Boeing, Lockheed Respond Differently to Declining Defense Spending

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COLORADO SPRINGS, Colo. — The world’s two biggest space-hardware companies, Boeing and Lockheed Martin, are taking what appear to be divergent paths in response to what they agree is a government space-investment landscape likely to get a lot worse in the coming years.

Assessing the same forecasts that U.S. Defense Department spending is poised to decline after a decade marked by unparalleled investment in military space assets, Boeing Network and Space Systems is re-entering the commercial market after a disastrous series of missteps a decade ago. Lockheed Martin Space Systems, meanwhile, has not much changed its commercial space posture.

The contrast was on clear display here April 12 during the National Space Symposium.

Roger A. Krone, president of Boeing Network and Space Systems, said the company decided to invest in its 702-MP satellite line, which targets the commercial market, without waiting for a U.S. government contract to pay for the nonrecurring engineering costs.

“We looked at what was going on in the government market and decided we can’t wait to go through a round of technology insertion,” Krone said. “We did this after having assured ourselves that we will get a reasonable return, or above that, on our invested capital.”

Krone’s remarks were peppered with references to commercial practices that the government should adopt as well as mentions of Boeing’s recent focus on commercial crew transportation, hosted payloads using commercial satellites as the hosts, and the overall commercial telecommunications spacecraft market.

It was not all upbeat. Speaking generally for U.S. companies whose work forces have swollen in recent years with the U.S. government demand for space equipment, Krone said the industry is now in a state of excess capacity relative to likely near-term demand.

“We need to be a lot more lean,” Krone said, referring to space-hardware companies in general. “There will be reductions in the work force.”

Joanne M. Maguire, executive vice president at Lockheed Martin Space Systems, focused her remarks on ways in which the Defense Department could better plan its acquisitions so as to enable its contractors to reduce their per-unit costs.

The U.S. Defense Department’s newly proposed satellite buying strategy, called EASE, or Evolutionary Acquisition for Space Efficiency, should help drive down costs insofar as it permits the military to purchase multiple satellites at a time. “Buying one at a time helps drive up costs,” Maguire said. But she added that prime contractors such as Lockheed must also “demand better cost and schedule performance from ourselves and our suppliers.”

Lockheed Martin maintains a presence in the commercial market. Its A2100 telecommunications satellite design occasionally wins a commercial order, and the company appears to have a lock on much of Japan’s commercial satellite business. Lockheed Martin also won the first commercial satellite contract from Vinasat, Vietnam’s new satellite operator. The company was active in a hard-fought contest to win a two-satellite order from Turksat of Turkey, a competition that was won, to the surprise of many, by Melco of Japan.

But Lockheed Martin remains wary of a commercial satellite market in which prices are usually far below what the U.S. Defense Department pays, and where some fear a certain commoditization effect in which standard “bent-pipe” telecommunications satellites are competed on price more than any special features.

“As we look at the [commercial] telecommunications market, we don’t see service providers giving sufficient pricing and profitability to take that on ourselves,” Maguire offered, in what she said should be viewed as a “counterpoint” to the Boeing position. In a more direct reference to Boeing, Maguire said Lockheed Martin is far from persuaded that taking an equity stake in a customer’s service business will prove profitable.

Investing in a customer’s business, she said, “suggests more confidence in the returns of the market” than Lockheed can justify.

Boeing’s El Segundo, Calif.-based satellite division used to rule the global commercial satellite market. There are multiple reasons for its loss of market share, including the company’s focus on U.S. government programs as that market boomed in the past decade, a rising European and Chinese domestic satellite manufacturing industry, and the emergence of Space Systems/Loral of Palo Alto, Calif., as an aggressive commercial competitor.

But Boeing’s reputation was also damaged a decade ago by defects on its popular 601 satellite design and the first half-dozen models of its 702 platform. In-orbit failures for these two product lines alone cost insurance underwriters around $2 billion and resulted in legal disputes that Boeing is only now shedding. The company also made a large, and ultimately mistaken, investment in the commercial launch market with its Delta 4 line of rockets.

These problems were before Krone arrived at Boeing. After several years of preparation, the company has now returned to the commercial market, selling multiple satellites to established satellite fleet operators Intelsat of Luxembourg and Washington, and Inmarsat of London. Boeing logged a two-satellite contract from Mexico in late 2010 as well.

To win the Inmarsat contract for three firm Ka-band satellites and two options — all 702 HP models — Boeing was obliged to commit to selling, on its own, up to 10 percent of the first three satellites’ capacity over the first five years of the system’s operation. Boeing further agreed to become an Inmarsat reseller of L-band mobile communications services.

Boeing has created a new services division to manage this effort, and a contract with Inmarsat for L-band distribution is expected in the coming weeks.

In an interview, Krone said Boeing is confident of its ability to find a value for a given megahertz of military Ka-band capacity and sell it to the U.S. government at a price that provides Boeing a bigger profit margin than it expects from the construction of the three-to-five Inmarsat 5 satellites. Inmarsat’s Ka-band system is called Global Xpress.

“To make the deal work, we needed access to a couple of additional revenue streams,” Krone said, explaining why Boeing sought the Ka-band services business in conjunction with the satellite manufacturing contract. The company’s experience in building the U.S. Wideband Global Satcom (WGS) Ka-band satellites for the U.S. Air Force has given it an understanding of future demand, and likely price points, for Ka-band capacity beyond what can be provided by WGS.

“Because of WGS we think we understand the Ka-band market,” Krone said. “What we have experienced is that what looks like a lot of bandwidth today does seem to get utilized as demand catches up with and then surpasses supply.

“It’s true I am at risk on the demand for Ka-band in the future,” Krone said of the company’s Inmarsat contract. “But Inmarsat’s satellite requirements were right up our alley with the 702 HP. If the question is: Are we comfortable with the military Ka-band marketplace? The answer is yes.”