Washington Space Business Roundtable (WSBR)
Topic: “Commercial Launch Reality Check – The Restructuring of the Industry”
Speaker: Frank McKenna, President, International Launch Services
Date: Tuesday, September 15, 2009
Location: The University Club, Washington, D.C.
Commercial Launch Reality Check – 2009:
The Restructuring of the Commercial Launch Industry
Thank you very much for giving me the opportunity to speak at the WSBR luncheon, today. Andrea, I appreciate the kind introduction. WSBR is one of those organizations that quietly does its’ work, year after year, to make a difference in Space, fostering open dialog, developing talent and stimulating enthusiasm for contributions and advancements in Space.
Fortunately, I am not here to talk about health care reform…. but I would like to talk about the health of an industry, the commercial launch industry. I am not here to talk about the latest and greatest technology, advanced propulsion systems, orbital mechanics, space tourism or the like. I am here to talk about the building of the space based telecommunications infrastructure and the health of that construction project from the launch providers role in the maturing of our industry.
This is an extraordinary time that presents a perfect opportunity to understand the underlying ills of the past and effectively move forward without creating future diseases at this inflection point. In two or three years, I truly believe that we could be looking back at 2009 and ask ourselves “How did we financially ruin the commercial launch industry, again!”
First, the basics. We have provided a copy of a commentary published in Space News this summer. In it, we shared our view of the state of the industry today and some of the fundamental issues we face going forward. Concepts like: investments require a return, more isn’t always better and the importance of “finding the right balance” are discussed.
Over the last 30-years, we have seen the birth of the commercial launch business. Of course, in the early years, Ariane dominated the commercial launch market. In the US as each of those who built rockets for the U.S. government - McDonnell Douglas, General Dynamics, Martin Marietta - entered the commercial launch market, those that didn’t make rockets formed ventures with those that did – including Boeing with the Sea Launch partnership and the Lockheed Corp. joint venture with Khrunichev that created the company that would later become International Launch Services.
We have witnessed the continued evolution of the commercial launch industry and we have now reached the conclusion of a long cycle. The market has corrected itself after years of oversupply and below-cost pricing. Launch service supply has adjusted to meet demand and prices have moved to a level commensurate with current and sustainable market levels. While functioning as a mature industry for the first time in its history, we now risk falling into another cycle that would take a tremendous toll. Many of us in this room lived through the ugly history of the commercial launch business in the early part of this decade. Many new entrants in the market coupled with a severe shortfall in both commercial and government demand created tremendous instability and uncertainty in the market. In order to sustain a healthy and reliable launch system, a rate of launches must be maintained to spread fixed cost, recover R&D, maintain reliability, expand facilities and develop talent and earn a profit. In the past, too many players trying to achieve the necessary launch rate resulted in cut-throat competition and prices fell through the floor. As a result, several players exited the commercial market and launch supply was rationalized. Some systems like Atlas and Delta, were fortunate enough to do so with government support, others as in the recent bankruptcy filing by Sea Launch, fell victim to their balance sheet. ILS has survived because we focused the business on heavy lift, aligned the ownership structure, and established a discipline to win profitable business that generates a sustainable launch rate. In the last 13 months Proton has launched successfully 13 times – 8 for commercial missions and 5 for the federal program.
Let’s look at the demand side of the equation. During the World Satellite Business conference in Paris last week, all of the major players in the industry came together to compare notes on their projections for the market. The forecasts were very consistent, showing relatively flat demand of around 20 commercial satellites per year with a slight downturn in orders expected in 2011 and 2012 after the current peak. Similarly, the forecast released earlier this year by the Commercial Space Transportation Advisory Committee (COMSTAC) projects near term demand on the average of 20-21 satellites per year. This further supports our position that the current level of supply is appropriate and proportionate for demand for the next five years. Together, the two main players in the market, ILS and Arianespace, can provide launch capacity for 22 commercial missions per year. This is more than enough capacity to serve the entire commercial market and does not include the other players with capacity available on existing vehicles, include Zenit, Atlas, Delta, H2A, and GSLV and Long March for non-Western satellites.
But today, operators are calling for additional launch capacity! There are systems under development, like the SpaceX Falcon 9 that may be operational in the next few years and there are existing systems that would have to overcome security and regulatory issues, like China’s Long March or India’s GSLV to enter the mainstream commercial market. Some say that ITAR reform is the key to Long March entering. Some say that Long March would make US commercial satellites more competitive in the global market, go figure. Now, Global Commercial Satellite Operators have formed a coalition to lobby the US congress to grant access for China’s Long March.
ILS has operated within the bounds of ITAR for 15 years and has learned to work within the system. That said, ITAR Reform is welcomed – it is tied to everything we do and we would like to see the process streamlined. Our view, however, is that ITAR reform is a separate and distinct topic from the use of Chinese or Indian launch vehicles. We understand that the United States Government is still concerned about the national security issues surrounding China and their access to U.S. satellite and launch technology, we expect diligent assessments, subcommittees, studies and a long period of time to evolve before granting access of Long March to launch US or Western satellites. Turning this into a US trade and US competitiveness issue is dangerous at best.
Next the concern is raised that reliable access to space requires more than two major launch systems like ILS/Proton and Ariane/Soyuz. Of course, this is the same dilemma that the US Government faced in selecting only two launch systems for US National Security with Atlas and Delta. And the USG current procurement plan is to down select to one launch system in the 2011 and 2012 timeframe. On the commercial side in late 2007 after the Sea Launch failure and grounding, a friend of mine and Boeing executive declared that if the commercial launch industry faces one more failure “it will be the equivalent of 9-11” for the commercial satellite industry. Within a week there was a Proton launch failure and of course, we did not have a 9-11 catastrophic experience. Last week, my same friend declared that we will have an industry based on a “single point failure” if Sea Launch does not survive! Such dramatizations could be understood if the operators or satellite manufacturers’ were willing to invest and fully pay for the excess capacity and such an insurance policy, this is far from the case. But the outcry, if answered, would have the opposite effect with more fixed cost, lower production rates, cutthroat pricing and reduced or no profitability and not finally stabilizing the commercial launch industry. All while this market is robust and resilient with the commercial operators declaring record profits in 2008 and so far in 2009.
We are at a critical turning point in the restructuring of the commercial launch industry and there is an exciting future ahead in building the commercial space telecommunications infrastructure connecting the globe and fueling the information age. Let’s do it right this time.
Again, thank you again for the opportunity to speak to you today and offer my insight and observations on the commercial launch industry. I personally look forward to continuing to provide real value for our customers across the globe---for many, many years to come.