The Case Against SpaceX, Part II

My commentary last week on the risks run by NASA in relying on non-traditional launch providers attracted over 10,000 readers, which is a gratifyingly large audience for such an arcane topic. However, some readers were incensed by my criticism of SpaceX, the best known of the new commercial launch companies. Several, including SpaceX spokesman Robert Block, submitted comments alleging that my post was incomplete, misleading, or motivated by my business relationships with other launch companies such as Lockheed Martin.

I plead guilty to the charge that the piece was incomplete -- I had much more research material than could reasonably be fit into a single blog posting. This week's commentary will provide some of that additional material, since it speaks to the points raised by my critics. However, I'd first like to note that last week's piece actually had some positive things to say about SpaceX and its founder, Elon Musk. I said that Musk "epitomizes the American entrepreneurial spirit," that he has risked over $100 million of his own money on the venture, that SpaceX seems to be "doing all the things necessary to minimize costs," and that the company "has delivered much of what it promised." I also conceded that some of the congressional opposition to SpaceX is politically motivated.

So last week's commentary wasn't a one-sided screed. But it did raise troubling questions about SpaceX's performance to date, especially with regard to schedule delays and pricing commitments. In addition, it cast doubt on a business strategy that seems to be at variance with the experience of every established launch provider in the aerospace sector -- including the Chinese, who were thought to be the lowest-cost source of launch services in the global market.

My main concern in raising these issues was that NASA not become overly dependent on an unproven launch provider -- one that only achieved its first launch success 32 months ago, but now says it will soon be ready to loft U.S. astronauts into orbit. With that in mind, I thought I would focus this week on how the company's track record compares with that of established launch providers, and why the assumptions made in its business strategy aren't likely to pan out in the real world.

Elon Musk's public pronouncements about the launch business fall into a long tradition in America of boosters who make bold claims for ventures in which they deeply believe. For example, in an article that appeared in Aviation Week & Space Technology on December 13, Musk said he was "highly confident" that his Falcon 9 rocket and Dragon space capsule could visit the International Space Station by mid-2011 (in other words, right about now); he said that future versions of the Dragon capsule would be able to land in an area "the size of a helipad, refuel and take off again;" and he equated the gravity forces on astronauts generated by launch in his existing capsule to what would be experienced on a ride "in an amusement park."

Musk's enthusiasm is infectious and inspiring, but SpaceX's performance to date doesn't measure up to the rhetoric. SpaceX has only mounted seven launches since its inception, three of which were catastrophic failures. By way of comparison. Lockheed Martin's family of Atlas boosters has seen 97 consecutive launches without a single failure. The United Launch Alliance in which traditional providers Lockheed Martin and Boeing are partnered to offer both Atlas and Delta launch vehicles has had 50 successful launches in a row.

SpaceX supporters contend this is an unfair comparison, because all of the company's launch failures occurred with the Falcon 1 vehicle that the company no longer offers. Both launches of the much bigger Falcon 9 vehicle last year were successful, they point out -- which is crucially important, since that is the rocket that SpaceX plans to use for supplying the space station. However, two launches isn't much of a track record, and those launches were far from flawless. For instance, the trade press reported after the initial Falcon 9 launch in June of last year that "roll torque" from the first stage engines had produced a "twisting motion" on lift-off, that an overheated actuator had caused "dramatic spin" in the second stage, and that restart of the second-stage engines did not occur as planned.

That's a lot of problems for a single launch, and concerns are hardly alleviated by Mr. Musk's description of the second-stage roll as a "non-fatal situation" (Musk admitted at the time he was "not happy" with the restart attempt on the second-stage engine). A series of tweaks presumably resolved these issues, because six months later the company conducted a second launch of the Falcon 9 vehicle that resulted in SpaceX becoming the first private company to ever launch a capsule into space, return it to earth and then recover it. But that launch too was less than perfect, with technicians during the final days before liftoff deciding to trim off four feet of rocket-motor nozzle extensions with metal shears to address an unexpected problem with cracking. Aviation Week described this unorthodox move in the headline of its story on the second Falcon 9 launch as "shear magic."

Let's keep in mind that what I'm describing here are the only two launches of SpaceX's main rocket that have been accomplished to date. Both occurred last year, and it isn't so clear that another one will happen this year. The company is trying to convince NASA to combine two contracted test flights into one to save time and money, since last year's initial test flight under a NASA commercial space contract was years late and used up most of the money allocated for three such tests. Even if NASA elects to merge the two remaining test launches, it will still need to spend more money than it was originally planning to verify that Falcon 9 and the Dragon capsule are suitable for space-station operations.

