A Sea Launch Zenit-3SL successfully launches a satellite last week. Some in the commercial space industry would like to see more launch providers, while others are concerned about creating another boom-and-bust cycle that hurts all launch providers. (credit: Sea Launch)

Too few or too many?

by Jeff Foust
Monday, March 24, 2008

There is never a good time for a launch failure to take place, but the Proton M failure earlier this month, which left the AMC-14 satellite in an unusable transfer orbit (from which it may yet be salvaged, albeit with a diminished lifetime) had particularly bad timing. For International Launch Services (ILS), the company that markets the Proton to commercial customers, the failure was the third for the Proton in just over 24 months, and the second in about six months. Moreover, the failure, at least initially, looks superficially similar to one that took place two years earlier, when the rocket’s Breeze M upper stage shut down prematurely, stranding the Arabsat 4A satellite in a similarly useless elliptical transfer orbit; in that case, the owners elected to deorbit the satellite.

But ILS is not the only company to feel the pain of this launch failure. The satellite’s owner, SES Americom, will suffer a financial hit from either losing the entire satellite or having its usable lifetime greatly decreased. It had already leased AMC-14’s entire capacity to EchoStar, the direct-to-home television provider, who will have to seek alternative satellite capacity or wait until a replacement can be launched if the satellite cannot be salvaged. SES will likely file a claim of some kind with its insurers, either declaring the satellite a total loss or to compensate for a reduced lifetime. That claim will come after a 2007 that saw two commercial launch failures—a Sea Launch Zenit-3SL and a Proton M—as well as a third commercial communications satellite, Rascom-QAF 1, that suffered a lifetime-shortening malfunction shortly after launch. Last week Aon Space predicted space insurance premiums would increase up to 30 percent given the losses—estimated to be $175 million—insurers suffered in 2007, on top of whatever claims are made for the recent Proton failure.

Then there are the other customers for commercial launch services whose plans will be disrupted by the failure, which will likely ground the Proton for at least a few months. After the Sea Launch failure last January, some customers brokered deals with ILS and Arianespace to secure alternate rides for their satellites, taking advantage of some gaps in their launch schedules. That will be far more difficult to do this time around, since there is little unused capacity in the near-term among commercial launch providers. Even prior to this month’s failure these companies reported having, at best, only a handful of opportunities through 2009: ILS reported last month having already booked 80 percent of its planned launches for 2010.

This has led some customers to grouse about the number of launch providers and their limited capacity. “To me the greatest opportunity we have for the future is to increase the number of launch providers,” Phil Spector, general counsel of Intelsat, said during a panel session on the launch industry at the Satellite 2008 conference last month in Washington DC. “The market can and should be expanded.”

Spector said Intelsat was “encouraged” by various programs around the world, ranging from Japanese efforts to commercialize the H-2A to India’s tentative steps into the commercial launch market (it carried out its first commercial launch, of a small Italian science satellite, just last year) to even China’s launch capabilities, which are largely excluded from the commercial market today because of US export control restrictions. “I can say from a pure customer point of view, we would very much like to be able to buy Chinese launches, we would certainly like to be able to buy Indian launches, and we would like to be able to buy Japanese launches,” he said. “The opportunity to expand the market would make a huge difference in how we would procure satellites, and ultimately in the cost of satellites and satellite capacity to our customers.”

Even without launch failures, current launch providers have struggled to keep up with demand, causing prices to rise. A commercial GEO satellite launch that might have cost $50–60 million a few years ago, when the market was in the doldrums, now might cost $90 million or more. “For customers we have signed to date, or are in discussions with, cost is the biggest issue that they cite,” Elon Musk, CEO and CTO of SpaceX, said during the session. One customer, he said, saw the price quoted for a launch on an unnamed vehicle double in three years. While major commercial GEO operators are traditionally not overly price sensitive, that level of increase can still be tough to swallow. “If you’ve got a business plan, and you’ve sold a bunch of investors on a launch price of X, and suddenly you go back to them and its 2X, that’s a really big deal,” he said. “There are business cases that close at one price that don’t close at another price.”

That’s not a view shared by the incumbent launch providers, however. “I’m a little taken aback by the notion that there aren’t enough launch providers,” Rob Peckham, president of Sea Launch, said in response to Spector’s statement. Many launch systems are also strategic national assets, he said, that are also used for government missions, and thus will be there regardless of the level of commercial business. “There are lots of launch vehicles out there; a significant oversupply on a pure supply-and-demand basis.”

Frank McKenna, president of ILS, said there’s a need to look beyond the near-term market situation and craft a long-term strategy for the industry. “A longer-term issue is… how to maintain a financially viable launch industry,” one that can better withstand the boom-and-bust cycles that have beset it in the last, he said. Such a strategy is needed for investors in this industry to see an adequate return on their investment. “The launch industry put $15 billion into this market in the late ’90s and did not see a return on it,” McKenna said. “That really ought to be the concern, because in the long run, if you cannot make a return, whether it’s subsidized or whether it’s private investment, it will not continue to come into the industry.”

One area of concern to McKenna is the number of systems planned for introduction in the next few years to serve the small end of the commercial GEO market: satellites weighing around three tonnes. Later this spring the first Land Launch mission, using a Zenit-3SLB launched from Baikonur, is scheduled to take place, while Arianespace is preparing to begin commercial Soyuz launches from a new complex at its spaceport on French Guiana next year. Other vehicles, including SpaceX’s Falcon 9 and potentially Orbital Sciences Corporation’s new Taurus 2, will enter the market in the next few years, although there has been no substantial increase in demand for this class of payload. Those systems, McKenna predicts, will create a lot of price competition among themselves, “and the question is, how does it shake out? That’s always the case, because the demand cannot support that level of supply.”

Customers, as well as those launch providers who believe they can compete on cost and win, look forward to such a situation. Spector said that a decrease in launch prices would stimulate demand. “In this marketplace in particular, companies have been shown in the past to actually come out of the woodwork, almost… when they can get launch capability and other factors down low enough to make systems potentially viable,” he said. Examples from the 1990s include Iridium and Globalstar; he acknowledged that those companies were not initially successful—both went through Chapter 11 bankruptcy reorganization—but that their problems had little to do with the launch industry.

“As you lower launch prices you also stimulate creativity,” Spector added. The commercial communications satellite industry is doing well with its current markets and business models, he said, but would like the opportunity to experiment with new technologies and approaches. Those efforts, he said, “are often stopped in their tracks by cost.”

If the surge of new medium-class systems does create a window of opportunity for customers to try out systems at lower costs before there’s a shakeout, as McKenna predicted, how long does that window last before there is a retrenchment? None of the Satellite 2008 panelists offered an estimate, but Musk said there is demand out there for a lower-priced vehicle like the Falcon 9. “We see a lot of people out there looking at building satellites that match that capability at the prices that we’re advertising,” he said. While some are reticent to invest much until the Falcon 9 is proven, “nonetheless, there are people out there who are ‘betting on the come’ and are building satellites to match that capability, and customers who are building business plans around that.”

Jeff Foust (jeff@thespacereview.com) is the editor and publisher of The Space Review. He also operates the Spacetoday.net web site and the Space Politics and Personal Spaceflight weblogs. Views and opinions expressed in this article are those of the author alone, and do not represent the official positions of any organization or company, including the Futron Corporation, the author’s employer.

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