Satellite Manufacturers Search for Military-Commercial Balance

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The chairman of the company that has sold more commercial telecommunications satellites than anyone else in the past two years said satellite manufacturers cannot expect commercial success if their eyes are riveted on the U.S. Defense Department.

Loral Space and Communications Chairman Bernard L. Schwartz’s remarks were directed mainly at Boeing Satellite Systems International, whose new president, Stephen T. O’Neill, joined Schwartz on a panel discussion here Sept. 8 during the World Satellite Business Week, organized by Euroconsult.

Schwartz evoked Loral’s recent win of a contract for XM Satellite Radio — exclusively a Boeing customer up until then — and Loral’s other recent successes as examples of the benefits that accrue to a company focused almost exclusively on the commercial market.

“If you depend on the military for a lead in R&D, you will go where the military customer wants — not the commercial customer,” Schwartz said. “It comes down to a difference in attitude, and it’s why Loral has a tremendous advantage over everyone else on this panel.”

Schwartz also acknowledged that Loral’s status in Chapter 11 bankruptcy protection for the past two years might have been a factor in the company’s recent successes. New York-based Loral expects to emerge from bankruptcy in October.

Schwartz said the Space Systems/Loral satellite manufacturing division remained profitable throughout the bankruptcy proceeding and will emerge debt-free. Loral is the only major U.S. satellite prime contractor that does not depend on U.S. government work for a large part of its annual revenues.

“If we get four or five satellite contracts per year we are making money,” Schwartz said. “We can’t hide our costs in the military programs. We have to be judged on cash flow.”

If Schwartz was mainly targeting Boeing in his statements, it was Ted Gavrilis, president of Lockheed Martin Commercial Space Systems, who delivered the most pointed rebuttal. About half of Lockheed Martin’s satellite work is done for the U.S. government, mainly the U.S. Defense Department, with the other half resulting from commercial contracts.

Gavrilis said the business used to be 80 percent commercial. Then the global telecommunications market crashed and Lockheed Martin was able to rely on its government work for support as it slashed costs and employees at its commercial-satellite division.

Gavrilis said that today, the company would prefer that 70 percent of its business came from the U.S. government, which he said is a more stable customer, and one capable of supporting research into new technologies.

“You cannot justify a big investment in commercial satellites today,” Gavrilis said. “The margins are just not there. Today, we [in the commercial business] all need to bid at nominal risk positions — meaning you have a 50 percent chance of making money on the contract.”

The two principal European satellite manufacturers, EADS Astrium and Alcatel Alenia Space, have long said that business with the U.S. Defense Department — and its cost-plus contracts — permits U.S. manufacturers to amortize research investment in ways non-U.S. companies can only dream about.

Europe’s military space market remains very small by U.S. standards, and the flow of technology often has been commercial-to-military, not the reverse.

Boeing’s O’Neill, who assumed his post only recently, did not engage Schwartz during the panel discussion. But in an interview, he said Boeing’s recent difficulties in the commercial market cannot be attributed to its defense work.

After losing money for more than two years, Boeing’s satellite division has been profitable for the past two quarters, O’Neill said. He said the company views its Defense Department involvement as a source of technologies that often find their way to commercial applications.

O’Neill said Boeing’s Wideband Gapfiller communications satellites, built for the U.S. Air Force and set for launch starting in 2006, include technologies that Boeing thinks will appeal to high-end commercial customers. He said the company would continue its policy of not bidding for commercial satellites unless the contracts call for technologies in which Boeing has special expertise.

O’Neill conceded that Boeing’s loss of the XM-5 satellite contract to Loral was difficult to accept. But he said Boeing will not be dragged into contract bidding wars in which price is the deciding factor.

“We took some bad contracts” in the past, O’Neill said, referring to money-losing contracts Boeing signed and only now is flushing out of its system. “We signed up for firm, fixed-price contracts that had high development costs associated with them. We’re not going to take bad deals now.”

How much commercial business is available to Boeing given the company’s current self-defined limits remains unclear. O’Neill said commercial programs now emerging suggest that Boeing’s approach will pay off.

“I will continue to focus on the upper end of the market,” O’Neill said. “The government programs we have worked on, which call for total-system solutions, not just satellite hardware, will help” in winning future commercial customers.