NASA to Taxpayers: The Boeing/Lockheed Space Launch System Is "Unaffordable"

No doubt about it: NASA's Space Launch System (SLS) is an impressive sight.

Standing 322 feet tall, the Boeing (BA 0.25%)-built SLS stretches twice the length of the space shuttle and is taller than a football field ripped from the Earth and tipped vertical. Powered by a massive L3Harris (LHX 3.46%) engine core and two solid rocket boosters from Northrop Grumman (NOC -1.56%), SLS puts out 12% more take-off thrust than the Saturn V rocket that first sent men to the moon.  

Yet for at least the past half-decade, industry insiders, and even members of Congress, have wondered if the SLS is truly worth it -- "it" being the high and ever-rising cost of SLS, which may necessitate canceling SLS production and switching to a cheaper rocket for Project Artemis, NASA's multidecade program to send humans back to the moon.  

Why cancel SLS?

At an original estimated cost of $1 billion per launch, SLS was always going to be a pricey rocket. But a few years ago, new estimates began filtering in that suggested SLS, which hadn't yet flown at the time, might cost even more than $1 billion.

Then $2 billion, $3 billion, and $4.1 billion.

As new estimates poured in, each arrived more expensive than the last, reinforcing the view that SLS might be rocketing toward cancelation -- until a miracle happened. On Nov. 16, 2022, the first ever SLS launch carried NASA's Artemis I mission on a trip round the moon and back, to safely parachute down to Earth. And while it turned out that NASA did in fact pay $4.1 billion for the mission, it had suddenly become much harder for SLS's critics to argue with success.

Harder, but not impossible.

What if they built a rocket, and no one could afford it?

Consider the September 2023 report to Congress, authored by the Government Accountability Office (GAO) and titled "Cost Transparency Needed to Monitor Program Affordability" of the Space Launch System.  

Curiously, the very first line of this report reads that "NASA does not plan to measure production costs to monitor the affordability of" SLS (emphasis added). Instead, the space agency plans to simply continue "to spend billions of dollars to continue producing multiple SLS components, such as core stages and rocket engines, needed for future Artemis missions" -- regardless of cost.

That could be a problem, given that in fiscal 2023, for example, NASA had a budget of just $25.3 billion to cover everything it does and is already finding itself needing a 7% raise in fiscal 2024, to $27.2 billion, to help foot the cost of Project Artemis. Adding urgency to the dilemma, at one point GAO notes that one upcoming mission, Artemis III, comprising "several NASA programs, including SLS ... could cost between $20 billion and $30 billion."  

That's basically NASA's entire annual budget, all spent on a single SLS mission.

Granted, this estimate encompasses programs beyond just the cost of SLS. But GAO notes that SLS alone accounts for "more than one-third of NASA's budget request for" Project Artemis -- so it's not an insignificant chunk. Meanwhile, GAO observes that through May 2023, some four years after GAO asked NASA to build a budget for Artemis III, the agency still "has not yet established a lifecycle cost estimate for the Artemis III mission."

Even worse: NASA's own officials tell GAO that once a budget is worked out, it's likely that "at current cost levels, the SLS program is unaffordable" -- "unaffordable," as in, "We literally cannot afford to send Americans back to the moon if we keep paying uncounted billions of dollars for SLS rockets." And as former UVA economics professor Herbert Stein once famously pointed out, "If something cannot go on forever, it will stop."  

What it means for investors

So how does NASA "stop" overspending on SLS? GAO has a few suggestions: "stabilizing" the schedule for SLS missions so that they fly more regularly; achieving "manufacturing efficiencies" to produce SLS rockets more cheaply; switching from giving Boeing & Friends lucrative "cost-plus" contracts for their SLS work; and insisting on fixed price contracts instead; and finally, encouraging "innovation."

At least two of these suggestions, however, pose significant risks to investors in Boeing, L3Harris, and Northrop Grumman stocks. First and most obviously, if the aim of cost-plus contracts is to lower costs, then this would logically come at the expense of the space companies' own profit margins -- good news for taxpayers; worse news for investors.

The second suggestion could be even more dangerous, however, if NASA alights upon the "innovation" of awarding moon contracts not to SLS and its contractors, but to SpaceX instead. In 2021, after all, SpaceX famously won a NASA contract to build and send a lunar landing rocket to the moon for just $2.9 billion -- 30% less than SLS's current cost. One year later, SpaceX won a second moon contract for just $1.2 billion -- 71% below SLS's cost.

As NASA finds its budget increasingly stressed, its SLS contractors may face with a choice: Dramatically cut the cost of their product -- and their profits -- or lose contracts to SpaceX entirely.