At the Satellite 2006 conference in Washington, executives from the major satellite operators said their industry clearly needed to consolidate. The oversupply of transponders and dumping of capacity by several players, particularly those in the Asia Pacific region, were destabilizing their businesses. Operators wanted to merge, stabilize their prices and chart a course for profitability. This stability, they rightly believed, would benefit the supplier base: satellite manufacturers, ground equipment suppliers and launch services providers.
Fast forward to Satellite 2009 and operators have gotten their wish. The world’s four largest commercial satellite operators now control more than 80 percent of global transponder capacity. Their businesses are solid and growing despite the global economic downturn. Cash flow is strong, capacity utilization rates are ranging from 80 percent to 97 percent and operators are seeing earnings margins (EBITDA, or earnings before interest, taxes, depreciation and amortization) of more than 80 percent.
Yet despite all the good news, some operators are concerned about launch capacity. They say there aren’t enough launch services providers. They express concern that under current circumstances, launch failures could lead to serious mission delays. They also complain launches cost too much relative to prices they experienced five years ago when market demand for new satellites had reached its nadir.
The best strategy to resolve the industry’s perceived ills? Encourage even more launch services providers to enter into an already overcrowded sector at below-market rates.
But is this solution really necessary? The Federal Aviation Administration COMSTAC forecast for commercial geostationary orbiting satellite launches shows a market of 20-22 satellites per year for the foreseeable future. Without bringing any additional launch vehicles into operation, no less than nine launch systems can address this small market today: Ariane 5, Soyuz, Proton, Sea Launch, Land Launch, H-2A, Atlas 5, Delta 4, Long March with a tenth, the Falcon 9, hoping to enter the market this year. As these launch vehicles together can accommodate more than 40 commercial satellites per year, the numbers should put to rest the complaint about capacity.
Additionally, satellite operators can take advantage of multiple launch agreements, in effect package deals with a bundle of launches, securing access to space in advance at favorable prices and with priority for launch slots. Intelsat and SES already have embraced this approach. In fact they focused on being the suppliers of their customers rather than the customers of their suppliers, purchasing launch contracts in bunches from leading service providers. Through multilaunch agreements these operators benefited from preferred customer rates and assured availability of slots on the mission manifests of the industry’s top suppliers.
Arianespace, for its part, has also done its utmost to assure quality and bolster capacity in the launch market, creating the kind of stability that operators need. We listened to our customers and we made important investments in launch capabilities and reliability.
Together with the European Space Agency, we invested more than $400 million to bring the legendary Soyuz launch vehicle to our base of operations at the Guiana Space Center, French Guiana, increasing its performance for geostationary satellites weighing up to 3 metric tons. This provides operators with important launch capacity for a growing satellite market segment. It will allow up to four commercial Soyuz launches per year beginning in late 2009, adding to the storied history of the world’s most reliable launch system that has already flown more than 1,740 missions during the past 50 years.
On the ground, we have invested millions of euros to ensure that our launch facilities meet the demand for up to eight Ariane 5 launches per year. This has entailed upgrades to ground systems and repeated quality checks that help to assure as flawless a launch as possible. Two years ago, Arianespace made special arrangements to expand production of Ariane 5 so that our industrial partners could build as many as eight launch vehicles per year. That means the capability to launch up to 16 satellites in dual launch mode should the market demand exceed current capacity. Our latest $5 billion order for 35 new Ariane 5s brings to 48 the number of vehicles currently in production, which equals the capacity to launch 96 satellites over the next seven years. This significant investment demonstrates Arianespace’s commitment to the long-term success of our customers.
Perhaps some satellite operators are insisting on cut-rate launches because they romanticize about the period early this decade, just after the dot-com bust, when launch prices sank by as much as 50 percent. But the truth about that era wasn’t pretty. When prices were cut in half, suppliers could not break even and quality eroded. Those low prices lead to repeated launch failures and higher insurance rates.
Despite the rebounds in prices since 2006, launch costs remain 30 percent lower today on a per kilogram basis than they were in 2000. This cost reduction, combined with improvements in satellite power and digital compression, means that a satellite launched today is several times more efficient, more capable and more profitable than a relay platform of the same mass launched a decade ago.
Finally, the question needs to be asked: are cheap launches really the cost-saving panacea that operators claim they are? If you closely examine the economics of fielding a satellite system, you will find that the expense of a launch is not the cost driver one would think it is. According to a study by Futron Corp., lower launch prices do not spur demand for more satellites. Futron found that, “launch costs are a relatively insignificant part of the cost picture” for a typical satellite television or VSAT (very small aperture terminal) data network representing less than 3 percent of the overall cost associated with providing those services to end users during the operational life of the satellite system. Thus, a cut-rate launch at 40 percent less than fair-market price only represents less than a 2 percent reduction in the cost structure that supports the end-user satellite service.
Following the example of the world’s satellite operators who have struggled through consolidation to maintain transponder pricing and increase utilization levels, we appreciate the need for market stability. We have taken every measure to create more launch capacity, maintain the highest level of quality, and give the greatest assurance to manufacturers, ground equipment providers and satellite operators alike. Obviously, with our order book of 32 geostationary commercial satellites plus a low Earth orbit constellation to launch for 25 operators on the five continents, this is exactly what we had to do.
Jean-Yves Le Gall is chairman and chief executive officer of Arianespace.