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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: porcupine --''''> who wrote (400)6/17/1998 5:53:00 PM
From: porcupine --''''>  Read Replies (1) of 1722
 
Boeing: It's not just jumbo jets -- it's satellite launches too!

June 16, 1998

Offering a Cheaper Ride to Orbit
From the Middle of the Ocean

By WILLIAM J. BROAD

Ever since 1926, when Dr. Robert H. Goddard, working
in Auburn, Mass., fired the world's first successful
liquid-fueled rocket, the field has developed along the same
general lines. Increasingly big and powerful vehicles have
blasted off from dry land.

In recent years, these rockets have carried into space mainly
communication satellites, which beam telephone calls, beeper
messages, computer data and television and radio programs
around the world. Such work is booming. In the next decade,
analysts say, more than 1,000 new communication satellites
are scheduled to be sent into orbit.

Now, a radical entry in the
launching game is getting
ready to blast off after an
investment of more than
$500 million by companies
in Russia, Ukraine, Norway
and the United States. The
team is joining inexpensive
Russian and Ukrainian
rocket gear with U.S.
marketing and technical
savvy. Boeing Co., the U.S.
aerospace giant, owns 40
percent of the joint venture.

In October, the team's
rocket is to rise from a
floating platform in the Pacific and carry a communication
satellite into orbit -- a space-age first. The aim is big profits,
and the infrastructure is similarly big.

The 660-foot control ship carries up to 240 people. The
launching platform is nearly as big as two football fields and
moves itself around at speeds of up to 12 knots. And the
rocket stands 20 stories tall.

Known as Sea Launch, the venture, if successful, will be a
technical feat that significantly boosts the payload weight that
a rocket can carry by simply starting the trek in the right
place.

By blasting off at the Equator rather than the higher latitudes
where most spaceports are found, the rocket will get the
maximum possible boost from the earth's rotation and follow
the shortest possible route to an orbit 22,300 miles overhead.
There, communication satellites turn in step with the earth,
making them appear to hang motionless and easing linkups
with ground antennas.

"We want to provide a low-cost alternative for launching
satellites," Jim Albaugh, the president of Boeing Space
Transportation, the U.S. parent of Sea Launch, said in an
interview. "We get up to 30 percent more payload than
launches from North America or Russia."

Last Friday, the team's control ship
(made in Scotland by the Norwegian
partner) left St. Petersburg, Russia
(where a Ukrainian rocket had been
loaded and Russian rocket-handling
gear installed), and headed for Long
Beach, Calif., site of the company's
home port (adapted from an old
Navy base). The floating launch
platform (made in Norway from an
oil rig) is being outfitted in Vyborg,
Russia, and is to sail for Long Beach
this summer for the launching debut.

Space experts say the venture has some risk. But they add
that the team and equipment are so strong that they will likely
open a major new pathway into the heavens.

"It's very smart," said Marco Caceres, a space analyst at the
Teal Group, aerospace consultants based in Fairfax, Va.

"Most rockets are launched out of government facilities, and
you have to wait your turn," at times for months or years, he
said. "Here, they're taking a vehicle that's relatively modern,
getting it at a good price, taking it and launching it for a
venture they own" at times they, rather than an outsider,
decide.

"And they're getting in at the start of the market boom,"
Caceres added. "The timing is perfect. They'll do very well."

Some arms-control advocates, as well as the Clinton
administration, which encouraged Sea Launch because it
employs Russian and Ukrainian rocket makers who otherwise
might pitch their wares and expertise to rogue states and
terrorists.

"It's rare that you find this kind of sweet technical fix to a lot
of policy problems," said John E. Pike, head of space policy
at the Federation of American Scientists, a private group in
Washington.

The team's Ukrainian rocket is known as the Zenit. Its
maker, the Yuzhnoye design bureau and Yuzhmash
production plant, once made for Moscow the SS-18, which
the Pentagon dubbed "Satan." The dreaded black giant was
the Soviet Union's deadliest weapon, able to deliver 10 or
more nuclear warheads with great precision halfway around
the globe.

