Microcosm Inc. believes that it is out of the running for a Pentagon contract to demonstrate a quick response small launch vehicle, and has begun making layoffs as a result, according to a senior company official.

That narrows the competition for the Falcon Small Launch Vehicle program to three companies: AirLaunch LLC, Space Exploration Technologies Corp. (SpaceX) and Lockheed Martin Corp.

The U.S. Air Force and the Defense Advanced Research Projects Agency (DARPA) are pursuing the development of the Falcon Small Launch Vehicle with the goal of launching payloads weighing up to 450 kilograms for no more than $5 million per launch, excluding payload integration costs.

AirLaunch of Reno, Nev.; Microcosm of El Segundo, Calif.; SpaceX of El Segundo; and Lockheed Martin Michoud Operations of Louisiana won contracts in September 2004 worth $8 million to $12 million to continue refining their designs for the small launcher. SpaceX’s deal also included the launch of an experimental satellite for the Air Force Academy, which is expected to take place in late September.

Jan Walker, a DARPA spokeswoman, said the agency has not made any awards, but expects to do so in the near future.

Industry sources said DARPA recently informed AirLaunch the company would soon be asked to begin negotiations for a Falcon development contract expected to be worth on the order of $40 million. DARPA said in September that the development phase of the program would culminate in 2007 with the launch of a small satellite.

Gary Hudson, president of AirLaunch, declined to comment, “other than to say we are optimistic.”

SpaceX will likely receive funding to increase the responsive nature of its rocket, sources said.

Elon Musk, SpaceX founder and chief executive officer, said in an interview earlier this month that he expects to hear shortly about a launch contract through the Falcon effort for 2007. Musk said Aug. 25 that SpaceX was still waiting to hear from DARPA, adding that a contract worth about $20 million could help the company reduce the call-up time for its rocket from about two weeks to less than 24 hours to support urgent military needs.

Lockheed Martin initially looked to have been knocked out of the running, according to the sources. However, one source following the effort said that no final decision has been made, and that the Air Force hopes to find a way to continue funding Lockheed Martin’s rocket, even if that means using money from outside the Falcon program — possibly in part from NASA.

Harry Wadsworth, a spokesman for Lockheed Martin Michoud Operations, declined to comment.

The Air Force wants to keep its options open for launching small payloads on short notice, and some officials are not entirely confident that they can rely on AirLaunch’s QuickReach vehicle, the source said.

QuickReach is the least conventional concept among the Falcon competitors, given that AirLaunch plans to use a modified Air Force C-17 cargo plane as the first stage. DARPA may be more confident in QuickReach because of its charter to pursue high-risk, high-payoff technology, but the Air Force may be more comfortable with a more conventional approach, the source said.

Robert Conger, Microcosm’s executive vice president, said his company had not received a final answer from DARPA. However, he said Microcosm recently broke up its subcontractor team, terminated arrangements with consultants working on the Falcon effort and laid off about 15 of its 50 employees based on its assumption that it has lost out in the competition.

Conger expressed frustration that the Falcon Small Launch Vehicle program had started with a focus on rockets that could launch small satellites on short notice, but later seemed to evolve into a pursuit of a platform primarily to launch Common Aero Vehicles.

DARPA envisions the Common Aero Vehicles as non-powered platforms capable of striking targets around the world soon after launch from the United States. The Common Aero Vehicles present very different challenges for a launcher than satellites, Conger said. A launcher for Common Aero Vehicles would take a suborbital path, and would carry a far more robust payload that is capable of withstanding re-entry conditions, he said.

In comparison, a small satellite launcher must be capable of handling a far more delicate payload and placing it into orbit, Conger said.

Brian Berger is editor in chief of SpaceNews.com and the SpaceNews magazine. He joined SpaceNews.com in 1998, spending his first decade with the publication covering NASA. His reporting on the 2003 Space Shuttle Columbia accident was...