Series of Unanticipated Costs Hit Inmarsat’s Bottom Line

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  Space News Business

Series of Unanticipated Costs Hit Inmarsat‘s Bottom Line

By PETER B. de SELDING
Space News Staff Writer
posted: 12 March 2008
02:55 pm ET




PARIS — Mobile satellite-services operator Inmarsat will be spending more cash this year than expected because of higher launch costs, unplanned investment in a Hawaii satellite access facility and unforeseen investment in its satellite telephone handsets, officials of the London-based company said March 6.

In conference calls with investors, Inmarsat officials insisted that the new spending was for one-time investments and not the start of a trend. But the company’s stock nonetheless fell by about 8 percent on the London Stock Exchange in the two trading days following the announcement.

Inmarsat
Chief Financial Officer Rick Medlock said the company would be spending between $210 million and $230 million this year, a substantial increase from previous plans, because of four developments.

First, Inmarsat canceled a launch reservation with Lockheed Martin for a 2009 Atlas 5 launch of the Inmarsat 4 F3 satellite, opting instead for a late April  launch aboard an International Launch Services Proton-M rocket.

Medlock
said the Proton launch will cost about $140 million, compared to between $110 million and $130 million for the Atlas vehicle. The price difference, he said, was solely due to the fact that commercial launches generally are more expensive now than when the Atlas reservation was made.

Inmarsat
also will be spending $20 million to permit satellite builder Astrium Satellites to make the Inmarsat 4 F3 satellite ready for the Proton launch, Medlock said.

A second area of increased spending will be for Inmarsat’s new telephone handset, based on the Asia Cellular Satellite, or ACeS, product for which Inmarsat has become lead marketer and technology developer.

Inmarsat
previously had said it would be spending no more than $60 million to modify the AceS phone for Inmarsat’s use. But the company has decided to fund certain research and development efforts to upgrade the phone, bringing the cost to about $100 million.

The third area relates to a Hawaii satellite access facility to be completed in time for the launch of the Inmarsat 4 F3 satellite. This satellite will be the third and final fourth-generation Inmarsat spacecraft and will give the satellites global coverage, filling in the existing Pacific Ocean region gaps not currently covered.

Previously unplanned investment in backup capacity for this facility will bring the investment to slightly more than $50 million, Medlock said.

A fourth unplanned investment relates to the Alphasat satellite that Inmarsat is buying as part of a cooperative agreement with the European Space Agency. Alphasat is a new, large satellite platform in which European governments have invested the equivalent of several hundred million dollars.

Inmarsat
will have use of most of the Alphasat platform to add to its existing L-band spectrum and to provide in-orbit backup if needed. The satellite is scheduled for launch in 2012 or 2013, and Inmarsat has agreed to spend around 260 million euros ($395 million) on Alphasat, including the launch, and payments will start in 2008.

Inmarsat
Chief Executive Andy Sukawaty said Inmarsat’s new satellite handset will retail for around $500, less than half of what competitor Iridium Satellites charges for its handsets.

Iridium has been gaining market share by luring customers of competitor Globalstar Inc., warning that Globalstar’s low-orbiting constellation is losing capacity while Iridium’s low-orbiting constellation is in robust health.

Inmarsat
hopes to do to Iridium what Iridium is doing to Globalstar – to present its competitor as facing insurmountable problems.

“Both [Iridium and Globalstar] say they are planning new low-Earth-orbit constellations, which makes no sense to those who understand the business because it’s twice the capital cost, with literally no competitive advantage whatsoever,” Sukawaty said.

Milpitas, Calif.-based Globalstar has contracted to build its new 48-satellite constellation but likely will need new cash to continue making payments to its prime contractor, ThalesAlenia Space. The first launch of the second-generation Globalstar satellites is scheduled for the fourth quarter of 2009.

Iridium expects to contract for its second generation of 66 satellites in mid-2009 and has estimated the cost to be around $2.6 billion.

Sukawaty
said Iridium has had a relatively easy time in the market for satellite phones because of Globalstar’s difficulties.

“Iridium has a $2.7 billion capex program staring them in the face and a huge funding gap to get there,” Sukawaty said. “Starting in late 2008 and early 2009, we are going to take market share. We are going to be aggressive on pricing and we are going to make it very difficult for them to come anywhere close to where they projected in their fund-raising that they are going to be.”

Inmarsat
reported 2007 revenue of $557.2 million, up 11.4 percent from 2006 as all its divisions – maritime, land-mobile and aeronautical – reported increased sales. Pretax profit, at $125.5 million, was up 39.8 percent compared to the previous year.