The dramatic launch failure of the NSS-8 satellite means business plans will have to be altered throughout the the length and breadth of the satellite industry. SES New Skies has lost a 100-transponder satellite and the challenge for recently appointed CEO Robert Bednarek is to pick up the pieces and make sure the business grows as much as it can over the next two years. In his first interview after the launch failure, Bednarek said "for New Skies principally, we are disappointed that we have lost some of our growth opportunities. NSS-8 was in part replacement capacity, but it would also have provided some additional capacity. Our biggest disappointment is that we have some customers desperately in need of additional capacity, and we now have to try and find other ways of providing for their growth."

Bednarek’s sense of disappointment was palpable: "There has been a lot of work done on that satellite, almost five years of collective work on the part of New Skies, Boeing and ultimately Sea Launch. There is huge disappointment on the behalf of teams who have worked so hard on such a large and complicated satellite."

Among the burning questions is how the operator going forward will be able to serve strong potential growth markets, such as India. The country is one of the most vibrant markets for DTH services. Zee Telefilms through Dish TV is already in the market, and with other entrants such as Tata Sky also present, there appears to be a strong opportunity for satellite players. Serving new Indian customers could be a problem now. Bednarek admitted "clearly, I think some of the DTH operators that are emerging are going to need capacity right away, and we may not be in the position to provide everything they need. I think the demand for capacity will be so strong, and so persistent over time, that when we do have additional capacity through one or more follow-on satellite(s), we will still be able to help support the future growth of that segment."

Bednarek was keen to point that the loss of NSS-8 would have "no impact"on existing subscribers. In terms of the plan in place, he said "we procured NSS-9 last year. This will be a satellite serving the Pacific Ocean region. NSS-9 will free up NSS-5, which can be used at 57 degrees East to replace NSS-703. We had a continuity plan, which was well-established before the failed launch of NSS-8. NSS-8 did have additional expansion capacity including over India. However, the capacity that was going to be available for India was fairly limited because of strong demand in the Middle East, Central Asia, lots of other places. We were already having capacity contention on NSS-8. One of the tasks in front of New Skies right now is to find the quickest path to providing growth capacity for existing customers in these regions."

Acquiring Other Assets

While the loss of NSS-8 is undoubtedly a blow, Bednarek believes there remains opportunity for growth over the next two years, and even hints at acquiring other assets. "There is still some potential," he said. "We still do have capacity on our existing fleet. I don’t want to give you the view that there is no incremental capacity. New Skies today also has access to the larger SES fleet. We have the satellite known as AMC-12 at our disposal which has a large amount of African C-band capacity on it. We have AAP1. There are things in the Astra pipeline that could potentially support some new capacity in Africa and in the Middle East. It is not a binary thing. This is not a case of no growth until 2.5 years from now. We will continue to look at what other in-orbit assets are available – ours or somebody else’s."

Appointed president and CEO in October, Bednarek’s first major challenge will be to deal with the loss of NSS-8, and decide in a short time frame how to replace it.

"In terms of a timeline, we are working on a schedule where we have a plan to review with our customers and then talk to various vendors within the next 30 to 60 days. There are a lot of options on the table. We can do a one-to-one replacement. We can look at adding capacity from multiple orbital slots. We can also look at how the other parts of the SES fleet can assist us. There are a lot of moving parts to it right now. I think the message is that our commitment to growth and to expansion is unaffected."

In terms of whether he is in favor of huge satellites such as NSS-8, Bednarek was noncommittal, saying "I would not rule out any particular option. Big satellites have their role, particularly where you can optimize their utility in pretty unique orbital slots, such as 57 degrees E which can absorb that much capacity from one satellite. Smaller satellites have their roles, too, in certain capacity arrangements and market dynamics. At this point, I would not say I have a certain philosophical bias one way or the other."

Thuraya CEO Speaks

An interested observer of the NSS-8 launch was Thuraya CEO Yousuf Al Sayed. Thuraya was getting ready to see its 5250 kg (11,578 lbs.) Thuraya-3 satellite launched by Sea Launch in the second quarter of this year. Thuraya could be one of the early casualties of recent events. Speaking in the immediate aftermath of the launch failure, Al Sayed said, "I did not expect it, given the outstanding track record of Sea Launch – especially the way the failure appeared on video, which was odd. I always had great confidence in Sea Launch’s capabilities. Sea Launch has already established a Failure Review Oversight Board to determine the root cause, and I am sure the findings will be both surprising and interesting."

In terms of the potential delay to the launch of Thuraya-3, and whether it will need to find an alternative launch provider, Al Sayed explained "it is normal to expect delays after such a launch failure, particularly that Thuraya-3 is next in line. However it is too early to fix a new timeline. It is too early to make such grand decisions. We first need to understand the magnitude of this event and how Sea Launch is planning to manage it. Once a new timeline is set, Thuraya will be in a position to assess options available. Our original plan was to have Thuraya-3 operational before the end of 2007. As of today with limited information in hand, I will not be able to say whether or not we will meet that target."

As to how the failure may impact satellite players in 2007, Al Sayed said "reasonable numbers of launch failures are normally accounted for in the risk management of space communications business and this failure is no exception. We are still at the beginning of year 2007 and this failure will have only minor impact. Major launchers have demonstrated great degree of maturity and reliability and this isolated event should not impact the launch business."

Analyst Reaction

While SES may lose out on some growth opportunities over the next two years, analysts are still generally positive about New Skies. Aysha Zaman, a satellite equity analyst at Dresdner Kleinwort, said in a research note "while the launch failure does not impact existing revenues, it was an important growth driver for New Skies. NSS-703 will now remain at 57 degrees E until it is replaced by NSS-5, to be freed up in 2009 following the successful launch of NSS-9. The NSS-8 downgrade is offset by two factors: 1) an upgrade to the revenue profile arising from the recent Canal+ contract and 2) a move in the $/EUR rate to 1.30 from our prior assumption of 1.33. Both factors mitigate the impact of the launch failure and result in a slight upgrade."

Kristof Samoy, a satellite equity analyst at KBC Securities, wrote "the loss is definitely a setback for SES but direct valuation impact should not be exaggerated: 1/ NSS-8 was entirely vendor-financed with payment conditional upon successful in-orbit testing 2/ the planned 2009 launch of the NSS-9 means that incremental capacity will be still be commercialized but only within a two-year delay."

–Mark Holmes

Contact, Yves Feltes, SES Global, e-mail, [email protected]

Ebrahim Khalil Ebrahim, Thuraya, e-mail, [email protected]

Aysha Zaman, Dresdner Kleinwort, e-mail, [email protected]

Kristof Samoy, KBC Securities, e-mail, [email protected]