The major FSS players have been at the forefront of the push to add more launch vehicle options around the globe, and the development of SpaceX could be the catalyst for the lower prices the satellite operators have been seeking. “There is no question that launch services have been too expensive. They have been more expensive in the United States than internationally, but nevertheless expensive,” says Gwynne Shotwell, president of SpaceX, which offers launches aboard its Falcon 9 rocket for $50 million to $60 million. “But we are competing internationally now, and we are winning. I think there is a place for a launch services provider that offers the same quality of service but at lower prices. The market is certainly responding to our being here.”

Other launch providers do not believe that launch service prices are too expensive. “In fact, the price of launch services has decreased considerably in recent years. For instance, today, with the 10-ton capacity Ariane 5, the price of a launch is only slightly more than it was 10 or 15 years ago with the Ariane 4, which offered a payload capacity of only 5 tons,” says Jean-Yves Le Gall, CEO, Arianespace. “This translates into a price per kilogram reduction of one-third over a decade. I can understand that operators are always looking for the lowest price, but when we are talking about launch services, prices have dropped significantly, while at the same time quality has improved.”

Le Gall says Arianespace and ILS have done a good job in covering market needs. “Arianespace can launch 12 to 14 commercial payloads a year and ILS 8 to 10. Market demand is roughly less than 20, so that is largely covered by the current supply situation. There is healthy competition between ILS and us. Each contract is fiercely contested, so I believe that industry gets both fair competition between suppliers and the guarantee of a launcher always being available. From my point of view, this situation is very good for industry.”

Arianespace and International Launch Services (ILS) have been the dominant forces in the commercial launch services market. Frank McKenna, president of ILS believes that there has been a “healthy level” of competition in the market. “We don’t believe we are actually in a duopoly. I think there are clear alternatives in the industry. At the SATELLITE 2011 panel, there were executives from China Great Wall, SpaceX, Lockheed Martin, Sea Launch, Arianespace. All of those vehicles play different segments of the market. The Sea Launch, ILS and Arianespace products are for heavy lift. Atlas will occasionally play in that market. The other vehicles are moving up from small to medium systems. That, of course, would be SpaceX and China Great Wall and Soyuz. That is a lot of competition.”

Marco Caceres, a satellite analyst at the Teal Group, believes the current market situation has been a mixed situation for the satellite sector. “It is bad for the industry in the sense that it keeps launch service prices relatively high,” he says. “It is good for the industry in the sense that those two programs are busy. They allow themselves to get into a launch rhythm, which supposedly will keep them sharp, and there should not be too many launch failures. Proton has had a number of launch failures in the past few years. Launching a lot does not guarantee you won’t have launch failures, but it certainly helps. It is better to be busy than launching two to three times a year.”

McKenna is concerned that a flood of new launch capacity will enter the market when there is not enough business to sustain it. “I do see we are at the peak of the replacement cycle right now. We predicted this three to four years ago. The underlying economics of the business are very clear,” he says. “The capital plans of large operators cannot be sustained as they have been in the last three years, where there have been 30 satellites per year in terms of order and 25 launches per year. I see that coming down as we come out of this cycle. I think the cycle will start to drop in 2014–2015, and if capacity is brought on as the cycle drops, that creates a significant disallocation of resources. What we will see is companies exiting the market again. Without predicting how that will play out, that is a natural result of oversupply.”

Operator Perspective

For SES and Intelsat, the two largest FSS operators, procuring multiple launch services is always a key component of their business plan. Kenneth Lee, senior vice president of Space Systems for Intelsat, says, “A few years ago, there was a huge concern on our part because the launch vehicle prices were skyrocketing. It was so inconsistent with inflation rates or any other metrics. They were looking at market-driven pricing, and we were extremely alarmed. That is still the case today where launch vehicle pricing is still significantly higher than what it should be based on the inflationary rate.”

