Table of Contents for Section 4

4 Conclusions & Recommendations
4.1 Business Analysis
4.2 Market Research
4.3 Develop Comprehensive Business Strategy
4.4 Devel. of Trans. Arch. & System Concept
4.5 Role of Commercial Space Transport System
The Full Section Index is at the end of this Section

Commercial Space Transportation Study

4.0 Conclusions and Recommendations

4.1 Business Analysis

The objective of the business analysis was to develop decision criteria based on the target markets, the business risks, and the potential of realizing a return on the investment. The analysis was initially intended to show the return on investment (ROI) of a CSTS that was developed from a purely commercial standpoint.

However, rather than focusing upon the financial viability of a specific concept, this analysis concentrated on developing a bounding set of parametric conditions with regard to the financial feasibility of any commercial system.

4.1.1 Methodology

Through the use of the market survey results and from the market capture analysis, an estimate of the vehicle flight rates and average annual revenues was calculated for transportation systems of differing payload capabilities and launch prices (Fig. 4.1.1-1).

Given these data, and using commonly agreed-to financial guidelines, the profit required per flight was determined for differing levels of initial investments. Differing mechanisms of investment risk mitigation to achieve these financial conditions were explored.

Figure 4.1.1-1. Business Analysis Methodology

4.1.2 Assumptions

Some basic guidelines were needed for the business analysis for the CSTS. It was assumed that the nonrecurring investments required to bring a CSTS to an initial operational point of readiness would be complete in 5 years from program go-ahead. This time span would allow for any required design and engineering, prototyping, testing, facility development, and initial production.

The total funding required for the development was spread as follows: 10% in the first year, 20% in the second year, 30% in the third and fourth years, and 10% in the fifth year. The mission model assumed a 3-year ramp to the steady-state demand level with a 25% capture in the first year of operation, a 50% the second year, and a 100% capture in the third and subsequent years. The maximum allowable period over which to recover the investment was set at 10 years.

Other significant assumptions involved the time-value of money and the tax implications for a CSTS. Constant-year 1993 dollars were used in order to allow the analysis to ignore the effects of inflation. The cost of capital was assumed to be fixed at 8% per year. Tangible assets of the CSTS would be depreciated over a 7-year period beginning with the first year of operation. The marginal Federal tax rate was assumed to be fixed at 34%.

4.1.3 Results

Under current conditions, the space transportation market is considerably different from nonspace commercial markets. Launch infrastructure, principal launch assets, and manufacturing facilities are under the control of various branches of the U.S. government. The market is predominately determined by governmental budgets. This places a large element of market risk due to the uncertainties of annual appropriations. Transitioning to a market that is predominately commercial requires the development of new markets and a major cultural change in the ways of doing business in space.

Private investment in space transportation can only be a feasible venture if the investors can be repaid. One measure of success is the internal rate of return (IRR). An IRR of 15% to 25% over the first 10 years of operations has been selected as the target value to evaluate commercial feasibility. The revenues from each flight, based upon the payload capability and the price per flight, must be balanced against the recurring cost charged to that flight, repayment of the investment debt incurred in constructing the system, and some amount of return to the commercial investors. Figure 4.1.3-1 shows the minimum average annual revenues derived from the mission capture model for the medium-probability model.

Figure 4.1.3-2 shows the results from a hypothetical $5B investment scenario. The figure shows the payback cash flow per flight required to satisfy the IRR goal. It also shows the expected flight rates from the mission capture analysis at different launch prices and vehicle payload capabilities.

As an illustration from the figure, a vehicle with 30,000 lb payload capability in the medium-probability model, and priced at $1000/lb pound will capture 38 flights per year. This system must achieve a payback cash flow of about $70 million per flight in order to service its debts and yield a 20% IRR after 10 years of operations. However, at $1000/lb, a 30,000-lb capability system can only achieve about $30 million in revenues, even before subtracting out recurring costs of operation. Obviously, it is not possible for such a system to be economically viable.

