AVIATION WEEK President Tom Henricks Paints Optimistic Picture for Space, Despite Challenges
AVIATION WEEK President Tom Henricks opened the Space Foundation's Space Business Forum: New York with a comprehensive overview of the space economy and the outlook for the future. The event, which was presented by the Space Foundation in association with Toffler Associates June 4 in New York City, examined the financial outlook and opportunities in the $257 billion space industry in a setting that encouraged discussion among financial analysts, investment bankers, institutional advisors, venture capitalists, insurers, and space industry leaders.
Good morning. My assignment this morning is essentially "current events." Certainly, the economy is at the forefront of everyone's mind - especially in this city where Wall Street is much more than just a street and Standard and Poors is one of my sister companies at McGraw Hill and the economy is certainly on our minds.
And, space ... Well, recently we've had a lot of space news - fortunately, most of it's good. After a national malaise about spaceflight, it's certainly gratifying to see the excitement generated by the most recent Shuttle mission to refurbish the Hubble Space Telescope. And last week the crew of the International Space Station doubled from three to six enabling the transition from a construction phase to a research phase. And, for those of us in the space community, the nomination - finally - of a NASA Administrator and a Deputy Administrator is good news. That the nominees are as knowledgeable and distinguished as my friend Charlie Bolden and Lori Garver is fantastic news.
Here, at the Space Business Forum, we're connecting the dots between these two current topics. We're here to talk about the space economy.
I am not sure that the financial community has a full understanding of what we in the business mean when we talk about the space industry or the space economy. Certainly, we know that the average American doesn't. And, I don't think investors and policy makers have fully grasped the impact that a robust space industry can have, boosting financial stability and building the kind of national optimism you need to keep an economy growing. I may sound cynical, but I am not ... The reason there's so much mystery about the space business is the rapid pace of change and development. I suspect that many here were unaware that there are six people at work in space today.
So, let's talk a little about what the global space economy is, what opportunities it presents, and what's getting in the way of its full potential.
Much of the data I will cite comes from The Space Report 2009, the Space Foundation's excellent wrap-up of what's happening in the global space arena. Each of you received a copy, courtesy of Lockheed Martin. By the way, you have also received a copy of AVIATION WEEK & Space Technology and you'll notice that Lockheed Martin ranked first among our top-performing aerospace and defense companies,You don't need to read along - you'd probably be distracted by all the fabulous photos and graphics ... But I urge you to look at it more closely later. I will just scratch the surface this morning.
Let me start by quantifying and defining the space economy. In 2008, global space activity exceeded $257 billion - and conservative estimates say it grew by about 2.5 percent. What many find surprising about that $257 billion is that more than two-thirds of it is NOT government, but rather commercial endeavors - and that every year more and more space investment and expenditure is for things that average folks use - and take for granted - every day. Things like accurate weather forecasting, telephone service, GPS services, and television programming.
The big chunks of the economy break down this way:
67 percent or two-thirds is commercial. That's split almost evenly between commercial infrastructure and commercial satellite services.
Space infrastructure is fundamentally hardware: launch vehicles, satellites, in-space platforms, ground equipment, and all the techno-wizardry that it takes to safely hurl objects into space and bring them back again. This is a pretty steady business, generating about $83 billion in revenues for 2008. Even with the economic downturn, 2008 launch activity was about the same as '07, with about a 60/40 split between non-commercial and commercial payloads. Forecasts for the next decade have some year-to-year fluctuation, but remain reasonably steady over time.
This is truly a global industry. Russia led the global commercial launch market with 39 percent, followed by a tie between U.S and multinational launches at 21 percent and about 18 percent for European launches. There was a slight decline in the number of satellites put into space in 2008, but an almost 20 percent decline in cost of the satellites, primarily because of the trend toward fewer high-cost, custom-designed government satellites and more lower-cost commercial satellites. In fact, commercial satellite manufacturing revenues doubled last year.
Ground equipment is by far the largest piece of the commercial infrastructure category - and I suspect everyone in the room has contributed already to the 10-15 percent year-over-year growth in this category. If you have satellite TV, a GPS in your car, a satellite radio or a satellite phone, you're in. I am not going to talk much about this category because our New Space Comes of Age panel will delve into it in detail. But, this is where the growth has been - and it will probably continue to be explosive. And, that's not a word taken lightly in this industry.
