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SpaceX Sues the Government Over $2 Billion In Rocket Contracts

Rich Smith, The Motley Fool

Seven months ago, the Defense Department made a controversial call. In a trio of contracts announced on its daily digest of contract awards, the Pentagon announced it was awarding these rocket development contracts:

  • A $967 million deal to United Launch Services, a subsidiary of the United Launch Alliance (ULA) joint venture formed between Boeing (NYSE: BA) and Lockheed Martin (NYSE: LMT).
  • A $791.6 million contract to Orbital Sciences, part of Northrop Grumman (NYSE: NOC).
  • And one worth $500 million to Blue Origin, the space launch venture created by Amazon.com (NASDAQ: AMZN) CEO Jeff Bezos -- and financed by $1 billion worth of sales of his own Amazon stock annually.
Rocket landing on floating barge

Image source: Getty Images.

What's missing from this picture?

Funding rocket development per se isn't controversial. For years, the U.S. space program has largely depended upon Russian-built engines to power American rockets -- making development of a new American rocket, independent of Russian parts, an important national security objective. But did you happen to notice which company is missing from the above list?

That's right: SpaceX -- the company that led the charge in favor of freeing the U.S. from reliance upon Russia's RD-180 rocket engine back in 2015. The Air Force handed out more than $2.25 billion in contracts -- but not $1 of these awards went to SpaceX.

Why not?

Two possible reasons

Let's look at the awards in question. Using nearly identical language, each space contract announced in October described the disbursal of monies "for the development of a Launch System Prototype for the Evolved Expendable Launch Vehicle program." This may be our first clue: The Pentagon sought expendable rockets for satellite launch, rather than the reusable rockets that are SpaceX's claim to fame.

To achieve this goal, the Pentagon decided to fund development of ULA's Vulcan Centaur launch system, Northrop Grumman's OmegA launch system, and Blue Origin's New Glenn launch system. It did not, however, give any money to SpaceX, which had bid three separate reusable rockets: Falcon 9, Falcon Heavy, and Starlink.

Here's where things get interesting. By all accounts, Northrop Grumman is designing OmegA to be an expendable (i.e., use once and discard) rocket. ULA, however, while continuing to design Vulcan Centaur to be expendable, plans to eventually upgrade its rocket, switching out the expendable Centaur second stage for a new refuelable-in-orbit ACES second stage -- making the rocket at least partly reusable.

And Blue Origin? Jeff Bezos always intended his rockets to be reusable.

So if the argument for not giving SpaceX a Launch Services Agreement (LSA) contract is because its rockets are reusable, not expendable, that argument simply falls flat. Two of the other three companies winning such "expendable" rocket contracts are also looking to build reusable rockets -- just as SpaceX does.

Heavy, heavier, heaviest

The Pentagon also noted that its aim in subsidizing development costs was to ensure there will always be at least two domestic, commercial launch-service providers capable of launching the heaviest and most complex payloads for the U.S. government. Could this be the reason SpaceX was left out in the cold?

With an ability to lift more than 25 metric tons of payload to low earth orbit (LEO), ULA says Vulcan Centaur will offer the Air Force "greater capability than any currently available single-core launch vehicle" -- seemingly a strong argument in favor of giving ULA the biggest contract of the bunch.

Northrop Grumman's OmegA rocket, meanwhile, has been reported to be aiming for a 10.1-ton payload to geosynchronous transfer orbits (GTO). In LEO terms, that probably translates to about a 24- to 28-ton payload.

And Blue Origin? Their New Glenn rocket is designed to top even that, with a targeted LEO lift capacity of 45 tons.

Now, these are all impressive figures. And yet, until one of these rockets is actually built and actually flies, their boasts of improved payload capacity remain unproven. Meanwhile, SpaceX's Falcon 9 already offers 22.8-ton payloads to LEO, and its Falcon Heavy rocketship -- which has already flown twice, and successfully -- has a 63.8-ton payload capacity to LEO, dwarfing the numbers posited by any of the three companies that actually won LSA contracts in October. Together, says SpaceX, its two operational rockets have already flown more than 70 times in support of commercial and government customers, and "won multiple competitive awards at price levels that have saved the [Defense Department] hundreds of millions of dollars."

And that's before we even consider Starship -- which SpaceX bid for an LSA alongside its Falcon 9 and Falcon Heavy launch vehicles. If it lives up to its billing, Starship will offer the Pentagon maximum payload of 150 tons to LEO!

The basis of SpaceX's complaint

Considering these facts and figures, it's understandable that SpaceX is a bit miffed that it was left out of the Pentagon's largesse last year.

As the company explains in its complaint, filed in the U.S. Court of Federal Claims on May 22, the Air Force's selection process in awarding the LSA contracts was somewhat "opaque," but seems to have dinged SpaceX's bid for having the highest risk factor of the four bidders -- a fact the company attributes to the Pentagon's focusing too much on its Starship rocket (which, admittedly, is still in development). SpaceX alleges that the Pentagon discounted the fact that SpaceX also bid two other rockets in service today, one of which has a greater payload capacity than any of the other still-in-development rockets proposed by its rivals.

Moreover, says SpaceX, its bid envisions using its existing, operational Falcon 9 and Falcon Heavy vehicles for all missions set to occur before late 2025. Starship would only be used for a handful of missions beginning in 2025. 

Given that operational rockets by definition have less development risk than systems still on the drawing board, SpaceX argues the Air Force's decision to leave it out of the LSA program was unfair, and is asking the court to "enjoin any further investment by the Government under the LSAs and any further performance by ULA, Blue Origin, and Northrop under the LSAs," reevaluate the LSA proposals, and reopen the competition.

Why this is important to SpaceX

Admittedly, there's also a counterargument here: Because the two rockets SpaceX says the Air Force gave short shrift to -- Falcon 9 and Falcon Heavy -- are already in operation, the company doesn't actually need government money to develop them. And the one SpaceX rocket that actually does need development money -- Starship -- may in fact be higher risk than the Vulcan Centaur, OmegA, and New Glenn rockets that the Air Force decided were lower risk.

If that was the Pentagon's logic in deciding to fund development at ULA, Northrop, and Blue Origin -- and not at SpaceX -- then it might actually make some sense.

Regardless, it's no surprise that SpaceX is picking a fight here, and it's because of what comes next. Sometime next year, the Pentagon plans to start Phase 2 of LSA, dubbed Launch Service Procurement. There, the Pentagon will pick two companies and award them -- and only them -- approximately 25 national security satellite-launch contracts running through 2027.

Granted, there's no official impediment to SpaceX for bidding on these launch contracts. But it seems likely that after sinking $2.25 billion into Vulcan Centaur, OmegA, and New Glenn in Phase 1, the Air Force might be inclined to favor these rockets in the more lucrative LSA Phase 2 -- and that poses a real danger to SpaceX.

As SpaceX states in its complaint, what it really wants is to ensure a level playing field for competition in Phase 2. SpaceX may need to win this lawsuit in order to get it.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.