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Boeing and SpaceX to launch astronauts: Bad news for Virgin Galactic?
The ISS was originally designed and tested to provide an operational lifetime of 15 years; this period passed in November 2013. In January 2014, NASA announced its intention to extend ISS operations until 2024, giving a new 26-year life span to the station. However, at the same time, NASA’s budget has been falling in real terms and the agency has had to develop new relationships with private enterprises, such as SpaceX, Orbital Sciences and Sierra Nevada, in an attempt to allow competitive forces to drive down the cost of rocket launches. Such companies have therefore been used for a number of projects including the transport of cargo and scientific experiments to the ISS in recent years. NASA also has greater ambitions in terms of deep space missions and therefore needs to free up operational capacity to focus on these projects, such as the Orion spacecraft being built with Lockheed Martin. Furthermore, concerns over the continued use of Russian Soyuz rockets (at $70m per seat) since the retirement of the US space shuttle in 2011, have also been raised by Congress following a breakdown in relations between the US and Russia over the Crimean region and subsequent souring of NASA-Russia relations. This has resulted in a suspension of contact between NASA and Russian government representatives unless in relation to specifically excepted activities, namely ISS operations. This matches the US policy of banning Chinese businesses from working with NASA, meaning that China is developing its own space station and independently advancing space technologies. This may have a negative long term impact given the rise in innovation in Asia and Russia.
Nevertheless, Commercial Crew Transportation Capacity contracts have therefore been awarded to Boeing ($4.2bn) and SpaceX ($2.6bn). The figures quoted are the maximum potential values of FAR*-based firm fixed price contracts (*Federal Acquisition Regulations). According to the NASA press release:
“The contracts include at least one crewed flight test per company with at least one NASA astronaut aboard to verify the fully integrated rocket and spacecraft system can launch, maneuver in orbit, and dock to the space station, as well as validate all its systems perform as expected. Once each company’s test program has been completed successfully and its system achieves NASA certification, each contractor will conduct at least two, and as many as six, crewed missions to the space station. These spacecraft also will serve as a lifeboat for astronauts aboard the station.”
The companies are due to launch NASA astronauts in 2017, using their CST-100 (Boeing) and Dragon (SpaceX) vehicles. Importantly, both Boeing and SpaceX will be able to sell human space transportation services to other customers in addition to NASA once they obtain certification. This may eventually give private individuals access to the planned Bigelow Aerospace space station, which will be for commercial use and is due to be launched in the near future, having been set back by budget constraints in the last few years due to the price of launches.
The Virgin Galactic sub-orbital space tourism project may be severely affected by these contracts. Virgin now has two or three years at most to exploit its space tourism venture (which hasn’t actually launched yet) before Boeing and SpaceX will be able to take passengers on a much more impressive journey. If the Bigelow Aerospace private space stations become operational (test modules are due to be launched in 2015) as well, Virgin will not have a spacecraft capable of transporting passengers to these modules and will quickly become the ‘budget’ and inferior space tourism option. Given the once in a lifetime cost that consumers are likely to associate with paying for a Virgin Galactic flight, if SpaceX and Boeing are able to reduce the costs of full commercial space flight, customers may prefer to wait until these options are available and simply ignore Virgin. This puts a lot of pressure on Virgin to deliver its service and to invest heavily in orbital space flight, without the support of NASA.
As the US space industry becomes increasingly privatized, the capital intensive and intellectual property heavy nature of the sector will likely mean that only a few companies will maintain dominance in the market, as has been the case with the aircraft industry. Boeing and SpaceX are now in prime position to take leading roles in the market, over and above other competitors such as Blue Origin and Sierra Nevada, giving them a very substantial first-mover advantage. Indeed, Sierra Nevada has since confirmed that they have filed a legal challenge to the contract selection process since they believe their solution would have saved $900m in public money.
On the face of it, Boeing and SpaceX appear to have some key business strengths that made the difference in awarding the contracts. Both companies have a high level of past performance in association with NASA, with SpaceX already successfully delivering cargo to the space station and Boeing being the prime ISS contractor, employing some 1,500 people to work on their space station services. These historic contracts have also allowed the companies to build relationships with NASA as a client and develop vital trust in the delivery of complex projects. In addition, both Boeing and SpaceX have considerable financial stability given the diversity and size of Boeing and the backing of multi-billionaire, Elon Musk, for SpaceX. Innovation, cost and technical ability may not therefore have been enough for competing companies such as Sierra Nevada.
Unfortunately for Sierra Nevada, research-led business models carry significant risks due to the tight rope that must be walked to secure large contracts. Diversification then becomes very important as a strategy so that the loss of a contract does not hinder the future performance of the company. Boeing clearly understands this as the company is involved in a wide range of industries from which it can draw synergies, including commercial airplanes, defense, space and security. SpaceX is a much younger company, having started in 2002, but already has substantial business in commercial satellite launches, as well as being part of the wider Elon Musk network of companies, which include Tesla Motors. This wider diversification has allowed the two companies to invest heavily in more ambitious plans.
The contract that has been agreed is a firm fixed price contract. This means that the contractor assumes all cost risk. For this type of contract, NASA must have felt that market conditions will remain stable and financial risks will be insignificant, in that the contracts will not be broken through an inability to fund the services. Whilst the incentive for the contractor is that for each $1 cost saving, they will obtain an additional $1 in profit, cost cutting is a dangerous route to follow given the complexity and high profile nature of the launches. Sierra Nevada’s $900m cost saving may therefore have been deemed unachievable in the long term, cursed with Alan Shephard’s (one of the first US astronauts) famous quote that “it’s a very sobering feeling to be up in space and realize that one’s safety factor was determined by the lowest bidder on a government contract”.
For more information on SpaceX, read our case study, ‘SpaceX: Monetizing space exploration’.
For more information on Virgin Galactic, read our case study, ‘Virgin Galactic: The pioneering adventure into space tourism’.