Lockheed-Boeing Venture May Burden Taxpayers

by

While the companies insist it is the only way to give the Pentagon and the intelligence community assured access to space, critics of the proposed Lockheed Martin-Boeing Co. joint venture on U.S. government launch business contend the deal could be bad news for U.S. taxpayers.

The proposed joint venture to create a single company called United Launch Alliance could have similar drawbacks to the defense industry consolidation that began in the 1990s, according to Danielle Brian, executive director of the Project on Government Oversight, a watchdog group here.

The Federal Trade Commission is expected to decide in late 2005 or early 2006 whether to approve the creation of the United Launch Alliance, said Jeff MacLauchlan , Lockheed Martin’s vice president for financial strategies at its corporate headquarters in Bethesda, Md.

Lockheed Martin and Boeing announced their plans for the joint venture in early May. The arrangement is intended to keep two sources of rockets available for national security payloads in case one rocket fleet is grounded due to a launch accident, a concept referred to as “assured access.” Michael Gass, Lockheed Martin’s vice president and general manager of space transportation, will serve as president of the new entity in Denver if it is approved.

The Pentagon awarded contracts in the 1990s to both Lockheed Martin and Boeing to each develop variants of the Evolved Expendable Launch Vehicle (EELV) with the expectation that a robust commercial satellite market would swell their manifests, reducing the launch costs and giving the government more than one source of launchers.

After the collapse of the global telecommunications market in 1999, the commercial market stopped growing, then began to shrink, forcing the U.S. Air Force to spend additional money each year to keep both companies in the launch business. The Air Force is spending $177 million for that purpose this year, and has asked Congress for $340 million in 2006.

However, the Air Force would have been unlikely to be able to sustain that level of funding over the long term, MacLauchlan said.

United Launch Alliance would be headquartered at Lockheed Martin Space System’s facilities in Denver, where the company builds its Atlas 5 rockets today. Manufacturing of the Atlas 5, as well as Boeing’s Delta 4 and Delta 2 rockets, would take place at Boeing’s existing rocket factory in Decatur, Ala.

Air Force officials had encouraged Boeing and Lockheed Martin to explore the joint-venture concept. U.S. Air Force Gen. Lance Lord, commander of Air Force Space Command, said during a brief interview July 12 that he believes the joint venture could help lower the Air Force’s launch budget if it gains approval.

Some critics, however, are unconvinced that the new arrangement is in the best interest of U.S. taxpayers. Previous consolidation in the defense business has eliminated the benefits of competition, taking away the incentive for companies to reduce their prices and improve their offerings, Brian said.

“This is a growing trend that we’ve raised concerns about over the past decade,” Brian said. “There isn’t a single weapon system being produced by a consolidated business that is cheaper than it was a decade ago. There are always promises of cost-saving in the future, but we never see them happen.”

Victoria Samson, a research analyst with the Center for Defense Information, a think tank here, noted that the EELV program was conceived with the promise of cost savings that have not materialized, giving the Air Force and its contractors on the effort a credibility problem when they project lower prices with the joint venture.

“It’s become a monopoly — call it what you want — but basic economic theory says that monopolies do not provide the best prices for consumers,” Samson said.

MacLauchlan acknowledged that competition usually generates the best prices. However, the same rules do not apply when there is essentially only one customer for these launches, he said.

“When you lower the cost, you lower the price,” MacLauchlan said. “What we’re doing here is no more complicated than that.”

Samson also raised concern for what might happen if the government needed to apply sanctions to the joint venture for violating federal acquisition rules.

The Air Force suspended Boeing from the government launch business in July 2003 when it concluded that company officials had improperly obtained proprietary Lockheed Martin technical data during the competition for the initial batch of EELV contracts.

With just one entity building the two rockets, the Air Force would appear to be unable to suspend the joint venture and still be able to launch its payloads, making it unclear how it could effectively punish United Launch Alliance, Samson said.