Blastoff From the Equator

Shown are some of the world's main launching sites for
communication satellites. Now, a private venture hopes to gain an
advantage in the highly competitive market by launching its
satellites from a floating platform at the Equator, getting an added
kick from the Earth's rotation and saving fuel by traveling a more
direct route to the point 22,300 miles above the Earth, where
satellites orbit in synch with the planet.

Dr. John M. Logsdon, director of the Space Policy Institute
at George Washington University, said Sea Launch was
bittersweet for national security because it diverted rather
than eliminated the threat. "It keeps production lines open in
the SS-18 plant," he noted, "but gives that cadre of people
something to do other than make SS-18s."

Whatever its merits for arms control, the private venture is
poised to challenge world rocketry. Each year this business
sends aloft scores of monsters belching fire and smoke -- the
Proton from Russia, the Long March from China, the H-2
from Japan, the Ariane from French Guiana for the European
Space Agency and the Delta and Atlas from the United
States.

Despite its newcomer status, the Zenit rocket of Sea Launch
has already won top customers. Hughes Space and
Communications, an industry leader, has signed up for 13
launches, including the first. That flight is to loft a five-ton
craft meant to knit Brazil, Mexico and the United States
together electronically.

Donald L. Cromer, the chairman of Hughes, which is based
in California, said the undisclosed Sea Launch price was
"very competitive." He added that costs were further cut
since Hughes would be able to ship the spacecraft to the
nearby home port of Sea Launch rather than across the
country to Cape Canaveral in Florida or overseas to a foreign
spaceport.

Sea Launch has sold five additional Zenit launches to Loral
Space & Communications, headed by Bernard L. Schwartz,
a top individual contributor to the Democratic National
Committee.

Recently, Loral and Hughes have been caught in a political
firestorm over whether they acted improperly in helping the
Chinese fix problems in their inexpensive Long March
rockets, and whether their donations to the president and his
party prompted the Clinton administration to look the other
way.

With Sea Launch, the two companies are looking for a
cheaper way to get their satellites into orbit.

Albaugh, the Boeing official who oversees the U.S. side of
Sea Launch, said many other customers would doubtless join
Loral and Hughes as the Zenit proved itself.

"We've got interest from a lot of satellite manufacturers," he
said in the interview. "At the prices we can offer, I think we'll
see a big increase in orders after the first few years."

The boost that the rocket gets at the equator occurs because
of the earth's eastward rotation. At the North Pole, this speed
is zero. But it increases in a southward direction until, at the
equator, the surface of the earth is moving eastward at more
than 1,000 miles per hour.

To take advantage of this rotational kick, most rockets
carrying communication payloads are fired due east, if safety
considerations allow such a flight path.

Over time, the world's spaceports have slowly pushed
southward to take an increasingly large share of this free ride.
The main Russian base, from which the first satellite,
Sputnik, flew aloft in 1957, is located at 45.6 degrees
northern latitude. Cape Canaveral in Florida is 28.5 degrees.
And the European Ariane site, a mere 5.2 degrees above the
Equator, was carved out of the jungles of French Guiana on
South America's northeast coast.

But even at the Equator, the boost of 1,000 miles per hour is
a relatively modest aid since the velocity a rocket needs to get
into orbit is 17,500 miles per hour.

For Sea Launch, an even bigger advantage comes because its
rockets will fly the shortest possible route to the high
equatorial orbit. In contrast, rockets flying out of, say, Cape
Canaveral at 28.5 degrees north, must burn fuel (the added
weight of which reduces payload capacity) to nudge
themselves down to the high orbit aligned with the equator at
0 degrees latitude.

Despite these enticements, the real driver behind the founding
of Sea Launch was the opportunity for new business that
arose after the 1991 collapse of the Soviet Union. By 1993,
Boeing was deep in discussions with the Energia company, a
star of the Russian rocket industry. The two judged that their
skills were complementary.

