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With Lawsuits and Mergers, US Space Market Primed for Changes

May. 3, 2014 - 03:45AM   |  
By AARON MEHTA   |   Comments
An Atlas V rocket is launched from Cape Canaveral, Fla. The United Launch Alliance, which builds the rocket, is facing competition from two US competitors.
An Atlas V rocket is launched from Cape Canaveral, Fla. The United Launch Alliance, which builds the rocket, is facing competition from two US competitors. (Patrick H. Corkery/US Air Force)
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WASHINGTON — A series of aggressive moves from two major space companies in the past two weeks is a sign that the military space launch sector is ripe for change, according to analysts and former US Defense Department officials.

SpaceX, Orbital Sciences and ATK have been eyeing the military launch market for years, with a plan for certification in the US Air Force’s Evolved Expendable Launch Vehicle (EELV) program, the service’s effort to make military satellite launches affordable. That market has been dominated by the United Launch Alliance (ULA), a joint venture between Boeing and Lockheed Martin that has recently celebrated 100 successful launches in a row.

Proponents have praised its run of success and the venture’s stability, while critics say it represents a monopoly that takes advantage of taxpayers.

Unchallenged for years, ULA now finds itself having to fend off a legal attack from SpaceX, industrial base challenges from Russia and the merger of two competitors in Orbital and ATK.

The first move came April 25, when Elon Musk, CEO of SpaceX, announced his company was filing a protest against the Air Force for its decision to award a block-buy contract for 36 launches to ULA, a sole-source deal that Musk derided as wasteful for taxpayers.

“The general rule of thumb is don’t sue your customer, and so the fact that SpaceX has chosen to do it says to me that they either think they have a good case, and/or they’ve concluded that if they’re ever going to get into the EELV business, there’s no other alternative,” said Steve Grundman, a Lund Fellow at the Atlantic Council and principal of Grundman Advisory.

“The simple facts of the matter — 36 of 40-some launches have already been awarded to the incumbent — probably substantiate the second half of this and/or proposition; the strength of their argument is harder to know from where I sit.”

“I think SpaceX is going to look to structure a solution, one way or the other, that gives them a reasonable path to compete,” said Jeff Bialos, former US deputy undersecretary for defense for industrial affairs.

Finding a middle ground or settlement could work for SpaceX in the long term. Bialos pointed out that an agreement could contain language allowing SpaceX to avoid operating under the Federal Acquisition Regulation (FAR) requirement.

“That’s a very complex cost accounting system, and the company has to give the Pentagon all its cost data,” Bialos said. “The big primes are set up for that. SpaceX has not been operating under that system, and maybe its costs aren’t allowable; maybe they’re fearful if they have to go under that system, the price they would need to charge would be higher. A lot of companies don’t want to be under the FAR and try to avoid it.

“They’re going to have to fight that issue at some point, so why not now?” he said. “I don’t know that you get that out of the lawsuit, but I think it’s part of a potential resolution.”

Whether the company’s protest is successful, it has shone a light on an issue that those in the space community have been debating for some time: Stick with a proven, successful commodity for the nation’s most sensitive launches, or move in the direction of new entrants?

“I don’t know if they have a good legal case. I do think they have an important, almost moral case, about competition and the need in declining budgets to have as much competition to reduce costs while preserving capabilities,” said Brett Lambert, former deputy assistant secretary of defense for manufacturing and industrial base policy.

“I think there’s an important principle at stake with their case about the introduction of innovation and new entrants into what many perceive as a very stale supply base in the heritage launch industry,” Lambert added. “Even if the potential financial savings are half of what the company claims over [DoD’s future years defense program], think about what the department could fund that they need, but can’t fund under the current plan.”

One of the Air Force’s top space officials agrees there would be major benefits to opening up the market.

“We really do believe competition in the launch market is good for the industry,” said David Madden, executive director for the Air Force’s Space and Missile Systems Center. “It really is a good thing, and we believe that and we’re pushing really hard to move forward to get new entries certified so we can have a competitive launch market.”

At the same time, Madden emphasized the need for dependability.

“Access to space is expensive, and that’s the bottom line, and assured access is even more expensive,” he said. “We’re not launching commercial [intelligence satellites]. If something happens in their business, it’s money that gets lost. In our business, it’s lives.

“Having assured space capability is critical to make sure that when we put one of our payloads on there, they’re going to get to where they need to.”

Balancing that tension — wanting to find new entrants while not risking billion-dollar satellite programs at launch — is key to the future of the space market, Lambert said. “I think the key is to find an appropriate balance.”

Russian Engines Blocked

The Air Force and ULA may be forced to look for innovation one way or another, following an April 30 injunction, issued by US federal Judge Susan Braden, that blocks the joint venture and service from purchasing any more RD-180 engines used in ULA’s Atlas V rocket.

The injunction rests on the fact that the RD-180 is produced by Russian company Energomash, under the control of Deputy Prime Minister Dmitry Rogozin. He’s one of the Russian individuals put under sanction by the US government in response to the growing crisis in Ukraine.

Rogozin’s involvement in the RD-180 program also was highlighted by Musk in his news conference announcing the lawsuit as a major reason the block buy should be halted.

“It seems pretty strange,” Musk said. “How is it we’re sending hundreds of millions of US taxpayer money at a time when Russia is in the process of invading the Ukraine? It would be hard to imagine some way which Dmitry Rogozin is not benefiting closely from the dollars that are being sent there.”

A SpaceX spokeswoman called the injunction a “prudent step toward understanding whether United Launch Alliance’s current sole-source contract violates US sanctions by sending taxpayer money to Russia for the RD-180 engine.”

In a statement, ULA called the judge’s ruling “deeply troubling,” and referred to SpaceX’s lawsuit as “opportunistic.”

Lambert called the questions around the RD-180 “one of many major issues in the launch arena.

“We’re talking about billions of dollars to build a new liquid motor, and there aren’t billions floating around right now,” he said. “We’re going to continue to be dependent on the RD-180 for some time. Fortunately, we do have quite a large stockpile of them, but at some point, you need to come up with a new system, and I think that is the desire of the Pentagon — along with lowering the cost of existing systems.”

ULA has said it has a two-year backlog of RD-180s, but at a certain point, it will need to procure new rocket engines. As of now, there simply isn’t an alternative for the Atlas V.

The House Armed Services Strategic Forces subcommittee requested $220 million in fiscal 2015 to begin the development of a US-based alternative engine as part of its budget markup, with a 2019 deadline for completion. Even if that program is funded and completed on schedule, ULA would have run out of RD-180s by that time.

ATK-Orbital Merger

While SpaceX has gathered the most attention as a competitor to ULA, it’s not the only player in town. Orbital Sciences has been eyeing the military launch sector for some time, and it took a giant step toward achieving that goal when it announced plans to merge with ATK to create a new company.

ATK is the 29th largest defense company in the world, according to the 2013 Defense News Top 100 contractors list. The new entity, Orbital ATK, will be able to draw on the resources of both companies as it bids on the military launch market.

“It’s interesting,” the Air Force’s Madden said when asked about the merger. “It will be an interesting opportunity because it will make a good company.”

“Businesses will do what they think is rational, and from a business perspective, it’s a rational decision,” Lambert said. “It moves ATK into the launch business and gives Orbital breadth and depth they didn’t have through some vertical integration.”

A spokesperson for Orbital declined to comment.


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