Space is hard -- and that can make it hard for taxpayers to get a good deal on U.S. government space launches.
Two years ago, in an effort to keep two competitors in the space race bidding against each other to keep prices down, the United States Space Force divided work on "Phase 2 Procurement" launch contracts roughly equally between SpaceX and its archrival in space, the United Launch Alliance (ULA) joint venture between Boeing (BA 3.19%) and Lockheed Martin (LMT 1.57%). In a pair of contracts valued at $316 million and $337 million, respectively -- splitting the money roughly equally -- the Space Force hired SpaceX to launch one rocket and ULA two, with all three missions scheduled to take place later this year.
NYSE: BA
Key Data Points
Space Force awards these kinds of contracts a couple-few years before the launches take place, though. And that means, here at the halfway mark in 2022, it's already time to award a few more contracts.
60 for me, 40 for thee
As SpaceNews.com just reported, the next eight Phase 2 Procurement national security missions (to launch over the next two years) will weigh more heavily in ULA's favor. This time around, ULA again gets the majority of the contracts -- five missions to put out: a GPS-3 satellite, the WGS-11+ military communications satellite, and three classified Space Force satellites dubbed USSF-16, USSF-23, and USSF-43 in orbit. It also gets the vast majority of the money being allocated, $566 million.
In contrast, SpaceX was awarded only three launch missions: USSF-124 (a missile defense satellite), USSF-62 (a military weather satellite), and the first batch of small satellites comprising the Space Development Agency's "Tranche 1 Transport Layer" of comsats. For this launch work, SpaceX will be paid $280 million.
If you do the math, therefore, Boeing and Lockheed's joint venture has been awarded 102% more money than SpaceX to do just 67% more work on these eight launches. SpaceNews also notes that, over the first five years of these Phase 2 contract awards, Space Force has awarded 60% of its launch contracts to ULA and only 40% to SpaceX.
NYSE: LMT
Key Data Points
Space math
When you work out the per-launch prices implied by these awards, a couple of observations pop. First and foremost, it's clear that ULA CEO Tory Bruno is succeeding in his promised goal of lowering the cost of ULA space launches. Per launch, these five latest ULA launches will cost taxpayers only $113.2 million apiece -- a huge reduction from just a few years ago, when ULA was famously quoting prices as high as $400 million for a Delta V launch.
That being said, Space Force is still paying ULA a 21% premium to the $93.3 million price that SpaceX is getting, per launch, for the three Space Force Phase 2 contracts that it just won. Is that fair?
Consider this: Since its unfortunate accident in late 2016, from 2017 through 2021, SpaceX conducted 109 straight successful launches of its Falcon 9 and Falcon Heavy rockets. After 25 more successful launches in a row so far this year, SpaceX is rapidly closing in on ULA's enviable record of having launched 150 rockets in a row without a single launch failure. Just 16 more launches and SpaceX will "tie" ULA.
What that will mean for investors
With each successful SpaceX launch, the argument in favor of Space Force paying a premium price to ULA for its greater record of reliability wanes. Presumably, this is part of the reason why ULA launch costs -- which reached as high as multiple times SpaceX's quoted prices as recently as 2015 -- have declined to the present-day premium of 21%.
That being said, even with the two companies' reliability records approaching parity, ULA still is being paid a premium. What's more, it's being awarded more launch contracts than SpaceX is getting, despite charging higher prices.
That may not sound fair. It may not be fair to SpaceX (or to the taxpayers ultimately footing the bill for these launches.) From an investor's perspective, however, it does suggest that Space Force is willing to overpay ULA at least slightly, relative to the rates it could charge if it awarded all contracts to SpaceX. The good news for investors is that if this remains Space Force policy in the future, it could put a sort of "floor" below the space profit margins that Boeing and Lockheed Martin will earn.
That may simply be the price Space Force needs to pay to ensure there's at least one competitor remaining in the space race to keep SpaceX's price hikes in check.
