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Proton launch
ILS is cutting prices on its Proton rocket to take advantage of changes in exchange rates and to lure customers from other launch providers. (credit: ILS)

Satellites, launches, and the recession

The current economic crisis—be it a sharp recession or something worse—has understandably led many in the space field to wonder how well space companies will survive the downturn. Some of the small, entrepreneurial firms are certainly finding it more difficult to raise money (see “Space and the financial crisis”, The Space Review, October 20, 2008), while the aerospace industry in general may be cushioned from the worst of the recession’s impact because of its close ties with the government (see “The space economy: a public-private partnership?”, The Space Review, March 16, 2009). But what about the big commercial space companies, including the operators of fleets of communications satellites? Could they weather the recession, or will they also suffer, and in the process drag down satellite manufacturers and launch services companies as well?

That question was at the heart of the Satellite 2009 conference held last week in Washington DC. Satellite operators in general expressed a surprising amount of optimism about their prospects, based on bottom lines that are strong today and a belief that they have enough business to ride out the financial storm until a recovery begins—provided the recession doesn’t stretch on too long. Launch companies, though, were less sanguine about the near-term economic future, concerned about a return to a period of overcapacity and lower prices that hurt the industry earlier this decade.

The last domino to fall

Satellite operators came to Washington riding a wave of generally strong financial results from 2008. During one panel, for example, a group of chief financial officers from leading companies touted a set of metrics ranging from revenues to transponder utilization rates—the fraction of satellite capacity in use—to demonstrate their financial health. “2008 was a fantastic year for Inmarsat,” said Rick Medlock, the CFO of the mobile satellite services company, in comments similar to those made by executives from other companies.

“Right now we’ve seen no significant effect from the economic conditions,” said Bednarek.

In fact, for some companies those figures might be too strong: European satellite operator Eutelsat, for example, has a utilization rate of 97 percent for its satellite fleet, a figure generally considered too high in the industry since it leaves little room for error in the event of satellite failures or other contingencies. Giuliano Berretta, CEO of Eutlesat, said the high utilization rate was the result of a “capex holiday”—a reduction in capital expenditures for items like new satellites—the company had earlier this decade. Capital expenditures have since increased and several new satellites planned for launch in the near future will reduce utilization rates towards industry norms of 80 to 85 percent. “After a holiday you have to go back to work,” he quipped.

Those healthy balance sheets heading into 2009 give companies confidence that they can do well this year despite the recession, in part because of the long-term contracts that are common in the industry. “I think it’s a testament to the quality of our business when almost 80 percent of our revenues, prior to the year beginning, are already in the bag,” said David McGlade, the CEO of Intelsat.

“Right now we’ve seen no significant effect from the economic conditions,” said Rob Bednarek, president and CEO of SES Americom-New Skies. Part of that, he said, is due to the long-term nature of the contracts they have, but also because of the key role they play to their customers. “To the extent that we’re involved in other people’s business plans, be it telecom or media distribution, we’re pretty vital to the continuation of those businesses.”

His comments were echoed by others, who are also confident that they will be insulated from the worst of the recession by the nature of their business. Demand for communications often goes up during downturns, as individuals and businesses seek information on the best way to move forward. Even luxuries like direct-to-home television can hold up well, since consumers may see them as cost-effective entertainment alternatives. “We are testing that this model is very resistant to crisis,” said Catherine Guillouard, CFO of Eutelsat. Even if the downturn is an extended one, “we will probably be the last domino to fall.”

Industry executives don’t expect a repeat of the telecom bust at the beginning of the decade, which resulted in excess satellite capacity and decreased prices. The key difference is a fewer number of “speculative” satellite ventures now than a decade ago. “The supply-demand imbalance is different; we began at a different point,” said Bednarek. “You have a greater dependence on good business models and profitable companies that are using satellite capacity. They are not going to go away.”

“This industry had not had the time to become exuberant again” before the economic downturn hit, added Eric Beranger, CEO of Astrium Services.

However, that doesn’t mean all is well for the satellite industry. Some smaller operators are finding it difficult to raise money needed to finance new satellite systems. And even larger operators concede that they will at least see slower rates of growth in 2009. “My best guess is that we’re going to see slower growth in ’09 and early ’10, but it’s probably going to be better growth than the rest of the terrestrial competition,” said Hoyt Davidson, managing partner of Near Earth LLC.

In addition, the optimism satellite operators have expressed is based on the assumption that the recovery from the recession will begin later this year, or early next year at the latest. An extended recession could affect the long-term contracts that are currently buoying satellite companies. “We should obviously not tell the world that we are immune from the economic crisis,” said Romain Bausch, president and CEO of SES. “If, for example, this crisis were to continue until the end of 2010 or into 2011, I definitely believe you would also see impacts on the [financial] results of the satellite companies.”

Launch uncertainty

While satellite operators expressed optimism about their ability to come out of the recession largely unscathed, launch providers appeared more concerned about the economic environment. That part of industry has been on a rollercoaster for the last decade, as the boom of the late 1990s went bust after 2000, sending it into a steep downturn that drove some providers out of the market entirely. Launch companies that survived the downturn have benefitted in recent years to stronger demand and rising prices—up as much as 30 percent in the last two years, according to some in the industry.

“If, for example, this crisis were to continue until the end of 2010 or into 2011,” warned Bausch, “I definitely believe you would also see impacts on the [financial] results of the satellite companies.”

