Let Competition Work

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  Space News Business

Let Competition Work

By LAWRENCE H. WILLIAMS

posted: 15 May 2006
02:10 pm ET


The U.S. Department of Defense and the Federal Trade Commission have spent the last year trying to figure out how to justify approving the United Launch Alliance (ULA), an unprecedented merger-to-monopoly of the Boeing and Lockheed Martin government launch businesses. As the Defense Department ‘s top acquisition official, Ken Krieg, recently told Reuters, “the commission has understandable concerns about approving a merger that would create a monopoly.” By its nature and design, the ULA will result in extraordinary market concentration and significantly reduce competition in the space launch industry.

In support of the ULA merger, Boeing and Lockheed have promulgated a number of myths and exaggerations, many of which were recently repeated as accurate and unquestionable in a May 8, Space News editorial titled “Approve ULA Now” [May 8, page 18].

First, Boeing and Lockheed Martin have relied upon claims that the “collapse of the commercial market” and, by extension, the companies’ “perilous financial conditions” justify the long-term provision of a series of structural advantages, which over time have included “assured access” payments, launch capability “sustainment” subsidies and long-term, exclusive launch allocations. And now the companies rely upon similar claims to justify the ULA merger.

Critically, however, Boeing and Lockheed Martin’s assertion that there was and continues to be a launch market collapse is undermined by the success of their own cost-competitive, commercial joint ventures, Sea Launch and International Launch Services, both of which have significant launch backlogs. Even Space Exploration Technologies Corp. (SpaceX), which only has been in existence since 2002, has successfully sold three of its Evolved Expendable Launch Vehicle (EELV)-class Falcon-9s, including one to the U.S. government. The truth of the matter is that Boeing and Lockheed’s launch vehicles simply are not cost competitive.

Second, Boeing and Lockheed Martin have threatened that either one (or both) would exit the U.S. government launch market. After receiving over $500 million each for launch vehicle research and development and over $1 billion in launch contracts (for which both contractors grossly underbid), the companies convinced the government to bail them out once they began losing money. By threatening to pull out of the market, they were ultimately able to secure hundreds of millions of dollars in government assistance. To the extent that this threat was ever real, it is now moot since the government now has eliminated any risk that these contractors could lose money by shifting 100 percent of their fixed costs to cost-plus contracts.

Third, the notion that there has been little true competition for EELV sales to the government is false. Boeing’s and Lockheed Martin’s past conduct — including Boeing’s theft of Lockheed Martin pricing information and the unresolved litigation alleging anticompetitive behavior between the companies — demonstrates that they have competed aggressively (if improperly) for EELV launches in the past. If the ULA is approved, however, even this last semblance of competition and its benefits will be eliminated.

Fourth, there is a misperception that the U.S. government, and the U.S. Air Force in particular, is the only party affected by this merger. The proposed merger, coupled with continued and increasing subsidies and long-term exclusive launch allocations, makes it virtually impossible for new players to enter the defense EELV market and effectively eliminates any prospect for genuine competition in the provision of such launch services, even if the new entrants have significantly lower prices. But potentially more damaging will be the ULA’sability to leverage their monopoly position to cross-subsidize and distort competition in the civil and commercial launch markets.

To its credit, the Space News editorial correctly highlights some of the flawed logic used to support the ULA merger — namely that the ULA will advance the policy of “assured access” to space and that it will result in cost savings to the government. In order to achieve the cost savings promised, the ULA is proposing to consolidate engineering in Denver and manufacturing in Decatur. It is obvious from the number of resumes circulating in the industry that a significant amount of the engineering talent in Southern California is not willing to move to Denver. This will result in a loss of knowledge and experience that is likely to undermine reliability. Furthermore, moving Atlas hardware production to a new facility is hardly trivial. Lastly, Delta and Atlas already have a single point of failure in the RL-10 and increasing commonality only increases the probability that both systems could get shut-down simultaneously.

Those who have studied this merger closely seem to agree that the ULA will cost more (at least in the near future), not less. The movement of people and production entails a significant non-recurring investment, as well as an increase in unit cost driven by a new learning curve. Moreover, since the Air Force’s EELV buys will be split between the Delta and Atlas, it will reduce the production rate of each vehicle even further, thereby inhibiting economies of scale and driving up unit costs for both vehicles. In sum, the ULA as currently envisioned is the least likely approach to achieving the Defense Department’s stated goals of assured access to space and reduced cost.

At bottom, this proposed merger-to-monopoly would never be approved but for the claim that it is required as a matter of national security. The Federal Trade Commission’s approach has been prudent — taking time to consider conditions that might minimize the ULA’s ability to use its monopoly position to distort other markets and also to facilitate new entrants. If the ULA is permitted to go forward, the regulators must ensure that the ULA cannot unfairly wield its monopoly power to the detriment of the government or competitors.

The best way to achieve this is to enable other competitors to compete fully and fairly on the merits. In this regard, the ULA merger should not be approved unless the merging parties agree to abide by legal restrictions that will:

– Prevent ULA from using its monopoly power and government subsidies to distort competition in other markets. Specifically, when the ULA sells EELVs to civil agencies or commercial customers, the ULA should be required to compete on a “total-cost disclosure” basis by providing the Air Force an offset for all costs related to the launches that are reimbursable under its launch capability contract with the Air Force. Alternatively, the ULA should simply be prohibited from selling to customers other than the Defense Department .

-Reduce barriers to entry for the sale of EELV-class launch services to the Defense Department. Specifically, the ULA should be required to forgo exclusive multiyear launch allocations (whether considered “notional” or otherwise) appearing in the EELV “Buy 3” launch services request for proposals.

Properly applied, these proposed remedies would help restore competition in the domestic EELV market. SpaceX and other potential entrants should be able to compete on a level playing field for EELV launches. The right scenario for all American interests, including national security, is for the United States to have world-class domestic suppliers of low-cost, high-reliability launch services that stand on their own legs. When free markets are permitted to operate without the distortion of government subsidies, they produce better products at lower prices, and the launch business is no exception.

Lawrence H. Williams is the vice president for international and government affairs at SpaceX.