The other half of the commercial space sector is commercial satellite services - which is driven primarily by satellite TV services, but also includes telephone signal relay, broadband services, satellite radio services, direct broadcast, and satellite positioning services. This category grew 10 percent last year and, although it will probably slow a bit as the economy curtails consumer spending and investment, it looks promising over the long haul as more and more businesses rely on integrated systems to deliver data.
The next largest portion of the overall space economy is the part that most people tend to think is the entire space economy: government space budgets. Reported government global space spending is about 32 percent of the entire world space economy - and the U.S. government is more than 80 percent of that sector. But, this also is the most difficult data to collect and we suspect that actual international government space spending is much higher - which would further boost the entire space revenue figure and alter the commercial/government mix.
Although the U.S. is the biggest government spender, we're seeing a great deal of belt-tightening - resulting in some difficult tradeoffs. Of particular concern is the ability to monitor the growing amount of space traffic and space debris - which will undoubtedly spawn space garbage collection businesses in the future if someone can figure out who will pay the bill.
Also, there's been a lot of talk recently about vulnerability of U.S. GPS system. It's too early to tell how serious this is - reports range from an impending shutdown next year to mild degradation over time. But, we do know that the U.S. GPS system is aging and will need additional expense.
The government category also includes in-space platforms such as the International Space Station, which is and will continue to be the super star for, perhaps, the next ten years or more. But, we're also starting to see growing interest in private in-space platform activities, such as SpaceX's Dragon Lab and Bigelow Aerospace's plans for a private space station.
One other part of the overall space economy is worthy of mention - not because of its size - it's just 1 percent - but because of its potential for growth and for rejuvenating the average citizen's interest in space. There are lots of names for it: space tourism, personal spaceflight, private space exploration. You'll hear a lot about private space travel from Richard Garriott today, so I won't go into detail there - except to say that this is real. Space Adventures, XCOR and Virgin Galactic all have customers - real customers who have paid real money for an opportunity to travel into space. As these companies gain experience and scale, we can expect fees to fall and revenues to grow.
What I could not imagine as a kid is reality today. And, although Richard's father, Owen, and I were both NASA astronauts several years together, Richard and I were also kids at the same time. Back then, we only imagined going into space as a government employee on a government vehicle. You had to become a military test pilot first. Well, until recently that was pretty much the case and the experience is still limited to government vehicles and commercial vehicles with test pilots. Today you'll hear from others how that's changing.
From an economic point of view, space is holding its own. There was real - albeit modest - growth in 2008 and we expect further modest growth this year. Space stocks - like all other stocks - got hammered last year, dropping about 45 percent. That sounds really rough - but it wasn't that far off the performance of the overall market. Plus, since March, space stocks have been following the national uptick.
There are many reasons to be optimistic about the future of the space economy. . .
First, the growth we've been experiencing in this sector is diverse - it's spread across multiple sub-sectors. And that points to overall health and a better ability to weather the ups and downs.
Second, space businesses offer many services that have now become "must haves" - that we are willing to pay for even when we're cutting back on other fronts. Security, communication, TV, and navigation are services that government agencies and individuals now must have. Even with cutbacks, there's value in keeping our nations safe, protecting our men and women in uniform, and monitoring potentially devastating and costly natural disasters. As private citizens, we have continued to purchase cell phones, television service and GPS systems even while reducing expenditures elsewhere. And, we've certainly come to expect accurate weather forecasting, working gas pumps and ATM machines and speedy access to data as our right rather than as discretionery.
Third, space programs, by nature, are long-term commitments. This means that significant thought goes into ventures before they are launched and they often involve multiple funding sources. Now, that long view helps the industry weather cyclical variations, but can also mean rather substantial lags before the industry reacts to the economy, a potentially positive characteristic because investment and full employment often continue in a bad market, providing stabilization for more volatile ventures. Then, when the effect is finally felt, it's often clear that the economy is in recovery.
We're seeing this pattern now - with actual growth while other businesses shrink. But there is some uncertainty - and that uncertainty is fueled both by the economy and by questions about where NASA is headed.
Now, although we are talking global space, I do want to spend a few minutes talking about NASA because it has a big impact on both government and commercial budgets - and, perhaps more importantly, it has a big impact on how we perceive the health of the space economy.
All I can say is that these are strange times - simultaneously encouraging and discouraging.
Recently, we've heard a lot about the dramatic increase in NASA funding, with the fiscal year 2010 coming in 5 percent higher than 2009 plus an added shot in the arm of a bit more than $1 billion in stimulus funds. A $2 billion increase is nothing to sneeze at and should be cause for celebration ... Right?
