by Christopher Mecray

The National Aeronautics and Space Administration (NASA) received heaping criticism in recent years for lacking an inspired vision for space exploration to provide a tangible focal point for its future. This criticism manifested in pressure for NASA to better support the case for ongoing funding of the manned space program, which intensified in 2003 following the Columbia Space Shuttle loss. The agency supplied this vision by returning to the long-discussed mission-to-Mars scenario, and President Bush has now endorsed this, calling for renewed focus on manned exploration beyond the Shuttle and International Space Station project, slated to be completed by the end of the decade. The questions that we grapple with as financial analysts, however, in trying to absorb this celestial fancy are several: Is the projected vision realistic enough to "stick" as an over-riding goal for NASA? What are the cost implications and how will it affect NASA’s budget throughout the coming years? Which commercial contractors will be involved and are there clear winners and losers?

Regarding the vision itself and whether it represents a sound goal, we do not pretend to have the answers to the myriad of scientific questions that are raised in determining the basic credibility of such space exploration projects. We do know, however, that both a Moon base and Mars mission have giant technical challenges that will not be overcome quickly, and almost certainly, would require massive funding increases, particularly under the bureaucratic rubric of NASA. Aside from achievability, however, we do see relevance in asking whether the benefits to science of pursuing the missions would come close to matching the doubtless grandeur of the cost. Likewise, whether the vision, seemingly based on platitudes about man’s unquenchable quest for exploration, will capture the imagination of real taxpayers as the bills mount. For now, we simply submit that a key risk to NASA could come from overreaching technically for a goal that could, over time, break budgets before they truly inspire the masses.

Fortunately for those anxious to avoid this thorny debate, the tough questions may be a ways off, thanks to the paltry funding slated to match the plan’s giant scope. Indeed, the near-term reality will focus more on money shifting, with the vast majority of the funds for the program to come from existing NASA budgets even with President Bush’s proposed budget increase. A shift of $11 billion spread out over five years will need to come from current NASA coffers and we expect most of this to come from earth-science and aeronautics programs. The winners within NASA would include the overall manned space centers (Johnson et al.) and the Jet Propulsion Labs involved in the exploration side. As for the added funds, the top-line increase (beyond already earmarked needs such as shuttle re-work) represents merely an inflation-index scope, or roughly $200 million throughout five years on a $16 billion annual budget. The bottom line: Bush is supplying the vision, but NASA must reprioritize to make it happen, since little new money is forthcoming. Of course, this is the hardest thing to ask a large bureaucracy to do, which does not help the chances for success.

Which commercial aerospace contractors stand to benefit from this future vision? Under the current contracting mechanisms and industrial base, Boeing and Lockheed Martin virtually dominate the NASA contracting budget, comprising nearly 40 percent of the $12 billion in available NASA dollars. (Some of this does flow to others through subcontracts, however.) Given their key roles in both manufacturing components and providing launch and other services to NASA, we would assume that much of the funding for new space exploration initiatives will at least begin with prime contracts to these players. Some of the first elements will have to include enhanced space vehicles (either a shuttle vehicle follow-on or a mixture of Apollo-type capsules and new cargo vehicles) as well as evolved launch and propulsion capabilities (derivatives of the current Evolved Expendable Launch Vehicles and research on new propulsion technology). Naturally, other contractors will eventually get a chance to participate in the projects, and we would assume no shortage of willing competitors. Still, we note that at the base, initial funding may involve tradeoffs rather than all new money and this may mitigate any upside at least until 2010 when the last shuttle flights are slated for liftoff and added budget money could be freed up. In the meantime, the frequency of shuttle flights may decrease (once they return to service at all), which may also allow some further budget shifting toward new design programs. This too, however, may initially go to the established commercial giants over any new upstarts in the early phases.

So, with a heavy dose of skepticism as an analyst, I see limited upside funding for an otherwise lofty vision, and must point to the current leaders as the key winners of the funding game. This will be the case at least until the process gathers momentum and new entrants can begin to play.

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.