Figure 4.1.3-1. Minimum Revenue Potential for Medium Probability Model

Figure 4.1.3-2. Payback per Flight Required With a $5 Billion Investment

Another example, using a vehicle with 55,000-lb payload capability priced at $600/lb, can capture 70 flights per year. It must achieve a payback cash flow of about $35 million per flight in order to service its debts and yield a 20% IRR after 10 years of operations. At a price of $600/lb, the 55,000-lb capability system can achieve about $33 million in revenues per flight. This case shows that if investors were able to accept a reduced IRR it might be possible to attain an economically viable payback.

The 70 flights per year of the 55,000-lb payload capability launch system priced at $600 per pound can generate about $2,310 million in annual revenues. From this annual revenue, the operating costs must be subtracted to determine the annual payback cash flow. Figure 4.1.3-3 can be used to illustrate how this level of payback cash flow can be used to show the maximum possible investment. If annual operating costs were zero, the $2,310 million annual payback cash flow would almost be sufficient to recover a $5,000 million investment at 20% IRR after 10 years of operation.

However, if annual operating costs were one-half the transportation price charged, then only $1,200 million would be available for the payback cash flow. This would only allow an investment of about $2,500 at the 20% IRR. If the operating costs were higher, even smaller investments would be economically viable.

This market study did not address the cost of space launches, nor the technical requirements to achieve specific launch cost goals. However, this analysis indicates that as a commercial investment measured at standard industrial investment return levels, the investment cost for a new space launch system must be kept in the range of a few billions of dollars.

Figure 4.1.3-3. IRR Sensitivities to Paybacks

This indicates a potential paradox in the commercial space transportation market. High flight rates appear to be necessary to reduce the price per flight. However, reduced price per flight reduces the revenue per flight, and consequently the cash flow available for investment payback.

We have not been able to prove the commercial space market elastic enough to enable the revenues per flight to be greater than the combined payback and operations costs per flight for a completely commercially developed system. To attract commercial investment it appears that some level of government participation will be necessary.

There are different options that can be considered for this, ranging from government development and commercial operation (which reduces the investment cost), to market and loan guarantees (which reduce the uncertainty in the revenues). Other options including corporate tax incentive and innovative financial arrangements may also be considered. Some of these investment options are outlined in Figure 4.1.3-4, along with a brief discussion of the advantages and disadvantages of each option.

Figure 4.1.3-4. Business/Investment Options

4.1.4 Summary

The business analysis for this initial phase of the CSTS has been used to define the economic thresholds associated with a commercially viable system. The CSTS specifically did not analyze the cost and technical constraints on a new space launch system. Parametric data relationships between investment and payback requirements indicates that a commercial space transportation system may be viable at low investment levels and higher launch rates.

To achieve these demanding goals, it appears that joint government/industry investment into the development of this system will be required. There are many options yet to be examined for these investment and financial arrangements.

4.2 Market Research

The fidelity of the database must be refined to include more detail information on economic, technical, social, and legal issues and concerns for the most promising commercial markets. The added research should focus on increasing the confidence in the medium probability mission model, over the 2000 to 2030 time horizon, to accurately define the markets, their potential growth, the size of the markets available to a new commercial launch system, and the share that can be captured by the new launch system.

For example, the hazardous waste disposal market requires assessing the major concerns about the disposal of nuclear waste in space. Additional study must identify and determine the credibility of social and legal issues, both pro and con, and the intent of responsible agencies, such as the Department of Energy, to consider a new launch system for nuclear waste disposal.

Our research disclosed that the startup of space launch activities in the most promising markets must be investigated in more depth and detail. Continuing research should focus on identifying the users and the business infrastructure in the emerging and new space markets. In both areas, more information must be collected on the key companies and the decision-makers who are or will be involved in using space. The infrastructure on how these companies will conduct commercial space business with the space launch and operations providers must be defined.

