by Chris Mecray

Probably the most interesting incremental data point on the space market in recent weeks was imparted by Boeing’s space business head, Jim Albaugh, speaking to the press at the Paris Air Show this June. Albaugh noted that Boeing is currently seeking additional financial help from the government to offset ongoing losses in its Delta 4 launch business plan. While this process has been under way for some time, Boeing is seeking increased assistance, apparently in recognition that the commercial space market "is never going to return to what it was in the 1990’s." It seemed fitting that this message was delivered from the French equivalent of a "double wide" trailer at the show that nearly blew away in a particularly nasty storm mid-week.

Boeing’s less than sanguine view should not come as a shock to any keen space market observer, as no right-minded analyst would have expected a full reversal in demand from currently depressed levels. But hey, the industry is rife with optimists, and forecasts for the market have been assuming at least a reasonable rebound throughout the decade. Boeing seems to be throwing in the towel on even a moderate growth scenario, however. What’s going on here? Although a cynic might suspect, as noted by the Wall Street Journal, that Boeing’s cries of "poor mouth" might be partially timed to minimize fallout from its legal dispute with Lockheed over launch awards for the Delta 4’s, it would appear the commercial satellite operators are merely opening their eyes, finally recognizing the realities of the market, which contrast starkly with the robust government space outlook.

The state of the space market for large commercial satellites is a bit nebulous, if you will. Forecasts start with satellite demand, broken up by end market, which is then stepped into implied launch demand. Teal Group, a leading independent forecaster, calls for commercial satellite demand of 324 units throughout 10 years, or 28 percent of the total demand. Further split according to size, large commercial is expected to account for about 22 percent of the GEO market. Teal expects around 20-25 GEO commercial launches per year to fit this satellite forecast, to be split essentially between the three major players Boeing, Lockheed Martin and Arianespace. Teal bases this outlook on a set of replacements, plus an estimate of viable future projects. By contrast, Albaugh noted a reduced expectation for only 12-15 large launches in the commercial space market, which is closer to the current slate in 2002-03.

What is the gap from? Most likely Boeing is moving to ignore the potential for certain emerging applications such as Trailblazer 1 or Encounter programs, while also not expecting full commercial viability for earth imaging programs such as Eros, Ikonos or SPOT. Clearly, the problems encountered in commercial space are many, including but perhaps not limited to: 1) limited consumer demand achieved for imaging, mobile telephony, digital satellite radio and other attempts at commercializing space, 2) limited access to capital for new projects given the apparent failures or lack of evident returns in current programs, 3) limited confidence in the launch market due to failures, which also causes model-killing insurance rate hikes. As such, the only reliable demand in commercial space seems to be for replacement of existing broadcasting satellites (Intelsat, Inmarsat, etc.), though even these may not be one-for-one with increased life and capability in the replacement birds.

Perhaps the most critical determinant of future demand recovery will be the realization of broadband demand, predicated largely on the use of data transmission for international business and mobile broadband applications for consumers. At present, Teal states that their forecast assumes limited demand, which implies that Boeing’s figures may be even more conservative and relying solely on replacement and capacity growth of broadcast satellites. This could have other implications though, given Boeing’s investment in a key broadband project.

We would tend to agree with this assessment primarily for two reasons. Given the obvious failure of the mobile telephony business plans (Iridium and Globalstar are morphing into Plan B phases, but these do not warrant replacement investment) and unclear development of broadband at this point (early 3G handset streaming video market acceptance in early stages has been disappointing, as one measure).

All this essentially means that Boeing and Lockheed Martin will continue to face losses in their launchers, short of government bailouts, as well as continued pressure to reduce commercial satellite capacity (Boeing’s Hughes sales and capacity has been approximately halved since the acquisition in 2000, while goodwill from the deal is entirely written off already). The only bright spot in this otherwise bleak picture is that defense-related space demand is soaring, on the heels of a Bush administration that has reprioritized space towards the top of the agenda for incremental investment (along- side missile defense). This has prevented losses for the contractors from meaningfully crimping overall corporate returns, though the overall growth issue still remains. Stay tuned, however, for more possible write-offs, if existing broadband and other commercial projects do not pan out.

Christopher Mecray is a research analyst with Deutsche Bank Securities Inc. The following comments should not be considered a recommendation concerning the purchase or sale of any security mentioned herein.