Well, not exactly. It's great to get any kind of increase, but this funding is still pitifully low, especially when you consider the depth and breadth of NASA's responsibilities. You'll recall that during the Apollo program, space helped drive a robust economy and build national pride and optimism perhaps unmatched in the history of our nation. That budget for NASA back then was about 4 percent of the federal budget. During the 40 years since the heyday of Apollo, we've fluctuated in the half to 1 percent range, staying at about 0.6 percent, even with this recent "big" increase. Plus, during recent years, NASA hasn't really had the kind of strategic focus needed to rally the troops and inspire the nation.
The stimulus dollars are being spread pretty thinly with about $325 million for earth science, $75 million for astrophysics, $150 million for aeronautics, another $150 million for commercial crew and cargo, $50 million for cross-agency support, $2 million for the Inspector General, and $250 million for Constellation Systems. Once again, a good boost, but a one-time boost that won't move the agency appreciably forward. Perhaps, though, it will bridge the gap as the Administration gets up-to-speed on what space can offer as an economic driver.
In a completely different category, the economic stimulus package includes about $6 billion to help bring high-speed Internet access to rural America. There's great potential here for additional investment in satellites and satellite services: evidence that Americans are willing to pay - themselves as well as through taxpayers - for space-provided telecommunications services.
The Obama Administration is on record as being "pro-space" and did, indeed, approve the $2 billion in spending increases. But, we're all waiting to see what kind of action we'll get. Will the new NASA leadership be able to reverse the $3 billion in cuts that are in the Obama budget for fiscal years 11-13? Because that the funding that we'll need to develop the launcher and lander to take us to back to the Moon. The almost five-month delay in nominating a NASA administrator was frustrating and the decision to re-examine the Constellation program at this point in the process introduces uncertainty for the contractors and government personnel responsible for America's present and future human spaceflight capabilities. Plus, we haven't seen any attempt to shorten the impending gap in sovereign human spaceflight capability when the space shuttle retires after only eight more missions.
The flip side to all this is:
- Charlie Bolden is a good man and, I believe, will fight with all his might for more funding, more clearly articulated NASA strategies and a space program that will make us all proud.
- Whichever way the Constellation Review Panel goes, we'll have a better sense of the strength of the Administration's support for the next leg of the U.S. space program. And, by the way, that panel isn't a group on NASA cronies. It includes the likes of XCOR's Jeff Greason, a new space guy with an outsider's perspective.
- The human spaceflight gap may motivate more private, non-governmental organizations to achieve human flight rating -- such as SpaceX is seeking - and that would give a shot in the arm to the industry.
The final economic ingredient I'd like to address is the workforce. Space employs about 260K people in the U.S. The average wage for space jobs in the U.S. is more than $88K - about double the national average for private sector wages. Plus, wages in all space sectors have grown over the past few years, at rates as high as 10 percent in some sectors. A growing space industry raises the profile of the average worker, which has an overall benefit to the economy.
The very thing that makes the workforce powerful also challenges us because U.S. schools are not producing enough scientists, engineers, and mathematicians to fill the jobs we'll need. Just like the space program, space jobs are a long-term commitment. They require specialized education and training, often an advanced degree in science, engineering, or mathematics. That means our children need a firm educational basis starting as early as elementary school. Here in the U.S., they are not getting it: less than a third of 4th grade students are proficient in science; only 39 proficient percent in mathematics. Bachelor's degrees in space-related fields dropped 8 percent in the past two decades and more than two-thirds of engineers graduating from U.S. colleges are not U.S. citizens. Many other nations are doing a better job, but our relative position in the space economy requires that we step it up and motivate and educate more kids to be spacemen and spacewomen.
Other challenges often come in the form of unexpected consequences - such as the International Traffic in Arms Regulations (ITAR) that place severe restrictions on U.S. companies' ability to bid on foreign jobs, collaborate with other nations or even hire qualified employees. This is not the intent of the regulations and there are promising signs that some of these unintentional outcomes are being examined and may be addressed soon. But, right now, ITAR undermines the efficiency and competitiveness of U.S. space businesses, many of them the finest, most innovative companies in the world.
As I have talked about the state of the business, I have alluded to some of the challenges the industry faces: fuzzy national strategy; economic queasiness; inadequate funding; sub-par educational systems.
