Does investing in transportation to Earth orbit make sense?
by Patrick J. G. Stiennon
|Do these space investors know something Wall Street doesn’t? Is there a potential for a new industry and high returns?|
The new space investors are going after—in the long term if not the near term—is the space transportation to Earth orbit market. Space transportation seems an unlikely realm for angel investors. Orbital launch services is an old, overbuilt market propped up by government subsides. The operations of the latest launch vehicles developed by the likes of Boeing and Lockheed Martin, the Delta 4 and Atlas 5, are being consolidated into a joint venture, the United Launch Alliance, to try and hold down the high cost to the Air Force. The market is flat and recent studies show negative elasticity of the supply curve, i.e., lower cost results in the overall dollar value of the market falling.
Do these wealthy investors know something we don’t or is it only a strange passion that causes them to invest so much with so little return? Large fortunes have been made in space using satellites, but the recent activity has not been in finding new uses for satellites but rather in attempting to build better ways to get to Earth orbit. The current administrator of NASA, Michael Griffin, has even offered to purchase at least some of NASA’s requirements for space station resupply transportation from private suppliers. The last 20 years has seen a regulatory regime under the FAA’s Office of Commercial Space Transportation develop that has brought some certainty to the regulatory issues involved in privately-financed launch vehicles and launch services.
Worldwide revenues in the satellite business are approaching $100 billion a year, yet launch services revenues have been falling in recent years, amounting to only $2.8 billion in 2004. Futron marketing studies have shown that if the cost of launch services falls, the increase in sales will not make up for the loss of revenue due to lower prices. Launch services around the world are generally in oversupply, with national governments providing subsidies to keep most launch vehicle builders in business.
What, then, is the thought process that is driving investment in space? Is it based on reality? Understanding this starts with the knowledge that the cost of the rocket propellants used in a well-designed vehicle is less than $10–20 a kilogram of payload transported to low Earth orbit. In existing launch vehicles the cost of propellants is a trivial part of the expense of space launch. The current price for a kilogram placed in low Earth orbit is up to $22,000, depending on whether the payload is launched using a Russian or Chinese rocket or the shuttle. In other transportation systems the cost of the fuel makes up a large percentage of the total cost of transportation; for airplanes it’s something like 40 to 60 percent. Rocket transport to Earth orbit is on the same level of energy intensity as transcontinental air transportation and so one might expect the cost of propellants to be a similar fraction of total costs. This factor of nearly a thousand between what one might expect the cost of transportation into orbit to be in a mature industry versus the current cost gives hope that with greater utilization, costs might fall by one or two orders of magnitude.
The second basis for interest in space transportation is the reasonable expectation that if launch costs fell sufficiently, large new markets would develop. The last 30 years have seen the search for large new markets which would provide incentive to drive down the cost of space launch—space manufacturing, solar power satellites, and tourism have all been proposed. Recently there has been considerable study, based on survey data, assessing and quantifying the tourist market.
Still, space transportation does not seem like a good bet for new companies if only because the capital investment is so large. If an orbital tourist vehicle costs as much to develop as the supersonic Concorde, it would require a $12-billion investment. The dotcom companies, on the other hand, were for the most part started for less than a few million—sometimes a lot less—but they rapidly had market capitalizations of billions.
|The cost of the rocket propellants used in a well-designed vehicle is less than $10–20 a kilogram of payload transported to low Earth orbit. In existing launch vehicles the cost of propellants is a trivial part of the expense of space launch.|
The capital markets and governments are notorious for investing in things for which no market yet exists: fiber optic networks, personal computers, biotech, stem cell research, satellite cell phones, Internet retailers, and others. Sometimes the best technology is made to work and new markets arise. Sometimes the technology doesn’t work, or our new markets are not sufficient to sustain the investment. However, the time lag between the investment and the return can be huge: Peter Drucker has argued that a new industry as a whole may not be profitable for decades. Recently the US spent $2–3 billion on the National Aerospace Plane, and almost a billion more on a single stage to orbit prototype, the X-33, in neither case was even technical success achieved.
What are some strategies that might work to allow at least a few startups to turn a profit before a large new industry is contributing to the world economy and costs do fall dramatically? The first is to follow the model of Orbital Sciences Corporation, namely, build a launch vehicle and gain the credibility to become an aerospace contractor for the government. After the consolidation of the 1990s the Air Force wants a few new contractors. This is already working for SpaceX.
Another approach is to build something that is suborbital and has a development cost which might be supported by a new market. Virgin Galactic is using this approach with suborbital tourism and apparently has the advanced reservations to prove it. A third approach is to build a small launch vehicle and sell the vehicle, not the launch services, thus decoupling the production of the vehicles from the market for launch services. This third approach might support a reusable manned orbital vehicle if development and production costs could be kept to not much more than a few times that of a modest-sized business jet. At that price, even if the vehicle had the payload of the Russian Soyuz (three persons and couple of tons), most countries and a number of institutions would find it affordable enough to own, even if it did not replace larger communication satellite launchers. SpaceX is well on its way to proving that an expendable/partly reusable vehicle, the Falcon 5, can be developed for under $200 million at a unit cost of $18 million. Is not hard to believe that a reusable vehicle of roughly the same size but one half the payload could be developed for $2 billion and sell for $180 million, if the design was kept simple enough.