SpaceX's Lower Cost Defies Boeing's Past

If SpaceX delivers on its plan to send astronauts into space for nearly 40% less than Boeing can, NASA could reap even bigger cost savings as the upstart company challenges decades-old practices in the industry.

Under the contracts announced last month, Boeing (BA) could get up to $4.2 billion to ferry passengers to the International Space Station (ISS), while SpaceX will get up to $2.6 billion for the same requirements.

SpaceX founder Elon Musk, who shook up the car and payment industries with Tesla (TSLA) and PayPal, wants to make space flight more affordable. A Boeing-Lockheed Martin (LMT) rocket joint venture is also looking to the tech world by partnering with Amazon (AMZN) founder Jeff Bezos' Blue Origin space venture.

Production of the so-called space taxis was halted recently due to a protest from losing bidder Sierra Nevada, which says that its proposal was cheaper than the winners and on par with them in technical areas. But on Oct. 9, NASA said that the production delay "jeopardized" the ISS and told Boeing and SpaceX to resume their projects.

The Weight Of History

While NASA is looking to reduce costs, the rejection of Sierra Nevada's cheaper bid and the inclusion of Boeing's pricier one also points to the space agency's other priority: reliability.

Boeing has worked with NASA since the dawn of the space age and has a proven track record that allowed it to command a higher sum. Its Apollo command module put Neil Armstrong on the moon. But Boeing's history may be weighing on its costs.

"Boeing's cost structure is higher than SpaceX — that's just a fact," said Marco Caceres, senior space analyst at the Teal Group.

Because the aerospace giant has been around longer, it most likely has an older, more experienced workforce with higher wages and labor costs, he added.

But the biggest cost differences likely come from manufacturing processes. Boeing builds its Delta rocket and Atlas V launchers in a vertical position, while SpaceX's Falcon 9 rockets are assembled horizontally, which is easier and saves on time.

Meantime, SpaceX is a vertically integrated company, building all of its parts in-house, with no subcontractors. Boeing employs numerous subcontractors to build components, which adds to costs.

"When you become a more established company, you can't be a specialist in everything," Caceres said.

'Very Different Hardware'

SpaceX and Boeing didn't respond to questions about their cost differences. NASA said in a statement that the dollar figures awarded are for the total potential value of the contracts, including the cost of certification and the maximum value for six post-certification missions.

"Because Boeing and SpaceX are using very different hardware and are using different development, operation and management approaches, they have different prices for their respective integrated crew transportation solutions," NASA told IBD.

Cost hasn't been an issue for Boeing in the past because the government hadn't emphasized saving money until now, according to David Livingston, a professor at the University of North Dakota's School of Graduate Studies of Space.

Yet despite SpaceX's seeming advantage in estimated costs, the reality can be different, he pointed out.

"You don't know final costs because things can always crop up and delay and increase costs," he said. "And you don't know operating costs until you start operating.

Boeing also has something that SpaceX can't build or pay for — experience in getting a human-grade capsule into space.

So far, SpaceX has launched its Dragon spacecraft to the ISS only with cargo. Sending humans into space requires a more advanced system.

"Developing a human-rated vehicle is a complex effort," Caceres said. "You have to build in redundant systems in case there is failure.

Because of the complexity in building a human-grade capsule, he said that SpaceX might not meet NASA's 2017 timeline. NASA too has doubts about SpaceX.

Boeing received higher rankings than SpaceX in likelihood of sticking to a timetable, according to a NASA memo on the space taxi bids that the Wall Street Journal reviewed. Boeing also beat SpaceX in technical maturity and got an "excellent" rating for "mission suitability" vs. SpaceX's "very good" rating.

Overall, Boeing received the top "very high confidence" rating in delivering what NASA wants vs. SpaceX's "high confidence." The agency noted uncertainties over SpaceX components meant to protect against radiation that haven't yet been made or tested.

So NASA might keep both Boeing's and SpaceX's space taxis in its hangars. The two systems, though designed to do the same thing, could have different features — making one, for example, better suited for a mission with sensitive scientific cargo.

Caceres believes that both systems have a place with NASA, which would have a backup in case something goes wrong and would continue to see cost benefits from competition.

"NASA's goal is to have the most reliable vehicle on the market," he said. "Even if (the space taxi) is twice as expensive, it would still be cheaper than what NASA was used to paying for the space shuttle."