The Denver Post Sunday, April 15, 2001
Lockheed looks for lift
Troubled space unit's hopes ride on Atlas V's May debut
By Greg Griffin
Denver Post Business Writer
As Lockheed Martin Astronautics prepares to roll out its first Atlas V, nearly a decade and $1 billion in the making, an important piece of business remains unfinished.
There is no customer.
So far, no one has stepped up to place a satellite atop the inaugural rocket, the successor to Lockheed Martin's venerable line of Colorado-built Titan and Atlas launch vehicles and rival of the Boeing Delta IV. Company officials say there's still plenty of time to line up a partner - the launch is scheduled for spring 2002 - and they're talking to several interested parties.
"It's a buyer's market right now, and the buyers can drive some hard bargains," said astronautics chief Tom Marsh. Lockheed Martin officials had hoped to have a customer lined up by the end of March but said they won't begin wringing their hands about it until October.
But the lack of a payload for the company's most important rocket launch in perhaps a decade points to larger troubles facing the giant defense contractor's Denver-based astronautics operation. In recent years, the unit was hit by a combination of low commercial demand for its rockets, intense competition from Boeing for government launches, a series of failures of its scientific-research spacecraft and the loss of a major contract for spy satellite work.
Operating profit at Lockheed Martin Space Systems, astronautics' parent division, plummeted 60 percent during the past two years, in part due to investment in the Atlas V, while employment at the unit's Jefferson County operation fell to its lowest level in 25 years. The operation is cutting employment this year by about 600 jobs, to 5,000.
Despite all this, Marsh and other Lockheed Martin executives are guardedly optimistic. They say astronautics made significant progress in 2000, which they hope to build on this year.
A successful launch of the 2001 Mars Odyssey for the National Aeronautics and Space Administration on April 7 was the first critical step toward recovery for astronautics' scientific spacecraft business. The development of the Atlas V has been nearly flawless so far, while Boeing's Delta IV suffered from engine problems last year. Atlas also fared much better than the Delta last year in new commercial orders.
And Lockheed Martin officials look forward to increased spending on defense and space programs under the Bush administration, though specifics of the defense budget aren't expected for several months.
"We're going to have to continue to perform, ... and we have to be successful winning our fair share of new business," said Albert Smith, head of the space systems division. "If we do that everyone will be happy with us."
Wall Street appears happy enough, at least about Bethesda, Md.-based Lockheed Martin Corp.'s overall health. Its stock is trading in the high $30s, nearly double its 52-week low.
But the company's space business still faces formidable challenges, analysts said.
"Things are looking up, but they're still a long way from where they'd like to be," said Paul Nisbet of JSA Research. "The company has indicated its future earnings growth won't be predominantly from space. They aren't looking to that area for real growth in the future."
Smith said space systems expects operating profits to remain steady this year at about 5.5 percent to 6 percent of sales.
Commercial satellite launches scaled back
At Lockheed Martin's Jefferson County operation, where rocket-building accounts for about two-thirds of revenues, the slumping commercial satellite-launch market continues to pose a big problem.
Because several large satellite communications companies went bankrupt in 1999 and others scaled back their plans, demand for launches fell far below what Lockheed Martin, Boeing and other rocket makers had anticipated, Nisbet said. U.S. launch companies sent just 10 commercial satellites into orbit last year, compared with 17 in 1999 and 22 in 1998, according to the Federal Aviation Administration.
The FAA estimated in 1998 that 33 commercial satellites would be launched internationally into high-earth orbit each year through 2010. The agency's current forecast calls for a more modest 30.6. That translates into about 23 launches since some satellites ride the same rocket to orbit. The demand for low-earth orbit launches, once considered the industry's true source of future growth, fell off even faster.
As a result, Lockheed Martin and Boeing found themselves with excess inventory and falling prices as they each spent billions developing their new generation of rockets. Marsh said Lockheed Martin has spent more than $1 billion developing the Atlas V, while Boeing is believed to have spent closer to $1.5 billion.
Lockheed Martin received only two launch orders in 1999, but it rebounded with 14 in 2000, which has helped reduce the inventory. Only one of the three Atlas IIIs planned for 2000 was actually launched. Original plans called for 18 Atlas III flights before the end of 2003.
"In our view, supply for launch vehicles outstrips demand two-to-one at this time," Marsh said. "That's driven the price down ... and has reduced the margins we can get on our rockets."
Marsh wouldn't say exactly how far prices have fallen, but Lockheed Martin's 2000 annual report gives a hint at the size of the pain. "Continued market and pricing pressures" on the Atlas program cost the division $85 million last year, about 20 percent of its total operating profit.
Fran Slimmer, spokeswoman for International Launch Services, a Lockheed-controlled venture that markets the Atlas, downplayed the market's effect on price.
"For the customers we work with, the top priorities are scheduling assurance and reliability. Price comes in as the third factor, though it's competitive, to be sure," she said. "It's difficult to be specific about prices because every contract is different."
Even as Lockheed and Boeing vie to capture a bigger slice of the commercial launch market, however, their share remains small compared with the business' undisputed leader, Arianespace. In early 2000, the French rocket-maker claimed 65 percent of upcoming commercial launches, while Lockheed had just 8 percent and Boeing none, according to the FAA. Each company has since added more commercial orders.