Lee believes operators such as Intelsat have been “vulnerable” with so little competition in the market. “There are two concerns having a duopoly. Firstly, these are the two major suppliers to launch large satellites. And having two means that there is limited competition and the prices are reflective of that type of market. They tend to and can price much higher as a result,” he says. “So operators are much more vulnerable. The other issue is reliability and assurance of launch when you need it. If you have a launch vehicle anomaly, we don’t launch again until we find out what happened. That downtime could be as short as a month or as long as a year or anything in between. Sometimes you have no recourse but to wait if there is an anomaly. Ariane has limited launch opportunities and so does a Proton and that creates additional risk for us. That is just as concerning as the price point.”

Michele Franci, senior vice president, planning and procurement, SES Engineering, calls it a seller’s market right now. “The issue is not so much whether they are too expensive or not expensive. The real issue right now is that the market is very limited. It is a seller’s market, so the prices of launch services move in an erratic way and we don’t really have good control of it. The lack of competition in launch services is obviously a big factor. If you look today at the costs of a satellite program, the launch services part is very important. It can make or break a business opportunity. So, in that sense, they are expensive,” he says.

The decision to announce a launch with SpaceX has caught many by surprise, given SES’s somewhat cautious reputation. In terms of why they did the deal, “If you remember we were the first ones to fly on a Proton. So, in that sense, it not like we don’t try things when we think they are correct. In this case, we did pretty extensive due diligence and we believe what they are trying to achieve is sound. They have a very good engineering team in place. The opportunity was right for us. Last but not least, the terms were pretty competitive as we were one of the first,” Franci says. “We encourage diversity and competition in the launch market. Of all the new players, we thought SpaceX was the most promising. If you can get a third player in the market, which is a bit different from the usual ones, it is going to be good for the industry.”

Lee says it is unlikely that Intelsat will go with a launch provider outside of Arianespace, ILS or Sea Launch any time soon. He adds, “Realistically, I don’t see us doing anything in the next couple of years for sure. It all depends on things such as U.S. government policy and how well they do with their development. We don’t really have a set time frame per sae. We are continuing to monitor their progress. We are very conservative. We need to make sure our assets are launched successfully without undue risk. We are not going to jump in just because things are a little cheaper — we need to see reliability demonstrated over time.”

Kjell Karlsen, general manager of Sea Launch, says margins are already tough for launch service providers. “I understand that the prices of launch services represent a significant element of our customer’s capital expenditure and closing business cases can be tough, however, I don’t believe they are justified to focus on this issue. What you have seen over the last 10 years is that the financial returns for the industry’s main launch service providers have been non-existent. At the same time, operators continue to deliver record financial results,” he says.

McKenna says current pricing mechanisms are an accurate reflection of the current state of the market. “The value of launch is being sorted out between the interaction of the operators and the suppliers. There is a clear recognition on the behalf of operators that commercial launch is not a commodity. It is not something that will be delivered by governments and subsidized to a point where it is more like a commodity. It is a highly technical product. There is risk and expense associated with it, and there are relatively long life-cycles with it. It is not like the technology curve can move a significant advantage in the cost structure or capability of these vehicles on a dime. Having said that, the industry does progress and make improvements in their systems, which all the providers have largely done,” he says.

Le Gall admits that due to financial issues, Arianespace is unlikely to look to drop prices in the near-term. “Our prices are fair and it is well known that Arianespace is not making money, which I regret. In fact, for the past few years we have posted losses because of various problems that impacted our manifest. Our prices clearly reflect the quality we deliver to operators, so we are not considering a drop in our prices,” adds Le Gall.

Caceres understands why ILS and Arianespace have adopted such pricing policies. “The fact there is only two launch service providers and that there is such huge demand in the market means that they have succeeded in maintaining launch service prices at a very high rate. I am not sure I would necessarily blame them for that. Certainly prices have been kept high. There is no advantage to lowering prices, as both have more than enough business. Even if they raised their prices, it does not mean they would get less business. There is plenty of business for everybody.”