Amy L. Buhrig, head of Sea Launch marketing, said the two
companies "worked closely with the Department of
Commerce looking for ways to work together."

Ideas came and went. The one that stuck was Sea Launch.
Its premise was that demand for satellite launchings would
soon outstrip the supply. Its trump card was to be the Zenit,
a military rocket that Moscow had used for launching a wide
variety of spy satellites.

In April 1995, the joint venture was formed in the Cayman
Islands. Boeing owns 40 percent, RSC-Energia of Moscow
25 percent, Kvaerner Maritime of Oslo, Norway, 20 percent,
and KB Yuzhnoye and PO Yuzhmash of Dnepropetrovsk,
Ukraine, 15 percent. Thought the Zenit is considered
Ukrainian, all its engines, a rocket's key component, are
made in Russia.

The venture has had some setbacks, none apparently serious.
On May 20, 1997, a Zenit flying out of Moscow's main
spaceport failed 44 seconds after liftoff. Boeing swept in
afterward to make sure the rocket design was sound.

Ms. Buhrig, the Sea Launch marketing head, said the
investigating team included Loral, the satellite maker;
Rocketdyne, an arm of Boeing specializing in engines; and
the Defense Technology Security Administration, which
helps guard military secrets as American defense contractors
increasingly work with other countries.

"My understanding is that we were observers and concurred
with the findings of the Russian-Ukrainian investigation," Ms.
Buhrig said.

The topic is politically sensitive because of Washington's
ongoing investigations into whether the aid Loral and Hughes
gave Chinese rocket makers helped China improve missiles
laden with nuclear warheads, thus endangering U.S. security.

But in this case, private experts say, there was probably little
chance of such aid because Russian and Ukrainian rockets in
some respects are superior to U.S. ones, especially their
engines. In fact, the Air Force recently selected a new rocket
for launching satellites whose engine is based on a Russian
design.

"We do not have anything
approaching Russian engine
technology," said Charles P. Vick, an
expert on the Russian space program
at the Federation of American
Scientists.

Governmental backing for Sea
Launch is so strong that it recently
won loan guarantees from the World
Bank after questions were resolved about whether Sea
Launch violated the bank's prohibitions on aiding military
activities. The bank will back guarantees of $100 million each
for Russia and the Ukraine, giving investors some protection
from economic, civil or military turmoil.

Though planning to work on the high seas where no nation
holds sway, the Sea Launch venture, by virtue of Boeing's
participation, still falls under Washington's watchful eye. The
Transportation Department says it must license any rocket
launching, and the Commerce Department says any U.S.
satellite maker that wants to use the Zenit must get an export
license.

If all goes as planned, Sea Launch will fire into space six
Zenits a year, though Albaugh of Boeing said the pace could
be quickened to eight. After the debut flight, rockets are to be
shipped in pieces from the Ukraine to Long Beach, loaded
aboard the command and assembly ship and integrated with
the satellite payload. The whole assembly will then be
transferred to the floating platform for blastoff.

The platform itself is unanchored, instead using propellers to
maintain position in choppy seas.

"We don't think there are any show stoppers," Albaugh said.
"It's a fascinating program and I'm amazed at the progress."

Ms. Buhrig of Sea Launch said company studies found that
one Zenit might fail catastrophically in every 11 flights. "This
is very good for the beginning of a new product line," she
said.

At the start, the company plans to move Zenits from the ship
to the launching platform only at the home port, which means
that both would have to jog back and forth from the Pacific
launching site.

But later, officials said, the launching platform might be left
in place at sea. This could save time, since the command and
assembly ship can move faster than the platform.

Ms. Buhrig said such a system would allow between 12 and
15 launchings a year, which would rival the rate of
commercial blastoffs at the world's busiest spaceports.

Caceres of the Teal Group said the venture would likely
prove to be very successful and that talk of low pricing would
evaporate as Zenit rockets started flying out of Pacific waters
with regularity.

"They'd be foolish to give a discount," he said, "because
there's a huge demand."

Copyright 1998 The New York Times Company
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