Buyers, Insurers Want Satellite Makers To Take on More Financial Risk

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While satellite operators and insurers would like to see manufacturers assume more financial responsibility for the performance of their hardware, manufacturers reject that idea, noting they already are making little or no profit on commercial satellite programs.

Speaking here April 15 during the 13th International Conference on Satellite Insurance, organized by Pagnanelli Risk Solutions Ltd. of London, several operators and underwriters said the “best efforts” clauses in contracts that make it difficult to penalize manufacturers for defective equipment should be scrapped in favor of language making the manufacturers share in the financial cost of an in-orbit failure.

As they have in the past, satellite builders said any attempt to force them to assume more responsibility will fail unless it is accompanied by an agreement from buyers to pay more for satellites in the first place.

Rick Masoni, executive vice president of Lockheed Martin Space Systems, said anyone proposing to load more financial risk onto manufacturers’ shoulders “couldn’t be further from the truth. Folks who suggest such a scenario really don’t understand the business.”

Masoni said satellite manufacturers make little or no money in today’s market. And even programs that do provide a profit margin usually include contract terms in which “any small misstep” on a manufacturer’s part that leads to delivery delays can wipe out the profit potential.

In addition, most commercial satellite contracts include performance-incentive clauses in which 10 percent to 15 percent of the contract fee is withheld, and paid out only after the satellite reaches certain in-orbit performance milestones several years after launch.

Masoni said with satellite operators running businesses whose pretax profit margins are between zero and 5 percent, fixing performance payments at up to 15 percent of the contract value is excessive. “Today’s structure is more than appropriate,” Masoni said. “Performance incentives should be more like one-twentieth of the contract.”

David B. Keslow, director of business operations at Orbital Sciences Corp. of Dulles, Va., said commercial satellite contracts are so competitive that any loss of performance incentives will plunge an otherwise profitable contract into the red for a manufacturer.

“We have to earn those performance incentives to earn any type of profit,” Keslow said.

Satellite in-orbit failures have been responsible for the majority of space insurance claims in recent years, a reversal of the situation a decade ago, when launch vehicle failures were the most risky part of the business.

Peter Jackson, chief executive officer of Asia Satellite Telecommunications Co. Ltd. of Hong Kong, said manufacturers need to be open with their customers on even minor changes to a satellite’s hardware or system configuration.

“The manufacturers have got to be really open with us,” Jackson said.

“I want to buy a satellite that has got parts that have been used for many years. And if I have something new, I want it to be in a system that, if it fails, it will not end the life of the satellite. But I have visited manufacturers for satellites that are supposedly using hardware with a long heritage only to learn that they changed the way wires are put in boxes. Has this been tested in space? Is it risky? We don’t know.”