Have you ever hired a lawyer? Has that lawyer ever asked for a "retainer" -- money you have to pay not for any specific service in particular, but just to keep the lawyer available, in case you need him?
Then you know how the U.S. Air Force feels.
The Air Force, you see, has a singular relationship with an entity called United Launch Alliance -- the joint venture formed by Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT) to handle space launches for the U.S. government. Every year, whether they launch a rocket or not, ULA charges the government about $1 billion to remain "on call." Then the government (that's you and me, the taxpayers) has to fork over additional cash in the event we want to, you know, launch a rocket.
For example, in September of last year, the Air Force awarded United Launch Alliance a contract worth $938.4 million to pay for "fiscal 2015 EELV launch capability," ensuring that ULA would be ready and able to launch a rocket should the government so desire. Then, four months later, the Air Force gave ULA another contract -- for $382.9 million this time, to pay for launch vehicle configuration on three rocket launches (one Delta IV and two Atlas Vs).
That's $128 million per rocket, not counting the cost of the actual launch -- and not counting the retainer. And if this sounds like a lot of money, it is. Because SpaceX can do the same job for less than $85 million.
At least, that's what SpaceX CEO Elon Musk told the U.S. Senate last year. Pointing to recent launch costs that averaged $380 million per rocket at ULA, Musk challenged an Air Force contract to hire ULA to conduct 36 space launches over the next five years, without giving SpaceX a chance to compete for the business. As Musk testified to the U.S. Senate Appropriations Defense Subcommittee, SpaceX can do the same work for $100 million or less -- saving taxpayers $11.6 billion over three dozen launches.
Turns out, the Air Force liked this idea. Earlier this year, the Air Force confirmed that rather than give all of its big launch contracts to ULA, as has been its practice, it will open up at least some "Evolved Expendable Launch Vehicle" (EELV) contracts to competitive bidding going forward. On Tuesday, the Air Force confirmed that it expects to have SpaceX "certified" to compete for these contracts by June.
What it means to investors
That's great news for taxpayers -- potential savings of 74% or more on future U.S. government satellite launches. But here at The Motley Fool, we're more interested in how the Air Force's opening up government satellite launches to competitive bidding might affect investors' portfolios.
So, here's my best guess.
The Pentagon currently plans to spend $7.1 billion on military space missions this year. NASA missions, which both ULA and SpaceX plan to bid on, are an even bigger market. In 2013, for example, NASA spent $7.9 billion on just its top 10 outside contractors. So, between those two agencies alone, this appears to be roughly a $15 billion annual market.
For its part, ULA says it's "not the least bit afraid of competition" in the space market, as CEO Tory Bruno told Reuters, and will seek out new customers to shore up the revenue streams of Boeing and Lockheed Martin, just in case SpaceX starts stealing Air Force business. ULA is also cutting costs, consolidating operations to just two launch pads (down from five), and working to develop an affordable rocket engine to replace the Russian RD-180 that powers its current generation of Atlas V. ULA may even implement an "a la carte pricing model" for its rockets -- perhaps similar to the one SpaceX already publishes on its website:
These moves hold the potential to support revenues and profits at Boeing and Lockheed Martin, even if the companies must share more of the space market with SpaceX. But on the other hand, if SpaceX proves itself to be a reliable partner in space launch, it could eliminate the rationale for the government paying United Launch Alliance its annual $1 billion retainer. To the extent that this is essentially "free money" for Boeing and Lockheed, an elimination of the retainer would clearly have an impact on profits -- more so on Lockheed, which earns about $3.6 billion annually, than on Boeing, which did $5.4 billion in profit last year, according to S&P Capital IQ.
The moral of this story: Beware the effect on these companies' share prices when $1 billion in revenues for Boeing and Lockheed suddenly goes poof!
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 293 out of more than 75,000 rated members.
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