The space manufacturing market, as an example, has a limited, fragmented infrastructure. Technical, operations, and contractual activities needed to purchase launches and the support required for successful space operations are not available. Similarly, new markets such as hazardous waste and space business parks have virtually no infrastructure to rely on for entering the commercial space market.

For emerging and new space market areas to realize their potential, more data are needed on the users' payload requirements, in terms of physical, environmental, and operational characteristics. These data must be interpreted and translated into launch system attributes that can be analyzed, consolidated, and categorized to assist the researchers in defining launch system requirements. Launch costs, as an example, must be one order lower than today's. Continuing research must assess the needs in terms of technology requirements.

More detailed data must be developed on the time-phasing plans for introduction of the commercial space products and services for the most promising markets. Indepth discussions will be needed with launch system customers to project the timing of their product/service introduction and the availability of a low-cost launch system.

Continuing market research must also examine the markets from a different perspective, one in which the operational mission requirements of several space markets are merged and translated into uniform requirements for a common launch system. For example, several markets have operational requirements indicating that a single launch vehicle design could uplift a substantial share of the mass to low Earth orbit at high inclination, polar, and geo-transfer orbits.

4.3 Develop Comprehensive Business Strategy

A new space transportation system is dependent upon the ability to structure a business plan that shows a financially sound and realistically achievable venture. This plan must address three key elements to achieve this goal:

  1. Financial
  2. Regulatory
  3. Alliance participation
Financial. With the use of market information from the Phase I study, a detailed business strategy will be developed that addresses the financial and economic factors required to make this a profitable venture. Financing becomes a key driver, since development costs will be extremely high for a new space vehicle having significant improvements over current systems.

Every avenue available will be reviewed/assessed and the results examined in detail by financial experts from all aspects of the business community before a final recommendation can be made. The following types of questions will need to be addressed:

  1. What rate of return and payback period is required to obtain support from the financial markets?
  2. Will initial niche markets be used to generate the revenue stream to finance subsequent market exploitation?
  3. Will different pricing structures be employed for comanifested operations?
Regulatory. The role of Government in defining the liability laws, vehicle qualification and flight worthiness certification, and crew training/certification (if required) must be clearly defined/ interpreted.

Alliance Participation. The working relationships within the alliance must be aligned as necessary to ensure the most effective application of industry assets in developing the Phase II products (system concepts, technology development plans, etc.). This could possibly lead to the introduction of new business entities that are specifically chartered to perform this commercial business activity.

4.4 Development of Transportation Architecture and System Concept

The CSTS Phase I activity successfully predicted the demand elasticity for new and traditional space markets for the years 2000 to 2030. One of the primary objectives of Phase II will be to define a commercial launch system, composed of one or more vehicles, to maximize return on investment while meeting these market demands.

Our approach to conceptualizing the preferred CSTS transportation architecture leverages off three fundamental principles:

  1. Concepts must support the CSTS business strategy as well as meet system requirements defined from Phase I market analysis.
  2. Use of a two-step concept development process where lesser concepts can be screened prior to extensive design activities.
  3. Conceptualization of an entire system, not just a vehicle, through allocation of cost, operability, and performance requirements.
Our process for concept development is shown in figure 4.4-1. CSTS will have established numerous business opportunities, or niches, that could be seized. Each business niche represents a potential market for CSTS and most likely will require a different launch system solution. For each business niche we will conceptually develop a number of potential solutions (a single system, family of vehicles, or a mixed fleet of differing systems), that capture all, or a portion, of the available market. These potential solutions will be screened to ensure that they meet the architectural requirements (individual customer needs, flight rate requirements, and preliminary cost targets).

Figure 4.4-1. CSTS Transportation Architecture Analysis and Concept Development

The next step will be to develop the launch vehicle and ground processing concepts to a lower level of detail. The concepts will be designed to meet performance and other system attributes such as schedule leadtime, reliability, and availability. In addition, concepts will be optimized through integration of system technologies to meet the operational cost targets.

