By Andrea Shalal-Esa
WASHINGTON, Oct 20 (Reuters) - The U.S. Air Force has talked for years about attracting more companies to the military satellite business to stir competition and cut costs. But progress has been halting at best.
Now, just as the U.S. military is finally revamping its approach, cuts in defense spending threaten to undermine even the modest progress that is being made.
Billions of dollars of new contracts are at stake, both for legacy satellite and rocket launch providers such as Lockheed Martin Corp and Boeing Co, and newcomers trying to break into the market.
The Government Accountability Office, a congressional research arm, last month estimated that the U.S. military, NASA and other government agencies would spend $44 billion just to launch satellites over the next five years. Billions more would be spent on building the spacecraft.
But military and industry leaders say the efforts to save money and attract competitors may falter without the seed money needed to work on prototypes and projects studying whether smaller, cheaper satellites can provide the missile warning, weather forecasting and protected communications services now handled by complex, large satellites that each cost billions of dollars.
"Any delay in getting a budget means that I lose the opportunity to get those activities going or to sustain them," Lieutenant General Ellen Pawlikowski, who runs Air Force Space Command's Space and Missile Systems Center, told Reuters.
"If I don't do those things, then I don't have the answers to do anything but go build clones" of existing systems, which would undermine the Air Force's efforts to use new developments and cheaper alternatives developed in the interim.
Executives at smaller companies such as Exelis Corp and Harris Corp voice similar concern.
"When budgets get tight everybody hunkers down and doesn't do anything new and creative," said Adam Harris, vice president for government sales at privately held Space Exploration Technologies, or SpaceX, which has invested about $1 billion to develop new rockets and associated infrastructure to launch satellites for NASA and the U.S. military.
Harris and others say tighter budgets could worsen problems already faced by the smaller companies, including rules that still favor dominant players such as Lockheed, Boeing and Northrop Grumman Corp.
U.S. officials insist they are committed to creating more competition and benefiting from innovations in the commercial market. But they say satellites are so vital to national security that they must move ahead judiciously.
"We are very serious about this, and I think we do have evidence to show we are driving this way," Pawlikowski told Reuters in a recent interview. "But I also can't put at risk the potential loss of a billion-dollar satellite."
The Air Force has in recent years mapped out how new players can get into the rocket launch business, and plans to award some smaller contracts for putting government cameras and other sensors on commercial satellites. But those moves have taken years longer than many even in government had hoped.
The new approach, called "disaggregation," uses smaller, less complex satellites for some missions. These can be built more quickly and launched on less costly rockets.
The change would make the U.S. satellite network more resilient to enemy attacks by spreading tasks over more platforms, making it harder for one disruption to take out a large swath of capability. That's seen as critical, given moves by China and others to develop ways to disrupt U.S. satellites.
It would also give the Pentagon more budget flexibility, allowing it to buy needed satellite capacity one piece at a time, instead of having to fund the mega-satellites it now uses, said Pawlikowski. She cautioned, however, that the overall cost of space programs might not fall dramatically.
One key part of the Air Force's new approach is aimed at reducing the cost of launches provided by the current sole provider, a Boeing-Lockheed joint venture called United Launch Alliance (ULA), by bringing in new entrants and buying numbers of launch services at a time to capture economies of scale.
Boeing and Lockheed used to compete for launch contracts but won approval for the venture in 2006 after they promised the move would save money.
Now SpaceX and Orbital Sciences Corp are trying to break into that business.
SpaceX, which has developed a rocket big enough to launch even large-scale U.S. government satellites, has been awarded several Air Force contracts to launch smaller-scale demonstration satellites, but it still has hurdles to clear before it can compete for launches of larger satellites.
Orbital builds medium-sized rockets but hopes that moves into smaller satellites will allow it to get a share of the lucrative launch market as well.
The current Air Force plan would give the ULA joint venture 36 more launches in coming years, while making 14 launches potentially available to new entrants starting in 2017.
Harris of SpaceX said ULA also received about $1 billion a year in "launch capability" funding on top of launch contracts.
"The business impediments are still definitely there," Harris said. "It's not a level playing field."
Orbital Sciences, which builds the Antares rocket, said the government's efforts were well-intended, but it continued to lock in "block buys" of heavy launches by ULA instead of moving to less expensive commercial options.
"Total mission costs are not being addressed in an aggressive and meaningful way when block buys of launchers that each cost hundreds of millions of dollars are locked in for the next decade, at a time when new lower-cost, commercially based alternatives are being successfully introduced," the company said in a statement provided to Reuters.
Orbital is also hampered by a requirement that government satellites be prepared for launch while standing up as opposed to lying on their side, a practice more common in the commercial sector.
Such rules make it difficult for smaller firms to compete, said Brett Lambert, who retired in August as the Pentagon's industrial policy chief.
"This department has been ... amazing at making sure that we open the door to competition, but what we weren't expecting ... is that there's a screen door - and that screen door is about process," Lambert told Reuters. "We're working on it, but it takes time."
Still, Harris, Exelis and others are keeping close watch on the reform drive, eager to benefit from more competition.
Lockheed, Boeing and Northrop are also jockeying to maintain their market position by developing smaller satellites, and exploring options in the so-called hosted payload market, in which government sensors can be loaded on commercial satellites.
Lockheed, for instance, is cutting costs throughout its satellite business while also working to expand options for hosted payloads, said Mark Valerio, vice president and general manager for Lockheed's military space line of business.
One litmus test is in how the Air Force proceeds with the need to develop new weather forecasting capabilities. Eric Webster, vice president and director of weather systems at Exelis, said he worried that budget problems could delay the Air Force's effort to replace aging military weather satellites.
Decisions on that program are due this fall.
A complex $15 billion satellite system that was being developed by Northrop Grumman for the Pentagon, NASA and the National Oceanic Atmospheric Administration was broken up by the White House in 2010, and the military part was later canceled.
Continued budget cuts could reduce the chances of a new program since weather forecasting needs are generally a lower priority than missile warning or secure communications.
"The option they keep looking at is, maybe we won't do anything," Webster told Reuters in an interview, referring to Air Force and Pentagon officials.
"The weather satellites are a microcosm of the larger issue. There's interest and maybe a little intent on how to do things differently, but there certainly hasn't been a full commitment," he said.
Exelis is working on two contracts to study different approaches to supplying the needed weather data, instead of building another large-scale weather satellite.
One proposal calls for the U.S. military to pay for imaging sensors that would be launched by Canada on telecommunications satellites flying over the earth's poles.
Webster said the Canadian satellite approach would save a lot of money, but still required investment from the U.S. military at a time when even relatively small programs in hundreds of millions of dollars are under extreme scrutiny.
Douglas Loverro, the Pentagon's point man for space policy, acknowledged that budget cuts could slow that kind of innovation. But they could also build momentum for change.
"I don't think it changes the ultimate strategy that we're pursuing," Loverro told Reuters in a recent interview.
"In some ways, it provides an impetus to go ahead and get you there faster because you have to save money."