Galileo Satellite Competition Leaves Tiny Margin for Profit

by

PARIS — Two industrial consortia plan to submit bids on Dec. 1 to manufacture at least six Galileo navigation satellites for the European Union in a competition that will test how badly they want the work, government and industry officials said.

With no more than around 200 million euros ($270 million) to spend on the satellites, the European Commission is hoping that the two teams, both led by German companies, will be willing to accept razor-thin profit margins to win this next slice of Europe’s highest-profile satellite program.

The commission, which is the executive arm of the 27-nation European Union, is expected to spend two months reviewing the bids with its Galileo technical manager, the 19-nation European Space Agency (ESA), before making an award in early February.

European Commission Vice President Antonio Tajani in October said the contract would be for six to eight satellites. But in Nov. 7 remarks to a space conference at the European Parliament in Brussels, Belgium, Tajani made reference to a six-satellite deal.

The competing consortia — one led by OHB AG of Bremen, the other by Astrium Satellites of Friedrichshafen — have been asked to include in their bids a proposal for six satellites and a proposal for eight. While they will be free to provide their own cost estimates, both bidders know that the commission has limited resources remaining in its Galileo budget.

The commission has 3.4 billion euros to spend on Galileo through 2013. That figure was supposed to cover the construction and launch of a 30-satellite constellation, including three in-orbit spares, plus the full network of ground facilities to operate the system.

Galileo is about 40 percent over that original budget, meaning the full Galileo system cannot be built with the available funds. ESA and the commission have estimated that of the 3.4 billion euros available to it, the Galileo program has spent some 3.15 billion euros to build and launch 18 satellites.

The first four were built by the Astrium-led team. Two were successfully launched in October aboard the inaugural flight of the Europeanized version of Russia’s Soyuz rocket, with two more to be launched aboard a European Soyuz in mid-2012.

Fourteen more Galileo satellites are under construction by OHB and scheduled to be completed starting in late 2012, with launches to start in 2013. The commission has proposed spending 7 billion euros to complete the Galileo network, operate it and launch replacement satellites as necessary between 2014 and 2020 in its next seven-year budget.

ESA officials have said that of the 250 million euros the program has remaining in its current budget, some 50 million euros will be needed to design a dispenser and make other modifications to permit four Galileo spacecraft to be launched on a single heavy-lift Ariane 5 rocket. That leaves 200 million euros to be spent on the next group of satellites.

For comparison, the OHB contract for 14 satellites was valued at 566 million euros, or 40.4 million euros per satellite, a figure that includes nonrecurring engineering charges incurred by OHB to design the first models.

The commission hopes to reduce that price by at least 18 percent for the next order, to 33.3 million euros per satellite, benefiting from the fact that OHB and Astrium need only to repeat work they have already done. The commission is so optimistic about the scale economies the bidders could achieve that it has also asked for an eight-satellite bid, or 25 million euros per satellite.

“This may have been a provocation,” one European industry official said. “The least that can be said is that this would require very aggressive pricing.”

In making the 14-satellite award to OHB in January 2010, the commission said it “intends to follow a strategy of double sourcing to lower risks, particularly in terms of delivering timings, and increase flexibility.”

The question before the commission is how to pursue a dual-source policy without asking one or another bidder to, in effect, stay on the sidelines for a given bid.

“The thing about dual sourcing is that you have to maintain two viable product lines, or accept to pay much more if one of the lines has not had work for a period and has assigned its teams to other projects,” said one industry official involved in the Galileo bid. “In this case, that would mean saying to OHB: ‘You sit out this round.’ But apparently they have not done that.”

OHB Chief Executive Marco R. Fuchs said his company is going all-out to win the new contract. Astrium Satellites officials, who were stung by the loss of the 14-satellite order in 2010, have made clear this is a priority for them as well.

In a Nov. 9 conference call with investors, Fuchs said OHB has received no indication that the commission will put its thumb on the scales in favor of Astrium and dual sourcing.

“For the first batch of 14 satellites we were the underdog,” Fuchs said. “This time, I don’t know. My feeling is that it’s really open, and that it depends on the quality of the proposal and the pricing. I don’t think any decision has been made on the political level — there’s no conspiracy or secrecy behind it. Galileo is a very visible project and it is an opportunity to show our ability to perform. Both bidders will do their utmost do win this.”

 

RELATED ARTICLES

Europe’s Galileo Funded Through Initial Deployment

Galileo Assessment Pulls no Punches

OHB’s Sales Rise on Galileo and Weather Satellite Work