End to DoD Launch Competition Brings Boeing, Lockheed Together

by

A U.S. Air Force decision earlier this year to forego a competition for 23 launch contracts and instead divide them roughly evenly between Boeing and Lockheed Martin likely provided the final push that convinced the companies to settle a bitter legal dispute and propose a joint venture to sell Atlas and Delta launchers to the U.S. government, according to government and industry officials.

Boeing spokesman Dan Beck said another major factor was the Air Force’s decision in March to lift the suspension that barred Boeing from competing for Air Force launch contracts.

Both the suspension and lawsuit — filed by Lockheed Martin — stemmed from charges that Boeing improperly obtained proprietary Lockheed Martin technical data during the competition for the first round of Evolved Expendable Launch Vehicle (EELV) contracts in 1998.

An Air Force investigation concluded that Boeing acted improperly and the service imposed an indefinite suspension in July 2003 that barred Boeing from competing for new government launch contracts. That suspension, however, was waived more than once when the Air Force had no readily available alternative to a Boeing launcher.

If the joint venture wins U.S. government approval, the lawsuit will be dropped and the two companies’ government launch activities will be merged into a single firm called United Launch Alliance.

According to identical documents both companies filed with the U.S. Securities and Exchange Commission May 2, each would have “a 50 percent ownership interest in a Delaware limited liability company to be formed.” Boeing and Lockheed Martin “have agreed to support the company’s initial working capital needs,” the filings said.

The merger would include all production, engineering, test and launch pad operations for the Atlas and Delta rockets.

The president of the new organization would be Michael C. Gass, Lockheed Martin’s vice president and general manager of space transportation. Daniel J. Collins, Boeing’s vice president for expendable launch systems, would become chief operating officer.

The companies said they expect to win government approval for the formation of United Launch Alliance by the end of 2005.

The deal does not include the commercial launch activities of either company, according to the papers filed with the Securities and Exchange Commission .

Chicago-based Boeing is a partner in the Sea Launch venture, which sells and markets launches of Ukrainian-built Zenit rockets from a seagoing platform built in Norway. Sea Launch has no U.S. government customers.

Lockheed Martin of Bethesda, Md., is a partner in International Launch Services (ILS), which markets both the Atlas and the Russian-built Proton rockets. If the joint venture is approved by U.S. regulators, ILS would no longer be involved in Atlas sales to the U.S. government, but it would continue to market both the Proton and Atlas commercially .

“At the closing, the company will enter into agreements granting exclusive rights to International Launch Services and Boeing Launch Services to market Atlas and Delta launches respectively, to commercial customers for a period of 10 years,” the SEC filings said. Boeing, however, had already withdrawn its Delta 4 from the commercial market to concentrate solely on sales to U.S. government customers.

The agreement prohibits either Boeing or Lockheed Martin from providing expendable launch vehicle services independent of the joint venture to the U.S. government for 7.5 years after the closing date of the deal. It also prohibits the companies from developing competing launch vehicles for the U.S. government for five years and from soliciting or hiring “certain employees” from the joint venture.

Each company will appoint three members of a six -person board of directors for United Launch Alliance.

The joint venture announcement came less than a month after Lt. Gen. Brian Arnold, commander of the Air Force Space and Missile Systems Center in Los Angeles, which oversees the EELV program , told reporters at the National Space Symposium in Colorado Springs, Colo., that the service planned to evenly split the next set of EELV contracts.

One industry official said that if one company won the vast majority of those contracts, the business case for the other would be unsustainable. “You faced the prospect of having to keep the entire work force intact for just one launch a year and that just won’t work,” this source said.

With competition removed from the program, the companies felt the environment was right to join forces, Beck said. “Without competition, it makes sense to have this setup,” he said.

Although Boeing and Lockheed had discussed the joint venture for more than a year , Boeing was unable to talk with Air Force officials about future launch projections while it remained under suspension, Beck said. This made it difficult to understand the number of launches likely to be available , rendering the joint venture hard to evaluate , he said.

Peter B. Teets, who had encouraged the joint venture during his tenure as undersecretary of the Air Force, called the deal a “smart move” that could be the long-term solution to keeping two sources of rockets available for national security payloads.

The companies project savings to the government of up to $150 million annually, which could help “ease the pain” of budgeting money annually to keep both sources available , said Teets, who retired from the Air Force in late March.

The Air Force will spend $177 million in 2005 for that purpose, and has requested $340 million in 2006.

The challenge now is to find ways to encourage the companies to keep their top employees working on the EELV program and ensure that their commitment to quality does not diminish in the absence of competition, Teets said.

U.S. Sen. Wayne Allard (R-Colo.) said he believes the joint venture will be an effective way of controlling rising launch costs. However, Allard noted in a brief written statement that “the devil is always in the details,” and said Congress will examine the deal closely to ensure that it “makes sense for the Air Force and the American taxpayers.”

A House aide said members have not yet delved into the details of the proposed joint venture yet, but are are eager to do so .

“We haven’t gotten any cost estimates yet. If it saves money, then fine. If it’s not going to provide significant savings then what’s the point?” the congressional aide said. “Having two companies doing launches, that’s just not an affordable strategy in the long run.”

Many of the details of the joint venture still are to be determined.

While some contraction of the work force is expected, the companies likely will combine their launch work forces — about 1,500 for Lockheed Martin and 2,300 for Boeing — before making decisions regarding layoffs, said Jeff MacLauchlan, Lockheed Martin vice president of financial strategies. He noted that attrition likely will take care of some of the downsizing. The deal will require relocating numerous Boeing and many Lockheed Martin employees , and many of those affected might choose not to move, he said.

Once approved, the new organization will be headquartered at Lockheed Martin Space Systems‘ existing facilities in Denver, where the company’s Atlas 5 rockets are built today. The Denver location will house United Launch Alliance’s management and engineering staff .

Manufacturing and integration of Atlas and Delta rockets will take place at Boeing’s facilities in Decatur, Ala., where the Delta 4 and Delta 2 are made today. Though it predates the EELV program, the Delta 2 will be included in the joint venture.

Joyce Riddell, president of the Huntington Beach, Calif., Chamber of Commerce, said a Boeing representative on the chamber’s board of directors assured the group that Boeing is committed to maintaining its Huntington Beach facility. The Boeing official told the chamber that jobs may shift to Denver, but personnel from other Boeing locations likely will move to the Huntington Beach facility, with little to no net job losses there , she said.

One industry official noted that Boeing has a number of programs that are either already in Huntington Beach or could be moved there and that the work force in Huntington Beach might actually grow larger if other programs in Southern California are consolidated there.

MacLauchlan said setting up the joint venture will involve significant costs , including consolidating and revamping factories. Those as-yet undetermined costs, he said, likely will be passed on to the Air Force through launch contracts because they represent an investment that will save money over the long haul.

The companies also have the opportunity to explore saving money by ordering rocket components in bulk , MacLauchlan said. But the joint venture will not attempt to significantly increase the commonality between the Atlas 5 and Delta 4 rockets because that would erode the benefit of having two sources of launchers for the Air Force, he said.

Staff writer Colin Clark contributed to this article.