Lockheed narrows gap with Boeing on sales
Lockheed Martin traditionally does much better on the government side of the launch business, but even that has eroded significantly in recent years.
In 1998, when the U.S. Air Force awarded contracts for the first 28 launches for the new rockets - called Evolved Expendable Launch Vehicles - Boeing's Delta IV won 21.
Lockheed Martin's Titan rocket was once the leader in Air Force satellite launches and the astronautics division's biggest source of income. But space systems' government rocket sales fell $140 million last year due to reduced volume, according to the annual report. The division also attributed $55 million in lost operating profit to "a more conservative assessment of future performance on government launch vehicle programs."
Lockheed Martin, however, appears to be closing the gap with Boeing on government rocket sales. Development of the Atlas V, which uses a well-tested Russian-built engine and evolved from both the Atlas and Titan, has proceeded virtually without a hitch. The first launch of the transitional Atlas III successfully placed a commercial satellite into orbit last spring.
But the Delta's engine, a new design, ran into trouble on its transitional Delta III. After the rocket lost its first commercial payload in 1999, Delta successfully launched a dummy payload last year and has performed well in tests.
Another advantage for Lockheed Martin is that it's further along in its development of the new rocket, having continued forward as Boeing struggled with the engine problems last year. Lockheed Martin will ship the first Atlas V from its Waterton Canyon facility to Cape Canaveral, Fla., in early May. The Delta is months away from shipping, Boeing officials said, as testing continues at its Decatur, Ala., manufacturing plant.
Lockheed officials believe they've gained much of the ground lost in the race for military launch contracts and that they'll do better when the Air Force awards its second round of launch contracts, possibly later this year.
"We've got a system we can count on," Marsh said. "We feel pretty good about where we are now, and I feel the government does, too."
But Jim Albaugh, chief of Boeing Space and Communications, is equally confident.
"We had some issues last year, but we've really turned the corner as far as our engine is concerned. The engine has demonstrated the full regime of its functions, and we've run it through its entire flight sequence," Albaugh said.
"From a technical perspective, the Delta and Atlas are both solid and well engineered. The commercial marketplace will dictate if there's enough room for one or two," he said.
Boeing has signed a commercial customer for its first Delta IV launch, scheduled to lift off next March, two months before its first military launch, Albaugh said. He wouldn't name the company.
Loss of sky-spy contract cost estimated $25 billion
Rocket-building is just one part of Lockheed's business in Waterton Canyon. Astronautics' other main activities - building scientific-research spacecraft for NASA and spy satellites for the National Reconnaissance Office - also have suffered big setbacks in recent years.
The unit's credibility with NASA took a huge hit in 1999, when its Mars Climate Orbiter and Polar Lander spacecraft each failed. A success with its 2001 Mars Odyssey would help repair that damage, officials said. The spacecraft launched without a hitch April 7 aboard a Delta II, built at a Boeing plant in Pueblo, and should reach the Red Planet in October.
Meanwhile, astronautics has scaled back its classified work since Lockheed Martin lost a massive NRO spy satellite contract to Boeing in 1999.
Loss of the contract, which some industry observers peg as high as $25 billion for all of NRO's satellite-building over the next two decades, cost an estimated 500 jobs locally and many more at Space Systems' Missiles and Space Operations unit in Sunnyvale, Calif.
It also appeared to signal the end of Lockheed Martin's longstanding dominance in the classified sector of the space business and represented a huge lost opportunity for growth, said John Pike, a Washington-based military space consultant.
Engineers at Waterton Canyon are believed to have built super-sophisticated "Lacrosse" surveillance satellites for the NRO throughout the 1980s and 1990s, Pike said. But the contract for the spacecraft - capable of penetrating cloudy skies and cover of night to collect detailed images - has run out, Pike said.
"It's quite evident the Future Imagery Architecture (as the Boeing contract is known) has shifted the decisive center of gravity in this area from Lockheed to Boeing," Pike said. "The Lacrosse workforce is basically boxing up, sweeping up. It has been in shutdown mode for a while."
Without discussing details, Smith verified that some classified work is winding down at Waterton Canyon, though he said it remains a robust source of work here and at Sunnyvale.
"We still have a significant amount of people working classified because we still have to fly out that inventory. And if you look at the nature of these systems, they need a very good sustaining engineering content until they're actually delivered on orbit. So those activities will go on for a couple of years," he said. "We also have a very secure and core classified program that was not affected by that loss."
Hopes ride on Atlas V's scheduled liftoff in May
In the meantime, preparations are under way for a big celebration at the Waterton Canyon plant in two weeks for the Atlas V's rollout.
VIPs from Lockheed Martin, the Air Force and various aerospace companies are expected to christen the rocket before it's painstakingly transported to Denver International Airport. There, the 205-foot-long rocket will be loaded on a massive Ukraine-built Antonov cargo plane and flown to Cape Canaveral, where final tests and preparations will be made.
If all goes well, and a customer signs on, the Atlas V will make history next May.
"It'll be 30 minutes of terror and then the ultimate in excitement when the spacecraft separates from the rocket," said Michael Gass, Lockheed Martin's Atlas program director. "That's the moment we're focusing on. That's when you know you've succeeded and your job is done."
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