Top Pentagon contractors keen on space business

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Military contractors are positioning to compete as the market continues to be reshaped by commercial players.

 

WASHINGTON — Just three weeks after hosting the first meeting of the National Space Council, Vice President Mike Pence traveled to Denver Thursday and made plans to stop by Lockheed Martin’s facilities where satellites and other space hardware are built.

According to his official schedule, Pence was there to check out NASA’s InSight Mars lander spacecraft, the collaborative human innovation laboratory and the Air Force’s next generation GPS 3 satellites.

Pence is the face of the Trump administration’s push to “lead in space again,” giving the industry a confidence boost and a show of political support for U.S. space programs even if the budgetary outlook remains murky.

Top defense firms with large space portfolios like Lockheed Martin, Boeing and Northrop Grumman are likely to benefit as space increasingly is viewed as a “contested environment” where the United States will be challenged by rising powers. Military contractors see new business opportunities and are positioning to compete as the market continues to be reshaped by commercial players.

In the third-quarter earnings call Tuesday, Lockheed Martin Chief Financial Officer Bruce Tanner said the company plans to spend from $100 million to $200 million in the next couple of years on capital improvements, and that includes upgrades to space facilities. “We are building a fairly large facility out of our space systems company in Denver to accommodate greater capacity and greater sized satellites going forward, because we think that’s where the market is headed,” said Tanner.

The company has huge stakes in NASA’s deep space exploration program. CEO Marillyn Hewson never misses a chance to tout progress in the Orion space vehicle. “We had significant accomplishment this quarter,” she told analysts. “Lockheed Martin and NASA engineers at the Kennedy Space Center powered up the next Orion crew module for the first time, initiating the vehicle management systems and power and data units, the brains and heart of the capsule,” she said.

The spacecraft is expected to travel more than 40,000 miles beyond the moon, “making this exploration mission a crucial milestone for our test campaign.”

Lockheed is one of the Pentagon’s primary suppliers of classified military satellites, including the missile-warning SBIRS and secret communications Advanced EHF constellations. Tanner said profit margins are getting tighter in those programs as business is flat and the Pentagon demands lower prices. Tanner spoke of a “continuing trend of lower government satellite volume both for SBIRS and Advanced EHF.” He called it a “good news/bad news story where we have the same quantity of satellites that we’re producing of SBIRS and Advanced EHF … making each one of them for less than the previous satellite.”

Commercial competitors

Mike Tierney, industry analyst at Jacques & Associates, said the commercial satellite industry is ready to compete in the national security arena, and is stepping up with new technology to meet stringent security demands for space systems such as satellite communications. “Threats from adversaries, specifically anti-satellite capabilities, emphasize the need for secure networks in space,” Tierney said in an email to clients. “The industry has begun to respond to this threat by vertically integrating the manufacturing process, protecting satellites from cyber attacks, establishing cheaper and efficient satellite production and designing satellites to minimize the impact of an attack.”

Industry analyst Byron Callan, of Capital Alpha Partners, said defense firms face uncertainty in the military space sector — because of increasingly capable commercial competitors — and delays as the Pentagon continues to pursue internal studies on future space needs.

Loren Thompson, an industry consultant who works with major defense firms, said Boeing’s defense chief Leanne Caret “sees major new opportunities in military and civil space,” although the outlook for commercial space is more clouded as non-traditional providers emerge.

Earlier this year, Boeing separated its military sustainment business from the defense and space unit to become part of a global services unit, Thompson said. “As a result, space now bulks larger in the plans of the defense and space unit.”

In the third-quarter earnings call Wednesday, Boeing CEO Dennis Muilenburg said part of the company’s growth strategy is to offer “information-based solution” such s health monitoring systems for airplanes and spacecraft. As vehicles “get smarter and smarter, there are more and more opportunities to leverage that data to provide value for our customers.”

Industry consolidation

One of the Pentagon’s largest contractors, Northrop Grumman Corp., is making a big play in the space sector with a $7.8 billion acquisition of missile and rocket maker Orbital ATK. The deal is still under review and subject to regulatory approval by the United States and the European Commission. Northrop Grumman CEO Wes Bush told analysts Wednesday that he projects the acquisition will close in the first half of 2018.

“We expect the transaction to receive thorough reviews, and we are engaged with the agencies in an effort to facilitate those reviews,” Bush said. Newly appointed Northrop COO Kathy Warden will be responsible for the integration of Orbital ATK.

Bush said this is a critical time to be involved in space. “I’ve been around the space business for a long time, seen a lot of transitions over the years. And we are in a period of dramatic change in terms of space architecture.” For most of his career, Bush said, “We’ve operated with the notion, which is now becoming an incorrect notion that space is somehow a permissive environment where we don’t need to be so much concerned about the actions of adversaries.”

The reality is that “everybody else has gone to school on what the U.S. has done over so many years. The strategic importance of space is recognized and consequently the vulnerability of space assets is understood,” said Bush, “So we’re at the dawn of a dramatic shift in the way that our architecture for our space assets is being assessed.” The goal is to make space a “real operating domain.”

Bush argued that Northrop and Orbital bring “complementary” assets to the table and the combination will not create a monopoly. “If you look at Northrop Grumman’s space portfolio capabilities, we tend to focus on the really big things. … If you look at the portfolio at Orbital ATK, it’s more of the smaller, in many cases, more agile response capabilities that are going to be core to this future.” Operating in space is “going to require combinations of both of those different types of systems to make it work. So, that’s why we’re so excited on the space side.”