Stéphane Gounari, a satellite analyst at NSR adds, “Launch prices have proved to be remarkably stable over the years, however, the current trend of low-cost launchers operated by private operators is not a novelty into the launcher market and should change the game. Therefore, commercial launch prices will see some pressure, but towards the mid-low end of the spectrum with the top-tier communication and government satellites still paying top dollar for the more reliable or captive systems. In the long run, if new launchers prove their mettle, this will bring down overall launch costs considerably.”

More Options

Karlsen believes that it is important for the industry to have more options other than ILS and Arianespace. “I don’t think it is in the operator’s long-term interest to have a duopoly industry structure. Paraphrasing a former executive vice president of ILS, ‘A duopoly is the next best thing to a monopoly’. It is the nature of our business that from time to time, every launch vehicle has had issues, and this could limit access to space and be detrimental for the industry,” he says. A vibrant Sea Launch is good for the market, according to Karlsen. “I have met most of the operator CEOs in Washington, D.C. recently, and everyone is consistent in their message. Everyone wants to see Sea Launch back in the market to provide the necessary access to space. We are building our plans on long-term supply contracts managed by our Russian partner, Energia. We are building up our backlog as we speak. We will take it step by step. We will have two launches this year, three next year and then we are back to our full capacity of five by 2013. However, we can maintain a healthy business with less launches than that.”

Shotwell believes the launch services market is demanding an effective third player that can launch various types of satellites. “Launch [cost] is by no means the driver in the lower to mid-level mass class, but launch is a huge driver in cost and price for the very heavy satellites, so those over 6.4 tons. We have only one solution there and that is Arianespace. That is terrible and we are going to fix that. … New players are great for the market. Secondly, the optimum number of players for the market is three,” she says.

In April, SpaceX unveiled its Falcon Heavy rocket and expects the first demonstration launch to take place as early as 2013, CEO and CTO Elon Musk says. The vehicle is designed to carry more than 58 tons (117,000 pounds) of cargo into low-Earth orbit, and SpaceX estimates that the average cost of a mission would be between $80 million and $125 million, and the vehicle initially would be offered as an alternative to Lockheed Martin’s Atlas 5 and Boeing’s Delta 4 vehicles that conduct launches for the U.S. government under the United Launch Alliance joint venture. “A Falcon heavy launch will cost $1,000 per pound to orbit, which is one-third of the cost of United Launch Alliance’s Delta 4 Heavy and can carry twice as much cargo and provide twice as much lifting, as the Delta 4 is only capable of carrying 25 tons,” Musk says. “… This provides six times more cost efficiency over the Delta 4 for satellite operators.”

Outside of the United States, Europe and Russia, FSS operators have expressed interest in China as a launch vehicle supplier, but political issues have so far stopped China from playing more of a role in the commercial launch market. Caceres believes that this could change. “If China continues to have a robust launch industry, I imagine it will only be a question of time before European satellite companies and even North American satellite companies decide to launch on Long March. I guess the question is, ‘Will the North American companies be allowed to launch on Long March?’ If you can set aside politics, I don’t see any reason why China cannot be a major, major player. If Long March becomes a competitive program commercially, I imagine the prices for launch services will come down significantly, and very quickly,” he says.

Franci says SES would like the option to use this vehicle in the future. “China probably has one of the best vehicles available, and the day the U.S. government lifts the limitations, we and everyone else would rush to use it.”

Changing Landscape

The launch services market could be on the verge of change, but it still looks to be years before any real impact is seen on launch prices. In the next few years, Sea Launch will have to demonstrate that it can engineer a recovery, while SpaceX will have to prove that it can move beyond demonstration launches and perform missions for paying customers. Then it will take Sea Launch and SpaceX many years to develop a track record of reliability that Arianespace and ILS already own. The incumbents will continue to capture the lion’s share of the launches for several years, but the pressure being applied by the potential of new entries will have an impact on launch prices and the market as a whole.

To comment on this article, visit Mark Holmes’ blogat www.SatelliteToday.com/blog/?p=90Mark Holmes is Via Satellite’s Associate Editor.