom, and Italy’s Finmeccanica.

These companies, some of which are operators or customers with no industrial stake in Galileo, and some of which are manufacturers with a very real stake in the program’s development, are expected to pick up the majority of development and launch costs approaching 4 billion euros ($ 5.3 billion), though members are supposed to recover their development costs from Galileo revenues. Taxpayers — through the EU and European Space Agency — will foot the remainder of the bill.

Galileo’s planned 30-satellite constellation officially is intended to be a complement to the GPS constellation owned and operated by the U.S. Department of Defense. Unofficially, Galileo is a EU supranational champion intended to compete with GPS by offering more accurate positioning information than non-enhanced GPS signals provide, assure EU member state independence from the U.S. military establishment and demonstrate European technological prowess.

The consortium was a political solution to the competition that left no one out of the project, but also put no one in charge. Now the project, scheduled to be operational in 2010, is beset with cost overruns, milestone delays and business case concerns. In March, EU Transport Commissioner Jacques Barrot warned that the consortium contracts might be revoked if these problems were not resolved by May 10.

Galileo’s technological and political justifications are clear; its commercial justification less so. Most use of Galileo is expected to be free, as is most GPS access. That does not matter for GPS; the U.S. Department of Defense does not operate it to make a profit.
In the case of Galileo, however, consortium members appear to have underestimated development and operational costs and have questioned how to achieve profitable operations. These concerns clearly play a role in ongoing delays.

What is wrong with Galileo? The project faces a lot of the same problems that plague Airbus, the EADS subsidiary locked in duopoly competition with Boeing in the commercial airline manufacturing sector. Airbus is a symbol of European pride and industrial success but is in economic distress due to production, management and currency exchange issues.

While Boeing has restructured, streamlined and outsourced its operations, Airbus has been blocked from making critically necessary parallel reforms by the principal shareholders of EADS — the French state and Lagardère of France and DaimlerChrysler of Germany, who often act as proxies for their governments. The two governments, along with minority stakeholders, have actively and freely intervened in matters such as plant closings, subsystem manufacturing and final assembly responsibility, and raising of capital, preventing Airbus from restructuring.

Galileo, like Airbus, was created as a commercial enterprise but EU member states have interfered with business decisions through heavy overlay of political pressure. Galileo was authorized at a time when the satellite industry was in crisis, with more than 50 percent manufacturing sector overcapacity. Galileo was a way to put European satellite prime contractors and subsystems manufacturers to work and break the European dependence on GPS.

A lot of changed since the program was conceived. The satellite operator sector has rationalized its overcapacity issues through private equity buyouts, flips, initial public offerings and consolidation acquisitions. The manufacturers, in response, have substantially rationalized their sector.

Today, with satellite manufacturer order books reasonably full with commercial orders negotiated at profit margins the manufacturers can accept, Galileo Consortium members are less worried about keeping their production lines busy and more worried about losing money on Galileo. Resource allocation is optimized for other business, and no single company is charged with keeping Galileo on track.

Galileo is designed to provide a public service and requires more public funding, but it also needs a commercial joint venture structure with a chief executive. Until then, Galileo is a stepchild — a symbol of European pride but no one’s commercial priority.
Spacebus, indeed.