For at least the past seven years, Airbus's (EADSY -4.02%) ArianeGroup joint venture (with Safran) has been trying to bring to market a new rocket to replace its venerable Ariane 5. The new rocket will be called -- shocker! -- Ariane 6.
Nearly a decade after it was first announced, it's still uncertain when Ariane 6 will fly. Initially expected in 2020, at last report, Ariane had pushed back its maiden flight to late 2023 -- with commercial operations not beginning until 2024.
But there's a problem with that date.
Help wanted: Someone to launch our European GPS satellites
At the same time as Europe has been planning to switch out its Ariane 5 rockets for new Ariane 6es, it's also been assembling a domestic European alternative to America's Global Positioning Satellite (GPS) network, dubbed Galileo.
The Galileo service went live in 2016, the same year Ariane 6 was announced. Today, it comprises 28 satellites, including spares, in medium Earth orbit (MEO). But like most satellite systems, these satellites must be replaced occasionally.
Indeed, at last report, only 24 of the satellites in orbit currently are still operational. Ten new satellites are scheduled to be launched in the future, including six that must be launched before the end of 2023. And here's the thing: The European Space Agency was hoping to use Ariane 6 rockets to launch them.
Which is going to be a problem if Ariane 6 won't be operational before 2024.
SpaceX to the rescue
So what's the solution? Well, just as we predicted last summer, it turns out that the European Commission (EC) is preparing to hire SpaceX to step in and fill the gap left by Ariane's missing Ariane 6es.
As Politico confirmed last week, the EC is circulating an "ad-hoc security agreement" to its member countries, requesting authorization to launch the next several Galileo satellites "exceptionally" with SpaceX rather than with local launch company Ariane.
As recently as last year, the EC was reluctant to take this step -- not surprising considering Ariane's long-standing complaints about how it cannot compete with SpaceX's low launch prices -- and wanted to sound out potential launch partners in India and Japan first. However, the EC concluded that with Russia's space program under embargo and Ariane 6 not yet ready to launch, the SpaceX Falcon 9 and the United Launch Alliance (ULA) Vulcan Centaur are the only other rockets on Earth capable of putting its Galileo satellites in MEO.
And since ULA owners Boeing (BA 1.51%) and Lockheed Martin (LMT 1.23%) are having difficulties getting Vulcan Centaur ready to launch, that leaves just one space launch company in the role of launcher of last resort: SpaceX.
What happens next...and what it means for investors
Now mind you, Europe is not known for its speed or agility in decision-making. Case in point: It's been considering building a reusable rocket to compete with SpaceX for almost as long as it's been working on the Ariane 6 -- and still hasn't made any progress. You won't be shocked to learn, therefore, that the EC still hasn't made a final decision to hire SpaceX to launch its Galileos. European governments use the Galileo constellation for encrypted communications, adding security concerns that complicate the decision.
Still, with the Galileo constellation verging on not having enough satellites to function at 100% capability, the deadline for making a decision is fast approaching. I'd say the odds now strongly favor a decision to hand SpaceX the contract.
So, what then?
Well, consider that with SpaceX operating a fleet of nearly 100% reusable, already-built rockets these days, the company's launch costs are rapidly approaching the cost of the fuel to fly the rockets. Conversely, SpaceX's prices can run as high as whatever any competing disposable rocket company must charge to build a new rocket. Thus, picking up anywhere from one to three additional launch contracts from Europe could mean as much as $200 million in very high-margin revenue for SpaceX.
At the same time, handing these contracts to SpaceX instead of Ariane means $200 million less money for Ariane to invest in its own space program -- including developing new rockets such as the Ariane 6 itself.
Result: Ariane risks falling into a vicious cycle of development delays causing contract losses, depriving it of funding to slow development further -- lather, rinse, and repeat. And at the same time, SpaceX is picking up new business, giving it more money to invest in developing increasingly more advanced products and capabilities of its own -- such as the Starship megarocket.
Unless something happens to interrupt this cycle, it's hard to see how this ends any other way than making SpaceX the dominant rocket launch company on Earth -- and making every other rocket company utterly uninvestable.
