SpaceX challenges alliance’s monopoly on satellite launches

LOS ANGELES - A highstakes battle is underway in Washington to launch the U.S. government’s most sophisticated national security satellites.

Space entrepreneur Elon Musk is pitted against the nation’s two largest weapons-makers, Boeing Co. and Lockheed Martin Corp., for military contracts worth as much as $70 billion through 2030.

For eight years, the Pentagon has paid Boeing and Lockheed - operating jointly as United Launch Alliance - to launch the government’s pricey spy satellites without seeking competitive bids. Now, the arrangement is drawing attention on Capitol Hill because of escalating costs and the cozy partnership.

The monopoly drew fire this month as lawmakers peppered defense leaders with questions about the arrangement. A bipartisan group of seven senators also wrote Defense Secretary Chuck Hagel asking for more scrutiny. That came days after the Government Accountability Office reported that the program had tripled in cost in the past five years.

The letter urged Hagel to “take all necessary steps to ensure the Air Force fulfills its commitment to provide meaningful competition.”

That’s good for Musk and his Hawthorne-based firm, Space Exploration Technologies Corp., or SpaceX. Over the years, Musk has repeatedly battled to break the grip the aerospace giants have on the nation’s space programs.

SpaceX has already changed the way NASA conducts spaceflight. The company now runs regular cargo resupply missions to astronauts aboard the International Space Station. It became the first private company to do so, a year after the space shuttle fleet was retired in 2011.

Last month, Musk testified before Congress, seeking the right to bid on the Air Force’s space-launch program, called the Evolved Expendable Launch Vehicle.

“There should be no more sole-sourcing under this program when competition is an option,” Musk said.

In 2012, Undersecretary of Defense Frank Kendall wrote a memorandum advising the Air Force to introduce competition and identify “up to 14 missions that should be competed as early as 2015.”

But the Air Force’s recent budget proposal offered no plans for competition next fiscal year, which starts in October. It also cut from 14 to seven the number of missions from 2015 to 2017. That was the catalyst for the Senate letter, which included the signatures of Democratic California Sens. Dianne Feinstein and Barbara Boxer.

The Air Force has responded by saying it favors more competition but cut the number of launches because there was no need to put additional satellites into orbit.

The Air Force currently buys United Launch Alliance rockets to launch schoolbus size satellites for spying, weather forecasting, communications, GPS and other experimental purposes. The government pays the company nearly $1 billion each year, whether it launches six times or none.

The money covers costs such as facility support, launch operations and support engineering.

“This is a great example of a bilateral monopoly at work: There is one buyer and one seller,” said Todd Harrison, a military analyst for the Center for Strategic and Budgetary Assessments in Washington. “We shouldn’t expect it to be efficient. We shouldn’t expect it to lower costs.”

Boeing and Lockheed formed the alliance in 2006 because market demand could not sustain two competitors at the time. The goal was to lower costs by more than half and cut the time to prepare for launch.

United Launch Alliance developed its family of Delta IV and Atlas V rockets to dominate the launch business. When the rockets were built, they were the most powerful since the Saturn V launched three men to the moon decades earlier.

At the time, the company believed it could use demand from the telecommunications market to provide the military rockets at reduced prices. But the commercial boom never materialized, and the company has largely depended on the U.S. government.

All of the alliance’s 69 launches for the Pentagon have been successful.

“There’s a reason the Pentagon doesn’t obsess over the launch costs anymore,” said John Pike, director of GlobalSecurity.org, a website for military policy. “Their rockets aren’t blowing up.”

In recent months, United Launch Alliance has been criticized for the way it builds its rockets. It uses a Russian-built RD-180 rocket engine on its Atlas V.

In the wake of Russia’s seizure of Crimea, SpaceX has hammered United Launch Alliance over use of the engine. The Pentagon has even directed the Air Force to perform a review to understand the implications of using it.

Musk said his company is able to keep costs low - rockets start at $56 million - because it manufactures nearly all of its own parts. Founded in 2002, SpaceX makes rockets at a facility in Hawthorne that was once used to assemble fuselage sections for Boeing 747s.

Business, Pages 25 on 04/15/2014

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