There are some indications, though, that this trend of rising prices may have stopped or even turned around. In recent months International Launch Services (ILS) has signed several launch contracts for satellites that were originally scheduled to go on other vehicles but had been delayed. Prices for the launches weren’t announced, as is standard procedure in the industry, but reports suggest that ILS charged on the order of $75–80 million for those launches, significantly less than the going rate of $100 million or more for a large GEO satellite launch last year.

ILS officials said that they have been able to take advantage of hardware “in the pipeline”—built for other customers who have since delayed their launch plans—as well as a decline in the value of the ruble: for most of 2008 the ruble traded at under 25 to the US dollar, but sharply depreciated in late 2008 and early 2009, falling to 36 to the dollar before rebounding slightly in the last month. “We’ve been able to roll back some prices,” confirmed Frank McKenna, president of ILS.

Other companies, though, said they have not seen signs of declining prices “I do not see a decrease in the price of the launches,” said Jean-Yves Le Gall, chairman and CEO of Arianespace. “I think this is a good move, because the last time we saw a strong decrease, we saw an increase in launch failures.”

Any decline in launch prices would be welcome news to satellite operators, some of whom have complained recently about increased launch prices. “We experienced something like a 30 percent increase in the last couple of years, which is a worrying sign,” said Eutelsat’s Berretta.

However, of greater importance to operators is a diversity of launch providers, giving them flexibility in the event of launch failures or other delays. Intelsat’s McGlade said that his company had even gone so far as to help prop up one unnamed launch company last year. “Frankly, we have supported at least one launch provider with extra funds to help them be healthy. It had a financial hit for us in the fourth quarter… but we did that because we thought it was right, and it’s right to have a number of competitors that could be there with us for the long term.”

McGlade and other satellite executives appearing on a plenary panel at the conference surprised many in attendance by pushing for United States companies to return to the commercial launch market. Boeing and Lockheed Martin largely exited the commercial launch market in recent years, with Boeing selling a few Delta 2 launches, primarily for remote sensing providers, while Lockheed has one Atlas 5 launch for Intelsat scheduled for later this year; both companies have merged their launch vehicle manufacturing business into a joint venture, United Launch Alliance.

“We would love to see the Americans back in the commercial realm, but they have to do so in a commercial way,” McGlade said. Berretta noted that Eutelsat was the first commercial customer for both the Atlas 5 and the Delta 4 (and in the latter case, the only commercial customer). “We hope the Americans are back in this market with their beautiful quality that they have,” said Berretta.

Lockheed and Boeing officials, though, are reticent to get into a commercial market where their vehicles are not necessarily cost-competitive. David Markham, president of Lockheed Martin Commercial Launch Services, said there may be an opportunity for greater commercial use of the Atlas 5 when there is excess capacity, as was the case in 2008, when various delays meant that there were only two Atlas 5 launches from Cape Canaveral.

However, he said, he would look for commercial launch deals only when they meant business sense. He said that that Eutelsat was charged only $50 million for that first Atlas 5 launch, an amount that wasn’t profitable for Lockheed. “We tried to explain to our shareholders that we could lose money like that and make it up on volume, which was a business case that was not sustainable,” he said. “We are not willing to participate in an all-out price war once again.”

Markham’s comments were echoed by Ken Heinly, director of launch products and services at Boeing. “Boeing will not enter into bad business deals,” he said. He then turned to fellow executives from launch services companies on the same panel, including the heads of the “Big Three” companies—Arianespace, ILS, and Sea Launch—and asked, “Is that your position? As I look over the years, it would seem as though there are either huge fluxuations in your cost base, or not all of those launches that you sold were that profitable. And we can’t do that, we will not do that.”

“We want to have launch providers who are healthy, but only so healthy,” said McGlade.

Boeing and Lockheed, though, aren’t the only US companies in the commercial launch market that can—or soon plan to—serve the needs of commercial satellite operators. SpaceX’s Falcon 9 rocket, whose first launch is planned for this summer, can launch many of the same satellites currently being launched by the Big Three and others. SpaceX CEO Elon Musk, speaking at a conference luncheon, said that the company is interested in signing up customers in this market. “We do feel that the commercial launch market is extremely important,” he said, “and we are in negotiations for some very significant launch contracts in the commercial sector.”

Satellite operator executives are interested in SpaceX, at least once the vehicle has some successful launches under its belt. “It is wrong to suggest that it is not going to be a viable option for us until some time in the distant future,” said Dan Goldberg, CEO of Telesat. “They’re being well supported by the US government, and they have launches coming up. If those are successful I think any one of us would seriously consider them a future opportunity.”

Operators are also, more controversially, interested in Chinese launches, particularly after Eutelsat recently became the first Western operator to agree to launch a satellite on a Chinese Long March vehicle since the United States enacted more stringent export control restrictions a decade ago, effectively blocking the Chinese from launching any satellites with American components. Berretta noted that, technically, Eutelsat didn’t sign a contract for a Chinese launch: they have a “delivery in orbit” contract with the satellite’s manufacturer, Thales Alenia Space, who arranged for the Chinese launch of the “ITAR-free” satellite, which avoids US export controls by not using any American compontents.

That interest in other launch options is a cause for concern among those in the launch industry, who are worried about overcapacity in the market: too many launches chasing too few payloads, a situation that could be exacerbated if the recession continues long enough to start significantly affecting operators. “There’s more than ample capacity to satisfy industry demand on the commercial side,” McKenna said. “My question is, are we about ready to oversupply the industry only to create a financial crisis amongst the launch providers?”

Operators share those concerns—up to a point. “We want to have launch providers who are healthy, but only so healthy,” said McGlade. “Healthy enough to ensure that they give us what we need, but not to gouge prices.”