Industry stuck on the launch pad Financial Times 10/09/02
author: Kevin Done
Copyright (c) 2001 Dow Jones Reuters Business Interactive Ltd.,trading as Factiva.
The space industry faces a scale of overcapacity it has never previously experienced and is braced for a further wave of
consolidation and rationalisation.
Amid mounting global tensions, the sector's products play ever more crucial and diverse roles - from handling military
communications and surveillance in the futuristic war fought over Afghanistan to the vital monitoring of the earth's
environment and climate change.
Leading players in the industry are struggling nonetheless to cope with an array of tough challenges that have forced many
into deep loss.
Antoine Bouvier, chief executive of Astrium, the leading European space concern and a subsidiary of European
Aeronautic Defence and Space company (Eads), says "the space industry has been in the throes of a severe and lasting
crisis".
The market for communications satellites, for example, which has previously generated 20 to 25 orders a year "will
probably drop to around 10 this year," he says.
The demand for launches is shrinking just as yet more capacity is coming available with two new-generation rockets,
Lockheed Martin's Atlas V and Boeing's Delta IV, staging their maiden flights in the US this year. The Atlas V made its
successful debut in late August.
Launcher companies, in particular Europe's Arianespace which is crucially dependent on the commercial market and lacks
the flow of military launches enjoyed by its US rivals, are having to cut costs drastically to support a halving in launch
prices.
In the US the strong expansion of the defence budget and the recognition of the rapidly growing importance of military
space programmes is providing US equipment suppliers with an enviable cushion against the woes of the commercial
sector. But it is a comfort that is largely absent elsewhere.
"In Europe we have to cope with reduced institutional budgets, both civil and military," says Mr Bouvier. The consolidation
that is under way among private satellite operators, led most notably in the past year by the $4.3bn purchase of GE
Americom, General Electric's satellite interests, by SES, the Luxembourg satellite operator, is also reducing the number of
available clients for the space hardware manufacturers.
Eutelsat, the European satellite operator, has received a number of approaches from competitors and private equity firms
interested in buying the company. Intelsat, the world's third largest satellite operator, has made the only formal offer,
believed to be valued at $3.5bn-$4bn, while PanAmSat is also understood to be examining the deal. PanAmSat itself is set
to be acquired by EchoStar Communications, the US satellite broadcaster, by the end of the year.
The consolidation among operators is being driven in part by the excess of existing commercial satellite capacity, which
has depressed transponder lease prices and put pressure on the sector's finances. This in turn has helped to choke off the
flow of new satellite orders.
"It is a terrible market," says Francois Auque, Eads executive vice president and head of the group's space division.
"There is huge overcapacity that must be rationalised. Of the five main [satellite] players only two to three will survive."
The satellite sector is dominated by Boeing, the world's biggest aerospace and defence group, which secured its position
through its costly $3.8bn takeover in late 2000 of the Hughes space and communications businesses, the world's leading
manufacturer of communications satellites.
It too has been hit by the weak commercial market and rising production costs, however, and has been forced this year to
take action to restructure the operation with a reduction in the workforce, a cut in the number of manufacturing sites and a
streamlining of design processes.
Within the US industry, executives believe the most likely concentration will come from a merger of the commercial
satellite operations of Lockheed Martin and Loral Space and Communications.
Sporadic discussions have taken place between the two groups but are yet to bear fruit. Both have suffered heavy losses
from failed investments in satellite telecommunications businesses, most notably Loral's ill-fated Globalstar satellite
telephone venture. Market forecasts made in the 1990s for the take-up of satellite phones turned out to be wildly
optimistic, and the technology was rapidly overtaken by far cheaper terrestrial mobile phone networks.
In Europe, where there are fewer options, the pressures are growing for some form of co-operation in satellites between
the two rivals Eads and Alcatel, the French telecommunications group, although the latter remains reluctant to engage in
substantive talks.
Eads believes that spaceis a core activity of strategic importance for its future, in particular in its defence businesses with
the rapid trend towards so-called "network-centric warfare" with the emphasis on the synthesis of advanced computer,
communications and surveillance technology with precision-guided munitions and rapid deployablity.
Boeing has already set the course for the industry to follow with its far-reaching decision during the summer to merge
two of its three main divisions, military aircraft and missiles and space and communications into a single $23bn business,
Integrated Defence Systems.
According to Phil Condit, Boeing chief executive "integrated solutions - joining together network-centric information with
integrated military air, land, sea and space-based platforms - is the direction modern defence systems are moving."
In an important move to prepare the way for future consolidation, Eads has recently bought out the 25 per cent stake of its
minority partner BAE Systems of the UK in Astrium. It is creating two subsidiaries, one for satellites and one for its
launcher (Ariane rockets) and orbital infrastructure (International Space Station) businesses.
Despite the present gloom about the state of the commercial space market, there are hopes that better times lie ahead.
"The telecoms market is cyclical and from 2004 we expect the level to rise to 20 to 25 sales a year, largely thanks to the
growth of the internet and the high data rates per satellite," says Mr Bouvier.
The European space industry is also placing big hopes on the Galileo project after the European Union finally gave the go
ahead earlier this year for one of the European Union's biggest and most controversial infrastructure schemes.
The 3.2bn satellite navigation system is planned to operate a constellation of about 30 satellites by 2008, giving Europe a
strategic rival, under civilian control, to the US military-controlled global positioning system (GPS).
The European space industry remains highly dependent on the commercial market, however, in contrast to the US, where
the largest share of income comes from government funded programmes.
According to the recent Star21 strategic aerospace review prepared for the European Commission, US aerospace
companies had a turnover from space activities of 33.7bn in 1999 of which 26bn, or more than three quarters, was funded
by the Department of Defence and Nasa. European companies, by contrast, had a turnover of less than 5.5bn, of which
only half came from institutional sources and the rest from the competitive, commercial market-place. |