These solutions will then be ranked based on a number of criteria. The final step will be to examine the ranked solutions for each niche, and then select the system that maximizes the potential return. Special attention must be given to the process for building and operating the new system to cost. This will ensure that the business venture effectively meets the investment requirements and provides the most comprehensive understanding of the potential risks. This approach to conceptual design will keep the new commercial launch system focused upon the realization of a solid business venture.

4.5 Role of a Commercial Space Transportation System

An important aspect of the study was the creation of a vision of space transportation's future. This vision can be divided into two distinct but interdependent elements. The first is the role the system would fill and the second is the projected evolution of the space marketplace. Together, these two constituents provide a definitive image of the alliance's perception of the future of space commercialization and the associated high-technology employment.

The evolution of space utilization into a new commercially motivated era is dependent upon the development of a modernistic commercial transportation system with a role that is diverse in nature, encompassing many aspects unfamiliar to the conservative culture pervasive in the U.S. space launch industry. The alliance's view of this new-fashioned role consists of the four fundamental elements shown in Figure 4.5-1.

New Market Realization—As part of the study, a great deal of emphasis was placed on the evaluation of these market areas, and their potentials were found to be intriguing. The introduction of a new, low-cost launch system would enable the realization of these potential markets.

  1. Competitiveness Improvement-The U.S. launch system industry dominated the international marketplace through the early 1980s. Foreign competition has steadily eroded the U.S. position, now capturing a 60% to 70% share of the commercial launch market. To regain the competitive edge, a new transportation system is required.
  2. Launch Industry Rejuvenation-The development of a new commercial launch system accomplishes two objectives. First, the U.S. space industry would become less dependent on the Federal government for its continued existence and profitability. Second, it would enable the U.S. government to partially rely on commercial industry to maintain its technical and experience base in vital areas.
  3. Public Benefits-A new space transportation system would provide tangible and intangible benefits to the general public. The development of new market areas would create new opportunities and capabilities, for example, space tourism. It would enhance productivity through the employment of space-based assets, such as communications and remote sensing. Additionally, the disposal of hazardous waste in space would enhance our management of the Earth's environment. Intangible benefits, with impacts difficult to predict, include increased public confidence in the space industry, resulting in increased public support for space-related endeavors, and the inspiration of society to accomplish even more difficult tasks, promoting the idea that almost anything is within our society's grasp.

Figure 4.5-1. The Role of a New Commercial Space Transportation System

4.6 Evolution of the Space Marketplace

The second half of the study's vision is the foreseen evolution of the space marketplace.
Figure 4.6-1 summarizes the high-level attributes of the current and projected future space marketplace. The current space industry is driven by the needs of the government and focuses on the requirements of its military and scientific communities. Launch system and spacecraft development efforts are funded almost exclusively by government agencies and are therefore captive to the politics associated with government-funded programs.

Because of the specialized requirements of government agencies and the experimental attitude currently associated with space-related endeavors, the cost of doing business in space is high, for both transportation and operation. As a result, the public perceives space as a generally inaccessible resource, available only to government-sponsored programs.

Figure 4.6-1. The Projected Evolution of the Space Marketplace

In 20 to 30 years, the alliance envisions space to be an entirely different enterprise. The alliance's underlying desire is for the public to view space as an integral and fundamental part of their existence, communicating globally, using products manufactured in space, vacationing at space-based amusement parks, etc. To attain this vision, changes to the culture underlying the space industry are necessary. The industry must evolve to commercial motivations and aspirations, including the commercial development of space.

The government should not be the only source of revenue for space programs. The industry should eventually transition from a defense- and science-driven enterprise to be consumer driven. Lowering the cost of access to space is essential to the ultimate realization of this transformation and would be the top priority of the alliance.

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4.0 Conclusions and Recommendations
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