What this latest gambit illustrates is that SpaceX engages in the same kinds of bureaucratic maneuvers that it derides traditional launch providers for pursuing. By the same token, it refuses to acknowledge instances in which traditional launch providers have exhibited the kind of entrepreneurial spirit SpaceX claims to have pioneered. Thus the fact that Boeing and Lockheed Martin have expended $4 billion in corporate funds to develop the Atlas and Delta launch vehicles gets short shrift -- as does the startling rate of innovation Lockheed Martin exhibited at the beginning of the last decade when it unveiled a new version of the Atlas launch vehicle every year for four straight years, all of them on cost and on schedule. Unlike SpaceX launches, which to date have been mainly test flights, the Atlas vehicles typically debuted by flying full-up missions for paying customers.

The bottom line on SpaceX's track record is that it's simply too soon to say if the company can be a safe and reliable provider of launch services in the way that traditional providers like Boeing and Lockheed Martin are. Whether it ever will be depends on the viability of its business strategy, the second item I wanted to discuss in this commentary. Although SpaceX has demonstrated a capacity for innovation, its success depends more on a new strategy for the space business than new technology. A key assumption of that strategy is that there is significant elasticity in the demand for launch services, such that a major drop in prices will bring new customers into the market. The strategy postulates that the resulting higher launch rates will enable economies of scale if the company controls costs and avoids the kind of bureaucracy seen in competing launch providers. Thus, a combination of increased demand and cost avoidance will enable SpaceX to under-price competitors.

There are three basic problems with this strategy. First of all, the elasticity of demand in response to price decreases is speculative, both with regard to how far prices can be cut and how prospective customers might react. That is especially true of potential private passengers on commercial space flights, a category of demand that space enthusiasts frequently highlight. A study conducted earlier this year by the prestigious Aerospace Corporation -- a federally funded think tank -- stated that "no one knows" how price cuts might affect demand for private space travel, but cast doubt on the financial feasibility of any enterprise keyed to that market. Other categories of demand are likely to be more robust. However, federal agencies utilizing launch services are notorious for shifting plans unexpectedly and a single mishap can lead to prolonged groundings. So sustaining a rate of launches not seen since the early days of the space race seems improbable, even if demand does surge. In addition, SpaceX is assuming it will save money by achieving high reuse rates for its boosters when it has yet to recover, much less reuse, boosters from Falcon 9 launches.

A second potential defect in the SpaceX business strategy is reliance on vertical integration -- pulling parts and component production in-house -- to control costs. Elon Musk states in a May 4 posting on the SpaceX web-site that, "because SpaceX is so vertically integrated, we know and can control the overwhelming majority of our costs." Actually, that's only half true. If launch rates and production levels are high, performing most manufacturing in-house can help control costs, but if rates are low then SpaceX ends up saddled with unnecessary fixed costs that could have been avoided by outsourcing. SpaceX competitors typically focus their in-house activities on areas where they have core competencies or a competitive advantage, purchasing other items from subcontractors who may have pricing advantages due to greater experience or economical production rates enabled by numerous customers. The notion that vertical integration saves money flies in the face of prevailing business practices, and probably will hinder SpaceX in meeting its pricing objectives.

A third big question mark in the SpaceX strategy is whether the company can continue to avoid unnecessary costs by minimizing "bureaucracy," which in this case means various forms of government oversight and regulation. A key reason why the cost structure in SpaceX contracts is so different from that of traditional launch providers is that it is allowed to escape a raft of federal acquisition practices that range from administrative charges to accounting requirements to workplace standards to small-business set-asides. For instance, NASA imposes heavy overhead charges on its traditional contractors to cover the cost of various agency functions that drive up the price of each space launch. SpaceX thus far has managed to escape most such costs by presenting itself as a non-traditional, "commercial" launch provider. But will it be able to continue avoiding the costs other companies must carry even as it competes against them for the same work? Probably not.

Thus, for all its achievements, SpaceX is an unproven supplier with a risky business strategy. The same thing has been said of every business start-up in history, but in the case of SpaceX the future of America's manned spaceflight program may be riding on its performance. With the Space Shuttle soon retired and follow-on efforts looking uncertain, launch failures or major delays by non-traditional suppliers could prove to be the final nail in the coffin of a program that has lost much of its political support. NASA was right to search for alternative business models and Elon Musk was brave to step forward, but in the end the space agency must have a safe and reliable way of getting astronauts into orbit if it is to have a future. Right now, NASA's traditional suppliers are the only companies who can credibly claim to meet that need.

Loren Thompson is Chief Operating Officer of the non-profit Lexington Institute and Chief Executive Officer of the private consultancy Source Associates.  The Lexington Institute receives money from many of the nation's leading defense contractors, including Lockheed Martin and other space launch providers.  Source Associates provides technical services to several companies that compete in space launch, including Lockheed Martin.