Is the U.S. Space Force playing favorites in space?
In 2022 and 2023, SpaceNews reports that the United States Space Force (USSF) awarded 60% of its National Security Space Launch Phase 2 (NSSL2) rocket contracts to the United Launch Alliance (ULA) joint venture of Boeing (NYSE: BA) and Lockheed Martin (NYSE: LMT) . SpaceX, which charges significantly less per launch than does ULA, was nevertheless awarded only 40% of the work.
In 2024, the numbers shifted even more heavily in ULA's favor.
$1.1 billion for me, $661 million for thee
On Friday last week, the Department of Defense announced its latest batch of NSSL2 contract awards, and the results were surprising. Despite charging more for its launches, ULA (technically, United Launch Services , a subsidiary of ULA) was awarded $1.1 billion in additional funding to cover an unspecified number of launches from fiscal 2022 to fiscal 2027. SpaceX, despite charging less for its launches, was awarded only $661 million in new funding for the same period.
In total, ULA raked in 62.5% of the awards. SpaceX got only 37.5%.
Doesn't quite sound fair, does it? And yet, here's something that you may not have noticed just from reading the contract award announced last week ( which I covered here on X ). When you add up all the NSSL2 contracts awarded over the 2022 to 2027 period, the amounts of work awarded to ULA and SpaceX come out much closer to equal: $4.5 billion for ULA, and $4 billion to SpaceX, such that the money is being split closer to 53% to 47%.
And I don't think that's an accident.
Competition is good -- but for it to work, you need competitors
Consider: If Space Force awarded contracts solely based on the prices its contractors charge, SpaceX would logically win all the work available. Its prices, after all, are cheaper than ULA's. If Space Force wants to get the best value for our tax dollars, awarding all the work to the lowest-cost provider -- SpaceX -- would be the way to do that. Nor is capacity an issue. SpaceX conducted a staggering 98 rocket launches last year , after all, and is aiming for 144 in 2024. It's got more than enough rockets to launch anything Space Force wants it to.
Problem is, if Space Force did give SpaceX all of its work, ULA would immediately go bankrupt. Unlike SpaceX, ULA doesn't have a commercial rocket launch business (it's tried to break into the commercial sector, but failed). Lacking revenue from government work -- or even lacking sufficient government revenue to cover its costs, there would be no way for ULA to remain in business.
And if ULA goes out of business, there would be no one else around to bid against SpaceX -- and with no competition, SpaceX would be free to charge monopoly prices on its rocket launches.
Competition is good, and more competition is better
And so you see the government's dilemma. In order to ensure low prices, Space Force needs to maintain competition in space launch. But doing so requires that Space Force overpay on at least some of its launch contracts, so as to keep SpaceX's biggest competitor alive and healthy.
And why is this important for investors?
Because now that NSSL2 is wrapping up, it's already time to start thinking about NSSL3 -- phase 3 of the National Security Space Launch program. NSSL3, you see, kicked off last month when the Pentagon announced that ULA, SpaceX, and a third space company, Jeff Bezos' Blue Origin , have all qualified to bid on a new set of launch contracts.
Running through mid-2029, NSSL3 is expected to see the awarding of some 90 launch contracts. And with the goal of maintaining (or even better, expanding) competition still paramount, it's very likely that these contracts, too, will be awarded not necessarily to the lowest bidder(s), but also with an eye to spreading work around among multiple contractors, so as to enhance long-term competition in the space sector .
This will be especially important to Blue Origin, which doesn't yet have a rocket capable of launching satellites to orbit, but is bidding in hopes its New Glenn rocket will soon fill that role. For ULA's owners, too, this is good news. As we saw in Lockheed Martin's Q2 earnings report, one effect of Space Force's policy has been to improve profit margins 11%, even as revenue grew only 1%, helping to boost operating profit margins to 10% in the first half of 2024 (versus less than 9% in 2023, according to S&P Global Market Intelligence data).
There's even some good news in all of this for SpaceX, because with Space Force apparently happy to pay higher prices for ULA launches, SpaceX has found room to raise its own prices , too.
That's something to keep in mind as we all wait around hoping to see a SpaceX stock initial public offering (IPO) someday.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0