Elon Musk and SpaceX's War on Boeing and Lockheed Martin Rages: Who Will Win?

Will Elon Musk win his case against the United States Air Force and two defense titans?

May 17, 2014 at 12:31PM
Delta

A United Launch Alliance Delta IV heavy rocket, the largest to ever launch from the West Coast of the United States. Photo: United States Air Force via Wikimedia Commons.

You've got to hand it to Elon Musk: the guy has guts. In fact, he's so plucky he's taking on not one, but two titans of defense -- Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT) -- as well as the United States Air Force, in what's shaping up to be an epic "rocket war." Here's what you need to know.

SpaceX vs. the United Launch Alliance
When it comes to launching payloads, such as satellites, into space, Boeing and Lockheed's 50-50 joint venture, United Launch Alliance, or ULA, definitely has a history of success -- it's launched 75 consecutive, successful missions to orbit, according to ULA. More importantly, this success has lead to a practical monopoly on national security satellite launches. Clearly, that's great -- and profitable -- news for ULA, but it also presents a problem for SpaceX.

In fact, it's this lack of competition that SpaceX is protesting. At a press conference, Musk stated:

SpaceX has decided to file suit and protest the air force [Evolved Expendable Launch Vehicle] block buy. This is a 36 core sole-source uncompeted procurement that was signed earlier this year, that essentially blocks companies, like SpaceX, from competing for national security launches. ... The national security launches should be put up for competition. 

Liftoff Of Upgraded Falcon

Liftoff of upgraded Falcon 9, Sept. 29, 2013. Photo credit: SpaceX.

Moreover, Musk contends that the Falcon 9 rocket used by SpaceX is approximately $300 million cheaper per launch than the rockets used by ULA. At a hearing before lawmakers, he stated, "[I]f SpaceX had been awarded the missions ULA received under its recent non-competed 36-core buy, we would have saved the taxpayers $11.6 billion." Plus, Musk believes that the use of Russian RD-180 engines in the Atlas V is a problem given recent Russian sanctions.

The fight rages
On the flip side of this argument, Michael Gass, president and CEO of ULA, told lawmakers that the success of ULA's launches, plus the block-buy, saves taxpayers' money. He pointed out that in the late 1990s the U.S. lost billions due to unsuccessful launches.

Furthermore, CBS News reported that Sen. Richard Shelby seemed to agree with Gass when he said that "while the goal of competition is to lower the cost of access to space, which I think is good, combined with a need to maintain performance and reliability such as we have today, competition may not actually result in a price reduction for the federal government." He further pointed out that much of the cost associated with launches is due to purchasing one launch vehicle at a time, and complex requirements for national security launches. 

What to watch
The launch of payloads into space is worth a significant amount for both Lockheed and Boeing. For example, in 2013, ULA accounted for 29% of Lockheed's $1.04 billion Space Systems' operating profits, and in 2013 Boeing reported $171 million in equity earnings from its ULA joint venture share. As such, anything that threatens this isn't the best news for investors. However, there are things to keep in mind. First, at the time of this writing, SpaceX wasn't yet certified by the Air Force to launch military payloads under the block-buy contract; second, ULA already has enough RD-180 engines for the bulk-buy, according to Boeing; and third, SpaceX might have missed the 90-day right-to-complain window. That's the good news for ULA. 

The bad news is a federal court will have to review the merits of SpaceX's claim and make a decision. That means right now, ULA's contract is still uncertain. Consequently, this is something investors should watch.

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Katie Spence has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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