Senior analyst Bonnie Triezenberg: "The Air Force needs to think about how they can maximize the number of U.S. suppliers."
WASHINGTON — A RAND Corp. study made public last week concluded that the U.S. Air Force has enough demand for launch services to support two domestic providers but should consider supporting a third supplier in the near term.
The study was praised by Air Force leaders as validation of the Space and Missile Systems Center’s plan to select two companies this year for the National Security Space Launch Phase 2 launch service procurement.
RAND senior policy analyst Bonnie Triezenberg said the study — conducted last year by a team of researchers — does legitimize the Air Force’s procurement strategy. But she cautioned that Air Force and Space Force leaders should figure out how to support a third provider because the current plan carries huge risks.
Following the release of the study, Triezenberg briefed members of Congress and tried to convey the message that even if only two companies receive Phase 2 awards, the Air Force should be working with more than two suppliers “so that if we need them in the future they will be there,” she told SpaceNews.
“We’re encouraging people to keep in mind that the Air Force has a charter to sustain the industrial base and they need to really think about how they can maximize the number of U.S. suppliers because launch is important to national security,” said Triezenberg.
The winners of the Phase 2 procurement will be awarded five-year contracts to provide launch services starting in 2022.
The vendor selection strategy was built on the idea that the Air Force is just one customer of the launch industry and procures services from a competitive market. “And sometimes the requirement to sustain the industrial base is a little bit at odds with that,” she said. There is a mentality of “I’m just here to get the lowest price I possibly can get for this batch of launches.”
Price and efficiency are important but need to be balanced against the Air Force’s responsibility to ensure there is a viable domestic industry to provide “assured access to space,” Triezenberg said. One of the lessons from the coronavirus pandemic is the value of access to supplies. “If you decide you’re just going to go buy masks from the lowest cost provider which happens to be China, then in times of national emergencies you didn’t sustain your industrial base. And that doesn’t work out so well, right?”
RAND forecasts the launch market is going to be flat or decline over the next 10 years. And there will be greater foreign competition which could erode U.S. companies’ commercial market share. “So in the long run we’re only going to be able to support two providers and we have to make preparations for that eventuality,” Triezenberg said.
But RAND sees a significant “supply side risk” between now and 2023 or 2024 when there might not be enough ready and certified rockets to launch national security satellites. That is why keeping a third provider viable ”we think is essential to mitigate that risk,” she said.
Shortage of certified rockets
The Air Force set a firm timeline to select two providers in 2020. There is an urgency to move on to new launch vehicles as the Air Force by law cannot buy United Launch Alliance’s Atlas 5 launches after 2022 because they are powered by Russian engines.
For the Phase 2 competition, ULA, Blue Origin and Northrop Grumman are developing new vehicles that the companies say will be ready for first flight in 2021. The fourth competitor, SpaceX, is the only one offering rockets that are already certified.
RAND mapped out the potential risks of a shortage of rockets depending on how suppliers are selected in Phase 2. The highest risk comes from selecting two new vehicles. Some risk is reduced by adding legacy vehicles to the mix. And the risk is nearly eliminated by adding a third supplier.
Triezenberg said the United States needs to move to new technology so it’s reasonable for the Air Force to bet on vehicles before they’ve flown if it has confidence in the design and technical maturity of the rocket.
But the strategy carries significant risk simply because new rockets always take longer to enter the market than predicted, she added. “We talk in the report about all the things that delay first launch. Technical maturity is just one of many reasons that you might not make your plan launch date.
“And we found no instance in history where anyone who said they’re going to fly next year , that it really was next year,” said Triezenberg. “And when you dig in and you look at the reasons they didn’t make next year it’s very rarely technical immaturity. It’s all kinds of other reasons.”
If the new vehicles are late, it’s ok “as long as you have access to legacy launch vehicles. That’s what we emphasize in the report,” she said. “What is dangerous is to choose two people who don’t have an executing product line, who haven’t scaled their factories up or haven’t scaled their people up.”
The Air Force has acknowledged that risk and put clauses in the Phase 2 contract to allow providers to offer legacy vehicles if the new rockets aren’t ready. “There’s enough Russian engines left in the pipeline, and the Air Force is allowed to buy them through 2022,” said Triezenberg.
“But it’s not a low risk plan,” she said. She blames this on a lack of investment over a long period during which U.S. vehicles were not modernized. “We now have two very aging vehicles in the Delta and the Atlas. We have the Falcon 9 and Falcon Heavy filling in the middle and then we have these new launch vehicles coming on. And so it’s really the lack of sustained investment over time in U.S. launch that that is giving you sort of this gap.”
Why support a third company?
The Air Force said it expects the launch industry to depend on a mix of commercial and government business, and insists that it does not want to have to subsidize companies. One of the requirements for Phase 2 providers is to bid fixed-price launches, which favors companies that have a thriving commercial business and can spread the cost.
Triezenberg said the Air Force is being way too optimistic about the ability to launch providers to sustain themselves in the future without government contracts. “Longer term, we don’t see this wonderful big vibrant economy in space launch that’s going to help you drive down costs,” she said. “We just don’t see that future for the launch business. And we believe that in the long term there is going to be consolidation in this industry.”
To help the industry defray the cost of getting rockets certified for national security launch and of building compliant launch pads on both East and West coast ranges, the Air Force in 2018 awarded Blue Origin, ULA and Northrop Grumman $2.3 billion in so-called Launch Service Agreement funding to be spread over six years.
The Air Force decided that only companies that win Phase 2 contract will continue to receive LSA funding. Triezenberg said that decision should be reconsidered as LSA funding would be one way to support a third provider that did not win a Phase 2 contract.
“In the report we use the term ‘tailored support’ because depending on how each of these firms wants to position themselves, it might be that all they need from the U.S. government is a little back stop, a little bit of risk reduction dollars, R&D dollars to keep them looking forward to the next time a national security space launch comes up for award.”
A withdrawal of LSA funding, said the RAND report, “could induce firms to abandon their efforts to enter the commercial market and provides an opportunity for foreign competitors to enter or expand their offerings.”
Triezenberg said she believes the Air Force has “softened” its position on LSA funding since the RAND study was briefed to leaders last summer. “That’s a change I saw over the last year working with them on this,” she said. “They listened to us and I think I’ve seen movement in that direction.”
Of the four launch providers competing for the national security Phase 2 contracts, Blue Origin has been the most openly critical of the plan to select two companies and of cutting off LSA funding to non-winners.
In a statement to SpaceNews, Blue Origin said the findings of the RAND report align with the company’s position that support should be given to more than two suppliers.
“We agree with the RAND study’s number one recommendation on the importance of the Air Force continuing to support three U.S. launch service providers through 2023,” said Brett Alexander, vice president of government sales.
“Targeted programs that grow the U.S. launch base – like continued launch vehicle certification and infrastructure funding – promote innovation, drive down costs, reinforce launch program continuity, and strengthen U.S. national security,” he said. “That is why we remain concerned about plans to terminate the Launch Service Agreements for providers not selected as part of the Phase 2 launch service procurement, especially because there is adequate program funding to certify three providers for intermediate and heavy lift national security launch missions.”
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