Fuel Loss Aboard Amos 5i Leaves Israel’s Spacecom with Looming Service Gap

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TEL AVIV, Israel — Israel’s Spacecom Satellite Communications Ltd. is scrambling to contain fallout from a surprise loss of fuel that will prematurely end the life of its Amos 5i, a second-hand satellite acquired late last year to ease the firm’s reach into Africa and Asia.

Purchased from Hong Kong-based AsiaSat for an estimated $45 million, the former AsiaSat-2 was assessed with a remaining lifespan of nearly two years, more than enough to serve as a gap-filler pending Spacecom’s planned mid-2011 launch of Amos 5. Amos 5i began service in late January, following its successful transfer to the 17 degrees east orbital slot provided as part of a deal with Russia’s Reshetnev Information Satellite Services, which will build the Amos 5 satellite. Since then, Spacecom has acquired 20 clients, all of which committed to transitioning to Amos 5, observers and executives here say.

But during a recent routine station-keeping maneuver, Spacecom discovered that Amos 5i’s fuel levels fell short of estimates, meaning the satellite will not last until Amos 5 reaches orbit. The publicly traded firm informed the Tel Aviv Stock Exchange Aug. 9, triggering an immediate 6 percent drop in price per share.

“The quantity of fuel is lower than that originally estimated by AsiaSat, from whom we acquired the satellite,” Spacecom reported. The firm noted that it was working, “in coordination with customers, to find alternative solutions to meet their respective requirements, in order to allow continued service prior to their return immediately after launch of Amos 5.”

Spacecom assessed direct damages at $12 million through 2011 due to write-offs, customer compensation and lost revenue. Despite the damages, Spacecom said the setback should not significantly harm the company’s strategic expansion into the African market.

Spacecom declined requests for additional information, and has not translated published statements. Nevertheless, a financial analyst writing in Aug. 10 editions of the Hebrew-language The Marker shed light on the reason for Spacecom’s belated discovery of the fuel issue. Uri Licht, research director for Tel Aviv-based IBI, said Spacecom blamed the delayed discovery on air bubbles obstructing the satellite’s fuel tank.

The analyst warned that Amos 5i customers forced to relocate to competing providers may not all return, as expected, to the new Amos 5. Moreover, loss of the “safety cushion” provided by Amos 5i elevates the urgency of getting Amos 5 launched on time.

Licht said Spacecom has accumulated a prelaunch backlog of $70 million for Amos 5, which according to his model reflects 60 percent capacity by 2012. But in light of the latest setback, he said, IBI moderated its projections to 40 percent capacity by 2012 and 60 percent by 2013.

Licht said AsiaSat has received only $20 million in payments toward the $45 million Amos 5i deal. “[Spacecom] does not intend to pay more than that and it is reasonable to assume it will demand penalty fees,” he wrote.

The premature loss of Amos 5i should not jeopardize Spacecom’s rights to the 17 degrees east orbital slot, said Mike Thompson, a London-based project director at Access Partnership, an international telecommunications consultancy. According to Thompson, the U.N. authority regulating space-based broadcasts allows an 18-month grace period to accommodate exigencies.

“If a satellite falls into disuse, operators are obliged to notify the [International Telecommunication Union]. And if broadcasts cannot resume within 18 months — and in certain cases up to two years — the clock stops ticking and the slot is deleted,” he said.

Meanwhile, Spacecom has the Israeli-built Amos 4 satellite slated for launch in 2012 aboard a Space Exploration Technologies Falcon 9 rocket, but beyond that the company’s satellite plans are murky. Israel’s Ministry of Defense, an anchor customer for Spacecom services, is still aiming for a government cost-sharing plan to allow state-owned Israel Aerospace Industries (IAI) to reclaim production rights to the next two Amos satellites. IAI was the exclusive satellite supplier to Spacecom until 2008, when Spacecom ordered Amos 5 from Reshetnev.

In return, however, the Ministry of Defense expects IAI to improve competitiveness by driving down costs by at least 20 percent.

IAI, a founding investor in Spacecom that has long viewed the company as an incubator for its communications satellite manufacturing business, has threatened to shut down that business should it fail to win the Amos 6 contract. “Under current conditions, we prefer to put money into the remote sensing business,” IAI Chairman Yair Shamir said.

Shortly after losing the Amos 5 competition, IAI began to unload Spacecom holdings in a two-year process completed with the May 16 sale of its remaining stock and the end of IAI’s presence on the Spacecom board.

In a direct deal with Eurocom Group, Spacecom’s majority shareholder with a controlling interest of 66 percent, IAI sold 14.57 percent of Spacecom shares for 167.33 million shekels ($44 million), or about 69 shekels per share. As part of the deal, Eurocom assumed up to $25 million in loan guarantees initially secured by IAI in support of Amos 4.

“Basically we cashed out, and we’re redirecting this money into other new businesses,” Shamir said in a Sept. 1 interview. To a larger degree, however, Shamir insisted liquidation of Spacecom holdings accented IAI’s maximalist investment strategy.

“Either we go full steam ahead and put a lot of money into acquiring new companies or investing in next-generation technology or … we hold on to it and wait for the right time and the right price,” Shamir said.

Shamir said he does not discount the potential revival of IAI’s communications satellite sector, provided the government matches rhetorical support with concrete funding commitments. “If we’re successful in securing state funds for the next five or six years, we’ll be ready and eager to take up the challenge,” he said.