Frank McKenna, President, International Launch Services

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When Frank McKenna took the reins at International Launch Services (ILS) in October 2006, he anticipated launching four commercial satellites per year aboard the Russian-built Proton rocket. This year, ILS expects to launch eight times, about double the number of launches on the Proton’s Russian government manifest.

Established 15 years ago to sell Proton launches to Western satellite companies, ILS has seen many changes. Two founding partners, Lockheed Martin Corp. of the United States and RSC Energia of Russia, are no longer operationally involved; ILS today is majority owned by Proton-builder Khrunichev State Research and Production Space Center of Moscow.

The competitive landscape has changed as well. ILS came into being amid a telecom boom that drew an unprecedented wave of investment in new commercial launch capabilities. But the boom went bust, driving U.S.-made rockets to the market’s fringes or out altogether, while U.S. government policy locked out another significant player, China’s Long March rocket.

Since Sea Launch’s mid-2009 bankruptcy filing, ILS and Europe’s Arianespace consortium have dominated the global business of launching large geostationary-orbiting telecommunications satellites, feeding off a market resurgence driven by the fleet replenishment programs of the world’s biggest satellite operators. But annual demand for launches is expected to drop from 25 to 20 over the next few years as the recapitalization cycles wind down. Meanwhile, Sea Launch is emerging from bankruptcy under the ownership of Energia, Space Exploration Technologies Corp. is aggressively marketing its Falcon 9 rocket and pressure is building to allow China back into the market.

McKenna spoke recently with Space News Editor Warren Ferster.

 

What’s your backlog?

Backlog’s 22 missions — firm backlog, no options — approximately $2 billion in value, with a solid set of operators and a good mix of satellites.

 

What does the rest of this year look like in terms of contract opportunities?

We’ll probably sign three or four more contracts between now and the end of the year in addition to the four awards that we’ve already announced this year. There’ll probably be five to six in our class. Our track record is approximately two-thirds of the heavy-lift market.

 

What’s your assessment of the market in general?

Last year, 30 satellites were ordered by the operators. We’re at the announced peak of the fixed satellite services replacement cycle. The decline we see in the next several years is being offset by some technology implementations, strong solid regional growth, Ka-band satellites and other hosted payloads that are now coming into the market. The most notable one is the Intelsat 22 mission, which will be launched on a Proton. It has the UHF payload for the Ministry of Defence of Australia, but it’s also used for U.S. forces.

 

How do hosted payloads drive more launch business?

Well, its additional revenue, so from an operator’s standpoint, it makes their business plans more robust and it allows the governments to achieve their telecommunications needs in a more affordable way. So it’s a win-win in that sense, and it grows the satellites to our class —- 5 to 6 metric tons —- which means we will get more business because of this trend. And this trend is here to stay.

 

Do you expect your business to decline as a result of the drop in overall demand?

We have prepared for it. We will be launching eight systems annually for the foreseeable future. The other trend we have to pick up on here in the same timeframe is that it’s very logical that after a replacement cycle, merger and acquisition action would start to occur to rationalize the industry after regional operators had grown to a critical mass stage in the last five years.

 

How is Sea Launch’s emergence from bankruptcy going to affect the competitive landscape?

The Sea Launch reorganization plan looks operationally and financially risky to me. The Sea Launch production lines have essentially stopped, and they owe their customers in excess of $200 million due to the deposits and advances that were provided by customers for launches that have not been completed or other disputes that they had. But the bigger picture is the magnitude of the operating losses that were being incurred to support the commercial launch industry over the last 10 years. Probably by the 2004-2005 timeframe, it reached its peak of insanity. And so as a result, the industry restructured itself. This is a very small industry and so a change from 25 to 20 launches is a significant change in the percentage of the infrastructure that is paid for by the launches. And adding one supplier is a significant change in the amount of infrastructure that has to be paid for by the operators. Of course not very many people see it that way — they think additional competition is going to drive down prices — but what basically happened was it drove people out of the market.

 

You don’t think Energia’s commitment to Sea Launch will make a difference for the company?

If Energia had the wherewithal to bail this operation out, why didn’t they do it sooner? There was significant damage to the customers through the abrupt bankruptcy that occurred a year ago. You can see the situation being created where there’s going to be disappointment again.

 

Why didn’t ILS compete to launch the Iridium Next satellites, when Proton rockets launched part of the original Iridium constellation?

We looked at the economics of that opportunity and we looked at the optimization of our system to do that. We want to concentrate on the heavy-lift geostationary market. Getting into the low Earth orbit constellations did not look like a good business proposition and was not necessarily best suited for our customers in terms of technical capability.

 

So why is ILS bidding to launch Europe’s Galileo navigation satellites?

That technically makes sense and from a business and cost standpoint it makes sense. The enormous funding pressures on Galileo won’t bankrupt the program; however, it could bankrupt Iridium and Globalstar. Galileo is a government-sponsored program that is at risk of not deploying on schedule; we are in the process of producing a proposal to the European government to launch the balance of the constellation after they’ve already awarded a significant portion of the constellation to Ariane-Soyuz.

 

What’s your reaction to the Center for Strategic and International Studies’ recent report saying U.S. policies limit commercial launch capacity and thus pose a national security risk?

We disagree with the basic premise. Rather than a data-driven analysis, the report appeared to us to be largely a complaint forum for commercial operators to criticize the U.S. Air Force and the United Launch Alliance, then asking the U.S. Congress to fix the problems long after Lockheed Martin and Boeing had lost billions of dollars supporting the commercial market. Conversely and simultaneously lobbying U.S. lawmakers to grant regulatory change to allow the Chinese Long March system to launch Western satellites in the name of U.S. national security is a thinly veiled attempt to lower commercial launch prices.

 

What’s the latest with Khrunichev’s Angara rocket program?

The first launch will be in 2013. You have not heard very much from me about it because we will not introduce a product commercially before we can deliver on it.

 

Where are you with the dual-payload adapter being developed with Orbital Sciences Corp.?

We marketed the ILS Proton duo in conjunction with Orbital Sciences; it’s two Orbital Sciences payloads with a unique adapter setup. Most of the large operators have told us that that configuration of two satellites, a Star 2.4 bus plus a smaller satellite bus — maybe 16 transponders in the second seat — is not really an economical configuration for their business plans.

 

Recently you signed a contract to launch two satellites for the Russian operator Gazprom, which traditionally has dealt directly with Khrunichev. Do you see a trend there?

That was a full-out open commercial competition. Gazprom did that with the recognition that they’re expanding their business globally; they recognize that going into the global marketplace with their capabilities requires that they transform into a global commercial entity, and selecting ILS Proton was a significant element to that, in addition to their contracting with Thales Alenia Space for the satellite hardware. No doubt there’s a trend. The prices aren’t that significantly different.

 

A while back a decline in the value of the ruble helped you win one or more contracts. With the ruble edging back up, how does that affect business?

We manage that: We manage the exchange rates, we’re a global company, we understand how to hedge against inflation, we understand how to hedge against currency fluctuation, we understand how to take advantage of global marketplace changes and we understand what it means when the competition’s currency changes as well and we bid in multiple currencies. Is this an easy market to make a living in? The answer is no. Does that mean sometimes our profits go up and down? Well, of course they do. Does it mean that we have significant financial stress? No, because we make sure that we’re going to be able to have the capacity to fulfill the obligations, be financially strong and operationally strong, and have the quality people that can deliver.