Risks of Mixing Launcher Policy into FSS Business

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A recent article in Space News offered a number of suggestions from a group of eminent European space industry figures on ways to revamp the European launch industry and, specifically, Arianespace [“Former Officials Urge ‘Radical’ Overhaul of European Launch Industry,” Nov. 22, page 7]. European officials certainly should give the “Long-Term Strategy for European Space Launchers” study serious consideration given the intimate knowledge the report’s authors have of Europe’s launch sector development and growth over the last two decades and more. Yet we at the international telecom market research and consulting firm NSR feel that while many of the suggestions in this study are no doubt very worthy of future implementation, there are two issues raised, one of fact and one of opinion, that are contestable.

The first, of fact, is the statement in the Space News article that “the report says … launch costs are equivalent to no more than 2 percent to 3 percent of a commercial operator’s annual revenue.” In actuality, the report states that the launch costs represent 2 percent to 3 percent of the “turnover generated by a satellite in orbit.” NSR in fact holds that in most cases, launch costs represent a substantially larger percentage of the revenues (either annual operator revenues or satellite turnover) that are generated by a typical geostationary fixed satellite service (FSS) satellite.

Depending on launch cost assumptions, a 2 percent to 3 percent share of turnover for an on-orbit FSS satellite would imply somewhere in the range of $3 billion to $5 billion generated over a typical 15-year lifetime. Of the roughly 250 FSS satellites currently operational, NSR estimates no more than a dozen would produce this level of cash over their lifetimes, and in these few cases the actual turnover would usually be closer to the $3 billion end of the range. Further, for every satellite that could be expected to generate a turnover in the range assumed in the report, there are probably two to three satellites that from a financial perspective are barely breaking even or even losing money for their owners.

For the remaining 80 percent of on-orbit satellites that are profitable, but only “normally” so, which for NSR implies an internal rate of return of at least 15 percent, their turnover is more likely to be in the $900 million to $1.5 billion range over 15 years. This implies that the launch alone typically represents 6 percent to 12 percent of an average FSS satellite’s turnover. Or in the case of the fraction of total capital expenditures (manufacturing, launch and launch insurance), the upfront cost of putting a satellite into space is more often 20 percent to 50 percent of the normal turnover. Another way to arrive at a similar result is to look at the number of commercial FSS satellites launched in the last year and compare this total capital investment to FSS satellite operator revenues for the year.

NSR feels that the above analysis demonstrates that for about 95 percent of the cases, launch costs are truly a significant expense in putting a new satellite into orbit. These high upfront costs are one of the most well known and defining aspects of the satellite industry. NSR recognizes that the issue of the fraction that launch costs represent of total turnover for a typical FSS satellite might appear to be nit-picking an otherwise well-thought-out and insightful report. Yet for a satellite operator, even basic financial models can show that a savings of $20 million to $30 million in capital expenditures can mean a 2 percent to 4 percent increase in the internal rate of return for a typical FSS satellite. A few percentage points increase in internal rate of return can be a major factor in deciding which satellite launch service provider to select or even if a specific satellite business plan closes.

The second issue, a matter of opinion, regards the idea in the “Long-Term Strategy for European Space Launchers” report that a levy, suggested to be 3 million euros ($4 million), be charged per annum for each satellite that occupies an orbital slot assigned by a member state of the European Union. The funds generated by the levy would help underwrite the cost of future upgrades for the Ariane vehicle, and the implicit assumption in the report is that the levy would essentially be minor, if not trivial, to satellite operators and that the benefits they gain from an improved Ariane would outweigh the cost.

It is NSR’s view that while the sum would appear small, it is not insignificant. Over the lifetime of an FSS satellite, such a levy could cost on the order of $60 million. This could amount to as much as, if not more than, launch and in-orbit insurance for an entire satellite program (at current rates), making the levy the third-largest direct cost after construction and launch. For a satellite operator, this would not be trivial in terms of business planning. It’s true that the levy as proposed mainly would be applied to the Western European FSS satellites that often have the highest industry turnovers. However, this does not change the fact that it still would be one of the leading costs even for these more profitable satellites.

Some might argue that operators need only raise capacity prices 1 percent or 2 percent over the lifetime of the satellite to offset the cost of the levy. But most of the growth for satellite operators, including those based in Europe using European slots, is coming from regions outside of Western Europe, such as Central and Eastern Europe, the Middle East and Africa, where price sensitivity is a critical issue. Competition with satellite operators that would not have the burden of the levy — be they from Russia, the Middle East, Asia or even new national players from Eastern Europe — is increasing, and the levy would tilt the playing field against those using the European slots.

Another risk is other governments worldwide deciding that levies are a good means for raising funds for any national initiative of their choosing. While it would level the playing field among satellite operators competing in different markets if all had to pay a levy, one does have to consider the ultimate cost to the industry of such a scenario.

The implementation of such levies worldwide for all orbital slot assignments would not be immediate, but for the sake of argument, let’s assume it would take 10 years, which is well within the time frame for planning the next generation of the Ariane. Assuming the number of operational in-orbit FSS satellites increases to about 275 from today’s 250 (or roughly two to three truly net new satellites per year), this would imply a total levy cost to the FSS satellite operators globally of about $1.1 billion.

According to Space News’ July report on the Top Fixed Satellite Service Operators, 2009 revenues for the FSS sector were about $10 billion. If we assume an annual average revenue growth rate of 4 percent to 5 percent, this implies total industry revenues of about $16 billion in 10 years. A worldwide implementation of the levy would therefore represent 7 percent of total industry revenues, which is not far off the figure that FSS satellite operators spend annually on launches alone.

What is the risk? Basic business theory tells us that a higher cost of doing business will probably result in less investment (for example, making new satellite business cases more difficult to close) and probably on the order of two to three fewer commercial FSS satellites launched each year. With about 20 FSS satellites being launched annually for the last few years, a decline of such a magnitude would be very significant to launch service providers.

The report certainly contains many valid and useful suggestions to help guide Europe through the difficult process of reaching a consensus on what road to take for future upgrades to Ariane. And, if anything, NSR’s analysis does support the conclusion that moving as quickly as possible to an Ariane that is less costly while maintaining its enviable reliability record makes the most business sense and would help ensure that Arianespace remains the leading launch service provider to the FSS sector for the coming decades. Unfortunately, this path can run counter to valid policy issues such as European launch independence, national industrial base concerns and the European Space Agency’s juste retour geographic return principle that can lead to higher costs and longer development timelines.

But these debates should be kept separate from what the European launch industry thinks commercial satellite operators should pay for their services. With the rapid changes under way in the global launch industry, FSS satellite operators over time will find they have more options, and the business case planning for new satellites means that satellite operators will choose the launch service provider that gives them the best value. And, as we all know, the cost of the service is always the first concern. Some sort of moral support among European satellite operators for European launch service providers is something that just does not plug into a financial model.

As for levies on satellite operators, be aware of the law of unintended consequences. While some policymakers might see a levy as an “easy” way to pay for what are essentially unfunded policy directives, NSR believes strongly that this could come back to haunt the launch service providers and operators alike over the long term. In short, the European launch sector needs to find a solution to its own concerns and not try to shift the burden onto its customers.

 

Patrick M. French is a senior analyst and head of the Singapore Representative Office for NSR LLC.