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Companies jockey for position in changing U.S. space market

By Andrea Shalal-Esa

WASHINGTON (Reuters) - Space companies are shifting strategies to benefit from a change in how the U.S. government buys satellites, rockets and space services.

After years of billion-dollar cost overruns and schedule delays on complex satellite programs, U.S. officials are looking for smaller, less expensive spacecraft and exploring alternatives such pay-for-service deals, or packing sensors on government or commercial satellites.

Air Force General Robert Kehler, who heads the military command that oversees U.S. nuclear, satellite and cyber operations, warned thousands of top industry executives this week that big-ticket space programs would be reevaluated as part of a 60-day review ordered by Defense Secretary Chuck Hagel.

"There is no doubt that our space-based systems are expensive and will be part of that review," he said at the week-long National Space Symposium, which brought together over 9,000 experts from across the industry.

"Regardless of the outcome, we must find ways to drive costs down as we look to the future."

The White House budget proposal for fiscal 2014 includes $8 billion for unclassified space programs, about the same as this year, and billions more for additional programs in the "black world," but officials are forecasting deeper cuts in 2015.

Brigadier General Roger Teague, director of strategic plans at The Air Force Space Command, told the conference that his office had already cut costs by $985 million by reducing staffing, testing and production costs, and was targeting additional cuts of $600 million across 20 programs this year.

INDUSTRY CHANGES TACTICS

The shift is changing the way big players like Lockheed Martin Corp, Boeing Co, Northrop Grumman Corp, and smaller firms like Orbital Sciences Corp, ITT Exelis Corp, Harris Corp and Alliant Techsystems Inc map out future business plans.

"If we keep doing things the same way and expect different results in this environment, that's not going to work," said retired Lieutenant General Trey Obering, the former director of the Missile Defense Agency who now works for consulting firm Booz Allen.

Rick Ambrose, who heads space programs for Lockheed, which is building new large missile warning, protected communications and global positioning satellites for the Air Force, said Lockheed is bracing for further declines in Pentagon spending.

He said the Pentagon was likely to stick to the existing programs for core missions, such as missile warning, targeting and protected communications, all contracts held by Lockheed, even as it explores new options. But all firms were under pressure to innovate, accelerate schedules and cut costs.

Ambrose said Lockheed's space division was halfway to its goal of consolidating 1.5 million square feet of facilities and would have reduced overhead by $300 million this year.

Lockheed also builds smaller satellites, and is taking part in Air Force studies about different approaches, but Ambrose warned against rushing headlong into new acquisition programs.

He said that approach backfired during the last drawdown, when the Pentagon curtailed existing programs before leap-ahead programs matured, leaving gaps in some important capabilities.

"If you're a wing walker you never let go of a rung until you grab the next rung," he said.

SPACEX VS BOEING

Lockheed and Boeing also face competition for the biggest rockets, with the Air Force laying the groundwork for new entrants like Space Exploration (SpaceX) and Orbital Sciences.

Boeing is rapidly expanding its commercial satellite orders after losing out to Lockheed on some bigger military contracts, but sees good opportunities for its new line of smaller satellites and the prospect of hosting sensors on its wideband communications satellites in coming years.

"It's clear that they want to move away from these big mega-programs that cost a lot of money and find cheaper solutions," Craig Cooning, vice president and general manager of Boeing Space and Intelligence Systems told Reuters, citing space situational awareness and communications as promising areas.

"If you look at our business overall, we have recognized the changes in the marketplace and we have adapted for that," he said, adding that Boeing delivered 11 satellites last year and was on track to deliver 10 more this year.

The Air Force is wrapping up an analysis of alternatives for a next-generation weather satellite this summer that will likely include several of the new approaches.

Companies like Harris and Orbital Sciences are promoting the use of "hosted payloads" in which sensors are packed aboard other satellites, although government and industry officials say some technical and policy issues must still be worked out.

Harris is working with Iridium Communications on the largest hosted payload deal to date, an aircraft-tracking venture to kick off in 2015 that it says will save airlines money but also holds promise for U.S. government missions.

Meanwhile, Inmarsat PLC is getting ready to launch its new Global Express communications satellites, which it says will offer comprehensive mobile broadband services to a variety of users, including the U.S. military.

Obering said the new environment presented opportunities, but the Pentagon needed to revamp its acquisition processes to realize the benefits of technological advances in industry.

One model could be the way the Missile Defense Agency had been freed from some budget processes to rapidly develop missile defense capabilities, Obering said.

"We have to fundamentally change our acquisition approaches to do that. We have to be able to move at the speed of industry to be able to take full advantage of what ... the commercial market will be offering in the coming years," he said.

(Reporting By Andrea Shalal-Esa; Editing by Alwyn Scott and Andrew Hay)

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