At this point you must be thinking: Tom, I thought your job was to pump us up about the space economy...
Well, first, I think it's important for you to understand the business in its entirety - challenges and all. Otherwise we're not having a valid discussion.
But, you also need to understand how truly strong this business is: even with all the issues I just outlined, the space business is growing, innovating and prospering. Just imagine what this business can be with the right legislative and political support, the right investment and the right people at the helm.
And, while, we're imagining, let's look at some of the potential new uses of space technology that may drive even more economic growth.
I mentioned space debris before: and it's a real problem. I had to maneuver the shuttle to avoid a large piece of debris on my first mission and a small piece did visible damage to a window on my third mission. It's real. I know that entrepreneurs are out there developing space debris removal technologies, ranging from collection to laser ablation to redirection into a fiery atmospheric death. The challenges are pretty significant right now - but the biggest challenge is financial. Who pays to clean up our universal backyard? If no one lays claim to it, who is responsible for cleaning it up? Well, as the problem gets more severe, we'll figure it out - and someone will make money doing it!
Another potential new industry is energy from space. Entrepreneurs are currently trying to develop cost-effective ways to harness the unlimited supply of solar energy in space and beam it back to Earth, most likely as microwaves. There's a great deal of allure in a product that could potentially provide power wherever and whenever it is needed without expensive and time-consuming ground transportation requirements and even greater allure in solar energy's environmental friendliness and efficiency. Right now, the collection technologies are still too expensive to make this approach viable, but there's a future here that could dramatically change the world's energy economy and politics.
Space is an exciting business - and it has an exciting future. We will continue to see innovation and risk-taking in the private sector, and we'll see an increase in global cooperation in the public sector. Despite the economy, space has had real growth in the things that are important - revenue, employment, and launches. Bu not immune to economic pain, we'll probably take the brunt of the downturn in 2010 when the rest of the nation hopefully is coming out of it.
Investment has slowed, we hope not to the point where innovation starts to stagnate, but we anticipate it will return when investors start to realize how steady and solid this business is. Most likely, economic challenges will drive a higher degree of partnerships, alliances and mergers - some with international components. Belt-tightening may also create the "necessity is the mother of invention" phenomenon, where companies create better, more cost-effective solutions because they can no longer afford the expensive ones. This opens the door for new market entrants.
On the policy front, we'll see continued international partnerships - which will most likely lead to more multinational investment and business ventures. On the home front, let's hope that NASA crystallizes its vision and goes to work to build better, stronger and more inspiring space programs. And, let's also hope that the ITAR issues are solved so that we can compete on a wide and open playing field.
The International Space Station is the epitome of global cooperation - and we expect continued multi-national participation. This spirit could easily extend to the next two opportunities: Moon and Mars exploration and eventual commercialization. We'll also see the continued emergence of new space powers: China, India, Brazil ... And, as more well-funded countries establish solo space capabilities, many more countries will seek partners so that they can maintain some level of space involvement. The evolution of international partnerships is going to create some interesting scenarios and opportunities. For example, the upcoming launch of China's first spacecraft to explore Mars will be atop a Russian launch vehicle.
Military space continues to grow in complexity. Space assets are being used more and more for tactical operations at the same time space situational awareness demands are multiplying. As more nations develop military space capability and as more "stuff" gets put into space, there's more to watch out for. The military's goal is to maintain current systems and expand capabilities while reducing costs and response times. But, status quo isn't the answer.
Some portions of the U.S. military satellite network have reached the end of their life expectancy and must be replaced with newer technology. As I mentioned before, we could see an increasing percentage of that network being fitted out with commercial solutions to fill in gaps and round out global capabilities.
Likewise, the GPS network will have to be upgraded fairly soon as will the nation's missile defense systems. All point to continued expenditures, some of which will drive innovation and commercial growth.
Commercial space will continue to grow - the number of launch vehicles needed over the next decade is projected to be 257 for the commercial sector and 636 for all purposes, with expenditures of $48 billion. Led by entrepreneurial efforts, the cost associated with launch hardware may start to fall, even further increasing the volume of launch activity. And, as more private spaceports are built, investments in space may have more direct economic impact in more locations - both in the U.S. and outside.
I hope that the "current" state of affairs I just covered gives you a better sense of the unique promise of the space business. It's a combination of extraordinarily exciting, highly esoteric activities such as Moon and Mars exploration, plus some of the most basic services demanded by the modern consumer. The space business has challenges, but it has even greater opportunities.