Launch Service Providers: Strategically Align For Profits

By Nick Mitsis

Launch vehicle providers are fighting an uphill battle as they try to increase their profit margins within a highly competitive marketplace. The keys to success, according to industry executives, rest in reliability, dual launch options, a proven track record and schedule assurance. Given that, the major rocket lines continue with business plans that involve vehicle and launch site upgrades, integration streamlining and more back-up services coming online by those who currently do not include such provisions within their contracts.

All this activity, however, is occurring during a rather cool market period. Ask any analyst who is following the industry and they will say there is an oversupply of launch vehicles and it remains a buyer’s market. In fact, the general view resonating from Wall Street is that current capacity stands at roughly 40 to 60 satellite launches per year, but the demand will only satisfy between 25 to 40 of them within the same timeframe. This is not good news for launch providers who are fighting harder for each contract that hits the bidding room table.

“Two-thousand-and-one is going to be a weak year; the continued failure of some commercial communications satellite programs and the dubious prospects for the smaller niches have only compounded the problem. My sense, based on today’s financial environment, is that business hopes that were slated for 2003 are going to drift out to 2004 and so on,” says Christopher Mecray, aerospace/defense analyst with Deutsche Banc Alex. Brown.

Analysts at the Futron Corp. examined what effect lower launch prices would have on the demand for launches. “Our study showed that there was more of a demand to launch at a lower price than at a higher price. There is an indication that demand would increase if prices fall and reliability rate is maintained,” says Linda Williams, senior analyst at Futron. But launch executives, at this time, are taking a cautious approach to lowering their prices. Arianespace, for example, will address cost reduction without compromising the reliability level it has achieved, meaning costs may remain where they are.

Boeing/Sea Launch: Survival Alliance

Business strategists among the leading launch providers are heeding the warning signs the marketplace is presenting and are embracing alliances in hopes that working together will help them weather this storm. The most recent business alliance came in March when The Boeing Co.’s Delta launch sector announced its mutual back-up plan with Sea Launch. This back-up agreement calls for Sea Launch to provide its Zenit rocket as an alternative for Boeing’s Delta 4 launcher. Boeing will reciprocate by offering its vehicle as a back- up launcher for Sea Launch.

“This was an attractive proposition for Sea Launch because such launcher back-up capabilities have become a discriminator in the marketplace,” says Will Trafton, president and general manager of Sea Launch. “Our customers were asking us for such back-up so we responded to their requests.” Smooth sailing through launcher industry waters, however, is not quite a reality for Sea Launch in light of this new partnership. “There is no doubt that this is a commodity market,” says Trafton. He adds that the launch vehicle sector is the most competitive part of the satellite industry.

“When you have oversupply, you reduce costs or margins. This has happened over the last few years and will continue over the next few,” he says. Within the back-up partnership, cost reduction may fall onto Boeing’s plate considering that Sea Launch’s costs for the Zenit is fixed.

Regardless, customers had been pressuring both companies to develop a back-up launch plan to compete with similar arrangements offered by Arianespace and International Launch Services (ILS). “It’s terrific,” says Walter Braun, senior vice president for engineering, operations and vendor management of former GE Americom (now SES Global), in response to the new back-up agreement. “In fact operators have been pushing for it because our clients need to have certainty that their transponders are going to be on-orbit by a certain date.”

John Argersinger, director and launch service engineer for Loral Skynet, concurs with Braun that a mutual back-up launch capability is an attractive offering to clients. “The launch provider must be able to demonstrate that they can provide realistic back-up provisions,” Argersinger adds. “In addition, the launch provider must demonstrate a small or reasonable cost impact and that the back-up could be targeted close to the original launch date.” In other words, clients welcome this flexibility, but they want to incur minimal if any cost for switching vehicles and still need to launch as close to the original launch date as possible in order to meet pre-established business objectives. “We ask for exit provisions that are not onerous if we feel we have to take our launch someplace else. We need as much certainty as possible and more certainty than we had in the past that things will get done on time and to performance specs,” says Braun.

Boeing and Sea Launch executives examined these points during their agreement negotiations. A “solid” transparent criterion has been established that will carry little impact, monetary or otherwise, to the client, according to company officials.

Such back-up capabilities will only succeed, however, if the vehicles slated to stand by are in working order. Recently, engineering problems with the Delta 4’s main engine alarmed both clients and Boeing executives. Gale Schluter, vice president of Boeing’s expendable launch systems, remains confident the performance problems plaguing the engine design are solved. “We are just about out of the woods on the development problems and then we start sprinting toward our first launch,” he says.

Currently, Boeing has four Delta 4 launches planned for 2002: two government, two commercial. The Delta 4 family, which includes five variants, has the capability of launching payloads ranging from 8,000 lbs to 28,950 lbs to GTO. “I think we will have a significant market advantage with the Delta 4 because we have re-engineered this product from the ground up,” adds Schluter. “Also, we will need to compete with Arianespace by offering some sort of dual-manifesting and that is something that we are also looking into very seriously for the future.”

For decades, Delta maintained a market niche in the small payload class. When Delta officials began studying a new, heavy-lift option, they also examined the costs associated with their existing service to try to lower the cost of building the new Delta 4. Since the largest cost is associated with the booster, Boeing built a new factory and “re- engineered the Delta product family for sustainable low-cost” production, according to Schluter.

