Lockheed-Boeing rocket JV feels competitive heat

May 25, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Entrepreneur Elon Musk isn’t just taking on technological challenges with Tesla Motors and SpaceX. His rocket-launching business is also turning up the competitive heat on Lockheed Martin and Boeing for the first time in a decade. SpaceX in April landed a contract to launch a U.S. military GPS satellite for $83 million, 40 percent less than the two defense giants’ joint venture has been costing the government.

Now Congress is considering helping the JV, known as the United Launch Alliance, by allowing it to buy more sanctions-tainted Russian rocket engines. That’s after paying the ULA to develop its own engine, which hasn’t yet materialized. Senator John McCain, who chairs the Armed Services Committee, is one critic of the plan. Debate on the relevant spending bill is scheduled to begin on Wednesday. If Lockheed and Boeing get what they want, it will be a strike against efficiency and innovation.

The ULA joint venture was conceived in 2005 to resolve a dispute between Boeing and Lockheed, which had been competing for military rocket launches. Their battle became so heated that Boeing was suspended for 20 months from Air Force business after being accused of stealing data from Lockheed.

The Federal Trade Commission said giving the ULA a monopoly over military launches would stifle innovation, raise prices and hurt quality. But the Defense Department argued that the joint venture would benefit national security. At the time, Lockheed and Boeing were the only firms with the needed capabilities, so the Pentagon’s concerns were understandable. But the FTC turns out to have been right: the lack of competition has squelched new ideas and kept costs too high.

The error was compounded by the Pentagon’s agreeing to pay the ULA $800 million a year as a retainer. This was purportedly to provide certainty to the ULA that its maintenance and other costs would be covered. The ULA has indeed delivered nearly 100 successful launches. But the regular flow of cash can only have discouraged efficiency and innovation.

Meanwhile, the defense contractors’ lobbying machine has been humming along. Musk’s SpaceX had to sue the government – not an action any company takes lightly – to get a chance to compete for military launches. The case was settled in 2015.

Boeing and Lockheed should have seen SpaceX coming long before then. It took time for the startup launched in 2002 to hit its stride, and it experienced several failed landings in addition to two missions that ended in explosions. But in 2014, SpaceX and Boeing became NASA’s partners to send astronauts to the International Space Station, which will end the agency’s reliance on Russian crews by 2017. And last year, SpaceX successfully launched and landed the Falcon 9, which is comparable to ULA rockets but cheaper.

Yet for the contract that SpaceX just won, the ULA didn’t even bother to bid, remarkably saying its accounting systems weren’t up to the task and blaming the sanctions that could curb the import of Russian-made engines.

The ULA’s reliance on Moscow made the national-security arguments and Congress’ support of the alliance questionable from the start. The Russian government is the main owner of NPO Energomash, the maker of the RD-180 engines used by the ULA, meaning President Vladimir Putin could cut supply off at any time. With each Air Force mission using one of the engines, Russian citizens have to be at the launch site to monitor the systems.

Putin has restructured Russia’s space industry to bring various companies, including NPO Energomash, under state-owned Roscosmos. Deputy Prime Minister Dmitry Rogozin and Sergei Chemezov, who runs the government arms company Rostec, sit on the Roscosmos board. Both men were put on the U.S. sanctions list after Russia annexed Crimea and supported separatists in Ukraine.

That brings the ULA, and indirectly the Defense Department itself, uncomfortably close to funneling payments to sanctioned individuals. The Treasury says it has not designated Roscosmos or NPO Energomash as sanctioned entities because it has concluded that Rogozin and Chemezov do not have controlling interests. It’s nonetheless an extraordinary state of affairs at a time when Russia is pursuing military interests that diverge from Washington’s.

The ULA says it needs more engines from Russia and that it will take at least until 2019 to develop its own. The Defense Department is supporting the additional purchases and argues that it’s critical that the United States maintains two suppliers for rocket launches, even though it was content with the Lockheed-Boeing monopoly for years. McCain says that once the nine Russian engines approved last year are used, that should be the end of it.

The ability to launch satellites at any time is of course a national-security requirement. But relying on Russian-made products seems to defeat the purpose. SpaceX is showing the ULA the way on technology and cost. Congress has a chance to do the same with the politics.

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