By Owen Kurtin

During my career, and specifically this year, I examined the chronic overcapacity of satellite operators, manufacturers and launch service providers in the industry. I wrote a series of articles in 2003 that referred to the respective percentage of overcapacity in each sector.

Since then, a wave of consolidation in the Fixed Satellite Service (FSS) sector, notably the Intelsat acquisition of Panamsat and SES Global acquisition of New Skies Satellites, as well as the growth of Mobile Satellite Service (MSS) and other non-FSS businesses, have substantially rationalized the operator sector. Now the same process may be underway in manufacturing.

The satellite manufacturing sector has operated for decades under special dynamics that tended to impede what might have been a natural consolidation process. Among those are that most manufacturers are not standalone companies but rather parts of larger organizations. This relationship has tended to obscure and immunize the manufacturers’ low profitability and low profit margins from shareholder scrutiny and ire. Other manufacturers are so-called "national champions," or perceived necessary components of a national defense contractor establishment for which political support, direct contracts and indirect subsidization offer protection from market forces. In addition, satellite manufacturing has a high barrier to entry, creating the perception that new entrants would have great difficulty gaining traction.

However, market forces are increasing the talk of consolidation of the sector, as the five leading players are battling in a market that appears capped at no more than 20 major orders per year and often fewer. Also, the customers — the satellite operators — historically have imposed whatever leverage was available to whittle down margins.

Consolidation should be a natural result, and the first steps may be taking place. At the Euroconsult Satellite Finance Symposium in Paris in September, Boeing and Lockheed Martin Commercial Space Systems announced that they would focus on government contracts and essentially withdraw from the commercial sector. At the Farnborough Air Show in June, rumors swirled that Thales SA of France, not currently a satellite manufacturer, was poised to acquire Alcatel Alenia Space, the satellite operations of Alcatel SA of France and its partner, Finnmeccania of Italy. As a second step, according to industry speculation, Thales may acquire the Astrium division of EADS, Europe’s other main satellite payload manufacturer, creating a European giant with a probable monopoly on public contracts and perhaps a third of the commercial communications satellites market. In the meantime, Loral Space and Communications has emerged from bankruptcy and Orbital Sciences has increased its market share and sector visibility, squeezing the other players even further.

Of course, industry speculation is not always right, but a consolidated operator sector means fewer customers for the manufacturers. This is not good news, particularly in an environment in which consolidated operators are likely to exploit any enhanced leverage to further eat away at already thin manufacturing margins.

Whether operator consolidation means fewer orders is another question. While the operators might be expected to pare some fleet redundancy from what their predecessors might have ordered had they remained independent, consolidated operators are presumably stronger and able to invest in fleet replacement sooner and undertake more significant new projects than financially weaker predecessors may have done.

Second, operator needs may generate significant order disparities within the manufacturing sector that create specialization, customer continuity and arbitrage opportunities for given manufacturers. For example, there remains a persistent global C-band overcapacity; that is not the case for Ku- and Ka-band. Also, while FSS growth is likely to remain a slow, single-digit growth affair, MSS and other "new" services such as ancillary terrestrial component service by MSS operators may generate higher growth. These factors may benefit manufacturers that develop repeat customer bases or bus or payload expertise in higher demand, higher growth subsectors of the industry.

Manufacturer consolidation and specialization seems ripe to rationalize the sector’s chronic overcapacity. However, the historical barriers to rationalization are crumbling slowly. Manufacturers may be facing the end game, but everyone still wants to be the survivor.