By Andrea Shalal-Esa
WASHINGTON, Oct 20 (Reuters) - The U.S. Air Force has talkedfor years about attracting more companies to the militarysatellite business to stir competition and cut costs. Butprogress has been halting at best.
Now, just as the U.S. military is finally revamping itsapproach, cuts in defense spending threaten to undermine eventhe modest progress that is being made.
Billions of dollars of new contracts are at stake, both forlegacy satellite and rocket launch providers such as LockheedMartin Corp and Boeing Co, and newcomers tryingto break into the market.
The Government Accountability Office, a congressionalresearch arm, last month estimated that the U.S. military, NASAand other government agencies would spend $44 billion just tolaunch satellites over the next five years. Billions more would be spent on building the spacecraft.
But military and industry leaders say the efforts to savemoney and attract competitors may falter without the seed moneyneeded to work on prototypes and projects studying whethersmaller, cheaper satellites can provide the missile warning,weather forecasting and protected communications services nowhandled by complex, large satellites that each cost billions ofdollars.
"Any delay in getting a budget means that I lose theopportunity to get those activities going or to sustain them," Lieutenant General Ellen Pawlikowski, who runs Air Force SpaceCommand's Space and Missile Systems Center, told Reuters.
"If I don't do those things, then I don't have the answersto do anything but go build clones" of existing systems, whichwould undermine the Air Force's efforts to use new developmentsand cheaper alternatives developed in the interim.
Executives at smaller companies such as Exelis Corp and Harris Corp voice similar concern.
"When budgets get tight everybody hunkers down and doesn'tdo anything new and creative," said Adam Harris, vice presidentfor government sales at privately held Space ExplorationTechnologies, or SpaceX, which has invested about $1 billion todevelop new rockets and associated infrastructure to launchsatellites for NASA and the U.S. military.
Harris and others say tighter budgets could worsen problemsalready faced by the smaller companies, including rules thatstill favor dominant players such as Lockheed, Boeing andNorthrop Grumman Corp.
U.S. officials insist they are committed to creating morecompetition and benefiting from innovations in the commercialmarket. But they say satellites are so vital to nationalsecurity that they must move ahead judiciously.
"We are very serious about this, and I think we do haveevidence to show we are driving this way," Pawlikowski toldReuters in a recent interview. "But I also can't put at risk thepotential loss of a billion-dollar satellite."
NEW POLICY SLOW TO TAKE EFFECT
The Air Force has in recent years mapped out how new playerscan get into the rocket launch business, and plans to award somesmaller contracts for putting government cameras and othersensors on commercial satellites. But those moves have takenyears longer than many even in government had hoped.
The new approach, called "disaggregation," uses smaller,less complex satellites for some missions. These can be builtmore quickly and launched on less costly rockets.
The change would make the U.S. satellite network moreresilient to enemy attacks by spreading tasks over moreplatforms, making it harder for one disruption to take out alarge swath of capability. That's seen as critical, given movesby China and others to develop ways to disrupt U.S. satellites.
It would also give the Pentagon more budget flexibility,allowing it to buy needed satellite capacity one piece at atime, instead of having to fund the mega-satellites it now uses,said Pawlikowski. She cautioned, however, that the overall costof space programs might not fall dramatically.
One key part of the Air Force's new approach is aimed atreducing the cost of launches provided by the current soleprovider, a Boeing-Lockheed joint venture called United LaunchAlliance (ULA), by bringing in new entrants and buying numbersof launch services at a time to capture economies of scale.
Boeing and Lockheed used to compete for launch contracts butwon approval for the venture in 2006 after they promised themove would save money.
Now SpaceX and Orbital Sciences Corp are trying tobreak into that business.
SpaceX, which has developed a rocket big enough to launcheven large-scale U.S. government satellites, has been awardedseveral Air Force contracts to launch smaller-scaledemonstration satellites, but it still has hurdles to clearbefore it can compete for launches of larger satellites.
Orbital builds medium-sized rockets but hopes that movesinto smaller satellites will allow it to get a share of thelucrative launch market as well.
The current Air Force plan would give the ULA joint venture36 more launches in coming years, while making 14 launchespotentially available to new entrants starting in 2017.
Harris of SpaceX said ULA also received about $1 billion ayear in "launch capability" funding on top of launch contracts.
"The business impediments are still definitely there,"Harris said. "It's not a level playing field."
Orbital Sciences, which builds the Antares rocket, said thegovernment's efforts were well-intended, but it continued tolock in "block buys" of heavy launches by ULA instead of movingto less expensive commercial options.
"Total mission costs are not being addressed in anaggressive and meaningful way when block buys of launchers thateach cost hundreds of millions of dollars are locked in for thenext decade, at a time when new lower-cost, commercially basedalternatives are being successfully introduced," the companysaid in a statement provided to Reuters.
Orbital is also hampered by a requirement that governmentsatellites be prepared for launch while standing up as opposedto lying on their side, a practice more common in the commercialsector.
Such rules make it difficult for smaller firms to compete,said Brett Lambert, who retired in August as the Pentagon'sindustrial policy chief.
"This department has been ... amazing at making sure that weopen the door to competition, but what we weren't expecting ...is that there's a screen door - and that screen door is aboutprocess," Lambert told Reuters. "We're working on it, but ittakes time."
Still, Harris, Exelis and others are keeping close watch onthe reform drive, eager to benefit from more competition.
Lockheed, Boeing and Northrop are also jockeying to maintaintheir market position by developing smaller satellites, andexploring options in the so-called hosted payload market, inwhich government sensors can be loaded on commercial satellites.
Lockheed, for instance, is cutting costs throughout itssatellite business while also working to expand options forhosted payloads, said Mark Valerio, vice president and generalmanager for Lockheed's military space line of business.
SATELLITE LITMUS TEST
One litmus test is in how the Air Force proceeds with theneed to develop new weather forecasting capabilities. EricWebster, vice president and director of weather systems atExelis, said he worried that budget problems could delay the AirForce's effort to replace aging military weather satellites.
Decisions on that program are due this fall.
A complex $15 billion satellite system that was beingdeveloped by Northrop Grumman for the Pentagon, NASA and theNational Oceanic Atmospheric Administration was broken up by theWhite House in 2010, and the military part was later canceled.
Continued budget cuts could reduce the chances of a newprogram since weather forecasting needs are generally a lowerpriority than missile warning or secure communications.
"The option they keep looking at is, maybe we won't doanything," Webster told Reuters in an interview, referring toAir Force and Pentagon officials.
"The weather satellites are a microcosm of the larger issue.There's interest and maybe a little intent on how to do thingsdifferently, but there certainly hasn't been a full commitment,"he said.
Exelis is working on two contracts to study differentapproaches to supplying the needed weather data, instead ofbuilding another large-scale weather satellite.
One proposal calls for the U.S. military to pay for imagingsensors that would be launched by Canada on telecommunicationssatellites flying over the earth's poles.
Webster said the Canadian satellite approach would save alot of money, but still required investment from the U.S.military at a time when even relatively small programs inhundreds of millions of dollars are under extreme scrutiny.
Douglas Loverro, the Pentagon's point man for space policy,acknowledged that budget cuts could slow that kind ofinnovation. But they could also build momentum for change.
"I don't think it changes the ultimate strategy that we'repursuing," Loverro told Reuters in a recent interview.
"In some ways, it provides an impetus to go ahead and getyou there faster because you have to save money."
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