Sea Launch executives, on the other hand, are confident the Zenit rocket will continue to prove its reliability and maintain a strong market share from the middle of the Pacific Ocean. On March 18, 2001, Sea Launch added another success to its launch roster when its Zenit 3SL rocket successfully lifted off from the Odyssey launch Platform, placing XM Satellite Radio’s XM-2 (ROCK) spacecraft into its designated 115 degreesW orbital slot. Currently, Sea Launch has three launches slated for this year and it is inking some four contracts for 2002.

International Launch Services Looks Toward 2001 Success

The global launch provider ILS already offers a back-up scenario for its clients. By offering mutual back-up, ILS provides its customers with an option to fly on either the Proton or Atlas vehicles that it markets. The company booked more than $1 billion in orders in 2000 and at our press time was set to announce its latest two contracts. According to Mark Albrecht, president of ILS, his company has become increasingly popular throughout the past year thanks to its mutual back-up capability.

“We have a dual integration track so that the mission is being designed to fly on either vehicle, enabling a switch to occur fairly close to the launch date,” adds Eric Novotny, vice president of marketing and sales for ILS. “Generally, when we have a back-up contract, we will make accommodations to ensure there is space available on the other vehicle. It is a delicate balance between the number of contracts we can sign, the likelihood a back-up will be needed and the period in which it will take place.”

Soon, ILS will have an additional vehicle in the marketplace alongside its Proton and Atlas families. The Angara class vehicles, a development effort by Khrunichev, is slated to begin service in late 2003 with its Angara 1.1 vehicle.

“Angara 1.1 will handle small payloads,” says Novotny. Even though the current state of the commercial LEO market is extremely bleak with no significant signs of rejuvenation, ILS officials are confident that scientific and civil missions will give the Angara 1.1 enough payloads to prove itself. Like other launchers, Angara 1.1 is an evolutionary space vehicle with sister rockets that will target the commercial markets beyond LEO. Therefore, all eyes will be on Angara 1.1 to see if it can prove itself as a reliable launcher.

But with Atlas and Proton, along with this year’s introduction of the Proton M/ Breeze M on April 7, ILS has an established and reliable reputation. Last year, it closed its most successful run with 14 launches, all successful, and contracts for 16 launches that now translate into a more than $3 billion backlog.

Arianespace Faces Rebuilding

As its global contenders formulate business strategies to increase market shares and gain additional contracts, Arianespace is facing a year of proving reliability with its heavy-lift vehicle and rebuilding its global dominance. “Our approach is to rely on our proven technology and heritage,” says Philippe Berterottiere, senior vice president of marketing and sales for the European launch provider. “Such a conservative approach is necessary as the space segment has already been greatly destabilized by both technical and financial failures.”

The estimated loss of roughly $187.3 million that Arianespace incurred last year was no surprise to the organization’s officials or shareholders, Berterottiere adds. The high cost of developing the Ariane 5 rocket from scratch to eventually replace the Ariane 4 was the key reason for the organization’s first financial loss in its 20-year history, he added. The Ariane 4 is to be phased out by mid-2003, by which time the last of the 13 remaining launchers will be used. Currently, Arianespace’s backlog stands at 48 satellites.

“In addition to flying the Ariane 5, Arianespace has upgraded its launch facility in Kourou, [French Guiana],” Berterottiere adds. The upgrades include a large new satellite preparation and check-out facility, which represents an investment of $60 million–of which $50 million Arianespace financed, while the balance was picked up by the European Space Agency.

Starsem Also Eyes Back-Up Option

The European-Russian launcher company providing the Soyuz family of launch services to the commercial sector, which is a subsidiary of EADS and Arianespace, is considering forging a back-up launcher agreement similar to the one between Boeing and Sea Launch. “We see the validity of the agreement between Sea Launch and Boeing and we are now working to see the possibilities of establishing a similar back-up plan, but it is a bit immature to speculate as to how this arrangement is going to materialize,” says Jean-Yves Le Gall, chairman and CEO of Starsem.

What is coming to fruition for Starsem is its introduction of the Soyuz/ST launch vehicle. The Soyuz/ST program boasts a new digital control and telemetry system that will give the vehicle a higher precision in steering and injection and dog-leg maneuver capability. Starsem has established reliability for the Soyuz because the rocket averages 10 flights- -mostly civil–per year. “We are currently negotiating commercial contracts.”

But regardless of new technology, Starsem officials have to modify the fundamental business plan on which their future profits are based. The greatest strength of the Soyuz vehicle is payload delivery to LEO–a market segment that is virtually non-existent. “Given the current defunct LEO state of satellite systems such as ICO, Globalstar and Iridium, constellation systems are not in a good position. Given that, we are also looking at the small GTO for telecommunication services,” Le Gall says. “The most important issue for the Soyuz launch vehicle is that we have roughly 10 flights per year and that bodes well for reliability.”

China Great Wall Still Has A Presence

Even though the U.S. State Dept. has stated that it will resume issuing licenses for launches to occur on Chinese-built rockets, the political sensitiveness of the export control issue continues to plague the Far East launch provider. China Great Wall Industry Corp.’s presence in the commercial launch service market remains cool. Recent foreign reports indicate that by 2005, China plans to develop new, heavier launch vehicles. China Great Wall officials were not available for interview for this article, but some information on its fleet of launchers is on the com- pany Web site at http://www.space.cgwic.com.

The Launch Capability Is Here To Stay

So as the global launch providers continue to navigate through this turbulent market, one thing will remain certain: customers’ needs will continue to be addressed. Whether it is through mutual back-up launch capabilities or a streamlining of prices, the world’s rocket lines will compete until the final second before liftoff for market share and client loyalty.

Nick Mitsis is Via Satellite’s Associate Editor.