The Pentagon’s proposed “block buy” of Evolved Expendable Launch Vehicles (EELV) from United Launch Alliance (ULA) will perpetuate a “long-term, high-cost monopoly” and will “seriously inhibit” the prospects for effective competition in the launch market, according to Orbital Sciences Corp. [ORB] CEO David Thompson.
Thompson said yesterday in a letter to Senate Armed Services Committee Chairman Carl Levin (D-Mich.) and Ranking Member John McCain (R-Ariz.) the government subsidizing of ULA, a partnership between Boeing [BA] and Lockheed Martin [LMT], obscures the true costs of EELVs and removes much of the motivation for ULA to seek operating cost efficiencies. He said it also incentivizes some government users to purchase EELVs from ULA because of their “artificially low production prices.”
“(This) creates an unfair competitive advantage for ULA in competition with Orbital and other United States rocket companies who do not receive such a cost subsidy,” Thompson said in the letter, which was obtained by Defense Daily.
Thompson recommended that any EELV block buy be limited in numbers and duration to the minimum needed to meet firm near-term launch schedules and that the separate EELV launch capability sustainment contract, which he said provides an unfair cost subsidy to ULA, be phased out as soon as possible.
Air Force spokeswoman Maj. Tracy Bunko defended the Defense Department’s block buy approach.
“The Air Force’s strategy is to move away from purchasing rockets individually to purchasing multiple rockets,” Bunko said yesterday in an email. “This will allow us to benefit from economic order quantity pricing and will improve predictability for the industrial base. The ongoing negotiations require the current contractor to provide their best price offers on a quantity range of six-to-10 booster cores per year and over contract periods ranging from three-to-five years. By examining a range of contract terms, the Air Force will identify the best balance of our operational and mission assurance needs while providing the best available value for the taxpayer.”
“United Launch Alliance was formed because the United States government realized the market was not large enough to sustain two companies to deliver critical capabilities reliably and profitably,” ULA spokeswoman Jessica Rye said in an email. “If the United States government assesses a different market condition or a new entrant has a better system solution, ULA would support any decision. We are providing full data transparency to show the value of the block buy. The final analysis of the appropriate buy is our customers that have to assess the best method to cost efficiently manage the risk of delivering the critical national security capabilities. It is not only about launch cost, it is also about the certainty to deliver capabilities that protect lives.”
Thompson specifically said the government subsidizes ULA by using a cost-plus contract to fund its annual sustaining engineering, manufacturing, operations and overhead costs. Thompson said this cost-plus contract is separate from production contracts that fund the costs of building and launching individual EELV rockets.
Thompson also expressed concern that with DoD budget tightening underway there is a “high likelihood” that fewer space launches will occur than currently planned, leading to growing inventories of excess ULA launchers. Thompson cites Government Accountability Office (GAO) and internal agency studies as well as a recent DoD statement announcing further EELV unit cost growth leading to a Nunn-McCurdy breach. A Nunn-McCurdy breach is when a major acquisition program experiences cost overruns that exceed certain thresholds, requiring the Pentagon to notify Congress.
Thompson said the proposed block buy would hamper government launch contract competition for “at least” the next eight years.
“Although DoD and other agencies have taken steps to bring new launch entrants into the market, the opportunities for these new commercial rocket providers to compete for the vast majority of government launch contracts will be significantly limited for at least the reset of this decade by the proposed EELV block buy,” Thompson said.