A U.S. Air Force Atlas 5 rocket lifted off in December carrying a payload whose unique capabilities are public information but whose missions are a closely kept secret. The unmanned X-37B spaceplane looks and operates more like a miniature space shuttle than a conventional satellite: It has a cargo bay, maneuvers in space, re-enters the atmosphere intact and glides to a runway landing.

The Air Force has two of the craft, built by Boeing Phantom Works, and the current mission is the program’s third, all of them classified. The vehicles originally were built for NASA; the Pentagon took over the program in 2004.

The X-37B is typical of the projects in which Phantom Works specializes: next-generation capabilities for customers that include the U.S. national security community and other divisions of Boeing. As head of Phantom Works, Darryl Davis oversees about3,000 employees and a billion-dollar portfolio of advanced technology projects with applications that he says range “from space to underwater and everything in between.”

Among Phantom Works’ high-profile space projects is the Orbital Express autonomous satellite rendezvous mission, funded by the Defense Advanced Research Projects Agency and launched in 2007. Phantom Works also builds miniature satellites for the National Reconnaissance Office (NRO) Colony 2 program — Boeing delivered 20 cubesats at the end of 2012 — and is responsible for many of the key technologies that enable Boeing’s satellite manufacturing division to produce a new line of all-electric telecommunications satellites.

Cutting-edge technology development often is an early casualty of budget austerity, and the current environment clearly poses challenges for Phantom Works. Although the so-called fiscal cliff that was facing the United States has been averted for now, the Defense Department still faces the prospect of massive budget cuts beginning in March failing a long-term budget agreement between Congress and the White House.

Davis, a propulsion engineer by training, spoke recently with SpaceNews correspondent Debra Werner.

What is the greatest challenge you face today?

Our greatest challenge today is understanding which programs are going to keep going on at a reasonable pace and which things will be put on the shelf for a while. In our business, everything is temporal. We have a robust technology planning process internal to the company and every year we have to make decisions on where to accelerate investment, hold investment level or decelerate investment. We adjust those investments as budgets ebb and flow. This one is just a little harder to see because we don’t know what will happen.

The third mission of the X-37B Orbital Test Vehicle program is now under way. Does Boeing expect the apparent success of this program to lead to additional business, such as manufacturing clones or some sort of follow-on vehicle?

Boeing is pleased with the success of the X-37B program as it demonstrates the capability to perform multiple missions while offering affordable access to space. Certainly, we believe there are further opportunities in this area, but specifics regarding any additional business in this area would be determined by customer needs and requirements.

The Boeing-built X-51 Waverider hypersonic vehicle failed during an August test flight. Do you know what happened?

I’m not at liberty to comment on that at this point. The X-51 is another emerging technology that is maturing. It is a high-speed reconnaissance system flying at very high altitudes. We have had three attempts with the X-51, the first of which was a huge success. We set a world record for the amount of time in sustained hypersonic flight.

The Air Force in October disclosed that it would be halting work on the Reusable Booster System Pathfinder, which was part of an effort to develop launch vehicles featuring an autonomous, rocket-propelled first stage and an expendable upper stage. Were you disappointed by that decision?

We understand the budget constraints facing our Defense Department customers. The Air Force and industry made important headway during the reusable booster study contract phase. Despite the funding realities of today, reusable single-stage-to-orbit vehicles offer the promise of greater flexibility and cost savings over current launch vehicles; therefore their time will come. When it does, we will be ready to re-engage with our customers.

You’ve mentioned that the Colony 2 cubesat program for the NRO was more challenging than you expected. Why was that?

We had made some assumptions that we could use things from some of the nanosatellites that we had previously built and quite honestly for some of the requirements that we had to address, that reuse did not work out as well as we had thought. It’s been a little harder to get there than we thought.

Will you continue to develop nanosatellites?

Yes. We will continue to use internal research and development funding to come up with new products based on lessons we learned. We will ask ourselves, “Are there other opportunities? Are there other customers that might be interested in procuring some of the same buses that we built for the Colony 2 customer?”

Once Phantom Works develops technology, do you hand it off to a Boeing division?

For big programs, programs that will live for many years, we transition them to one of Boeing’s operating business divisions. We tend to execute technology demonstration programs like Colony 2 ourselves. If they grow beyond technology demonstrations, then we transition them to the business unit. Now, it’s not a hard and fast rule. As we understand where various programs go, our objective is always to be advancing technology, hopefully always for programs of record. We always hope to transition big franchises to Boeing business divisions.

Is Phantom Works providing any assistance to Boeing Space Exploration on the CST-100 commercial crew capsule?

Phantom Works is involved in many programs across the Boeing enterprise including space-related programs in conjunction with Boeing Network and Space Systems. Some of these programs include CST-100, satellite development and other space access programs. The Phantom Works team is also assisting on a variety of projects in the areas of network systems; electronic and information solutions; strategic missile and defense systems; space and intelligence systems; and space exploration.

A prototype of the Phantom Eye, your persistent unmanned vehicle designed to spend several days in the stratosphere, flew in June. What’s ahead for that program?

Phantom Eye is a liquid-hydrogen-powered vehicle. I tend to call them unoccupied instead of unmanned because there are high degrees of autonomy but the vehicles are always under the supervision and command and control of humans. We had a minor incident on the June landing. We are repairing the vehicle and hopefully we will get to altitude, 60,000 feet [18,000 meters], before the end of the year. That is our objective.

Phantom Eye has the ability to persist for long amounts of time. The demonstrator can fly for up to four days at 60,000 feet. For countries that can’t afford to launch a satellite, this is a pseudo-satellite. Launching a satellite to geosynchronous orbit is pretty expensive, but think about an airplane that can fly for 10 to 12 days at 60,000 feet. It can always be recovered, you can change the payload and you could carry multiple payloads.

What’s ahead for Phantom Works?

Our job is to take technologies, turn them into innovative capabilities for our customers and hopefully, do it in a pre-emptive way such that when the next programs of record are getting ready for competition, we have demonstrated that much of the technology is ready. One of the challenges the industry at large faces is that when we try to deliver technology in a program of record that has not yet matured, we tend to have challenges. So we are trying to mature that technology before the emergence of those programs of record so we have a higher probability of success in meeting our commitments.