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Opportunities and Roadblocks for the
Development of Commercial Space
Enterprises
Michael D. Griffin
CEO,
Schafer Corporati...
Introductory Observations
• Space development ca. 1950-2010 – military and civil –“all government, all the time”.
o Few ex...
Observations (cont.)
• But even if “space is hard”, space development could (would) benefit enormously from
give-and-take ...
“Commercial Space” and the Market
• Free market structure, expectations, and constraints are not well aligned with the
str...
Communications Satellite Business Example
• Assumptions
o High-end communications satellite – 56 transponders.
o Investmen...
ISS Cargo & Crew Market
• Assumptions
o Anchor market is total US commitment to ISS: 15,000 kg/yr, 8 seats/yr (2 flights)....
ISS Cargo & Crew Market (cont.)
o The company captures half of the US ISS market.
o December 2008 NASA Commercial Resupply...
ISS Cargo & Crew Market (cont.)
o The company operates with a net profit margin of 10% across all lines of business.
 39%...
ISS Cargo & Crew Market (cont.)
• Results
o Enterprise yields 20.5% IRR; well below “risky investment” expectations of 25-...
Lunar Cargo Market
• Assumptions
o An international lunar base is developed with initial logistics requirements at least
e...
Lunar Cargo Market (cont.)
• Results
o 27+% IRR for lunar cargo business alone.
 Can be delivered with 7 launches annuall...
Conclusions
• The ISS cargo/crew market by itself is insufficient to drive the development of a viable
commercial space tr...
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Griffin Georgia Tech 22 feb 2016 1

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Michael Griffin's presentation to the Georgia Tech School of Aerospace Engineering, 2/22/16. Uploaded by verbal permission given to Stephen Fleming, academicvc.com

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Griffin Georgia Tech 22 feb 2016 1

  1. 1. Opportunities and Roadblocks for the Development of Commercial Space Enterprises Michael D. Griffin CEO, Schafer Corporation Seminar Georgia Institute of Technology 22 February 2016
  2. 2. Introductory Observations • Space development ca. 1950-2010 – military and civil –“all government, all the time”. o Few exceptions: comsat industry, more recently (and less robustly) commercial imaging, most recently ISS cargo resupply (2008). o Space exploration and development are primarily an element of national strategy.  Both “hard” and “soft” power, and including scientific and economic influence. o Consequences as expected from government/prime contractor monopoly:  Slow development tempo, high cost, risk aversion, reduced innovation as compared with railroad, automotive, aviation, consumer electronics and information technology industries.  But: “space” really is hard; quite possibly more like early open-ocean maritime experience than any of the above examples.  Strong “pushback” for > 30 years from nascent “commercial” entities claiming ability to perform “routine” space launch and operations tasks more efficiently.  Not so far supported by the evidence; i.e., “what’s stopping you?”  If you can’t beat a government enterprise, should taxpayers support you?
  3. 3. Observations (cont.) • But even if “space is hard”, space development could (would) benefit enormously from give-and-take of competitive forces. o Greater long-term societal benefit seems likely. o Market discipline forces greater pace and quality than government oversight. o But – market incentives and government policy objectives must be aligned. o A “government sponsored commercial market” is a contradiction in terms.  When a commercial product is not ready to emerge, government cannot force it; when it is ready, government cannot stop it. • Yet, history offers numerous examples where sponsorship of public enterprises has led to the creation of new commercial markets. o Maritime, rail, automotive, air transportation; power grid, water supply, satellite navigation. • Key space policy question for the 21st Century: how can public policy decisions most effectively spur collateral private developments in space? o Must first consider why private development has not already occurred.
  4. 4. “Commercial Space” and the Market • Free market structure, expectations, and constraints are not well aligned with the structure of space development programs. o Inflation averaged 3.1-3.2% from 1926-2010. o US Treasury Bills – 2.5% annual return, relative stable in recent decades. o High-grade corporate bonds – 5.5% from 1926-2010; real-dollar payback ≅ 30 years. o Equity Markets (70% US, 30% International) – 10% from 1926-2010; real-dollar payback ≅ 12 years. • Riskier investments must offer smaller commitments, greater return, quicker payback. o Venture Capital – > 40% return, 5-yr payback, < $5 M. o Angel investors – > 1000% return, 5-yr payback, < $1 M. • Space investments generally do not fit these profiles. o Large front-end commitments, risky enterprises, lengthy payback times.  Few investors seek such endeavors, and those who do aren’t in it for money.
  5. 5. Communications Satellite Business Example • Assumptions o High-end communications satellite – 56 transponders. o Investment NPV at beginning of Year 1 – US$0.5 billion. o Three-year development – equal real-dollar revenues in Year 4-18 (15-year life).  Out-year revenues inflated at June 2011 3.6% US Consumer Price Index. o Average $1.5 M/yr annual revenue for each 36 MHz equivalent transponder (current spot market price $1-2 M/yr depending on terms and conditions).  $84 M/yr total annual revenue. • Results o IRR 13.0% (9.4% real-dollar return) o Payback in Year 13 at 10% discount rate (i.e., cost of capital is the opportunity cost of the long-term equity market return: 10% from 1926-2010, or 6.8% real return). • Comsat business case is consistent with market treatment of investment with modest additional risk as compared to equity market index fund.
  6. 6. ISS Cargo & Crew Market • Assumptions o Anchor market is total US commitment to ISS: 15,000 kg/yr, 8 seats/yr (2 flights). o ISS remains in operation through Year 20 (16-year cargo market, 15 years for crew). o Company develops launch vehicle, launch facility, ISS-compatible cargo vehicle, crew vehicle. o Crew vehicle is a human-rated variant of the cargo vehicle, with additional investments for crew systems.  Investments in cargo vehicle apply to crew vehicle also. o Best-commercial-practice, four-year development program: cargo revenue in Year 5, crew revenue in Year 6.  Year 1 NPV of non-recurring costs for major system elements: Launch Vehicle – $350 M Launch Facility – 50 M ISS Cargo Vehicle – 200 M Crew System Upgrades – 100 M Total Expenditures – $700 M
  7. 7. ISS Cargo & Crew Market (cont.) o The company captures half of the US ISS market. o December 2008 NASA Commercial Resupply Service (CRS) ISS cargo contract pricing of $59K/kg assumed when service begins in Year 5, inflated at the June 2011 3.6% CPI in out-years. o Crew transportation is priced at $125 M/seat in Year 6 (double the average price of Russian Soyuz in 2014-16); inflated at 3.6% in out-years. o Launch service also offered in non-ISS market; $150 M/launch assumed in Year 5, inflated at 3.6% per year thereafter. o 4 non-ISS launches in Year 5, 2 additional launches per year to 12 in Year 9, constant thereafter.  Steady-state launch rate for all customers at least 14 per year. Delta launched 12 times in 1967, 13 times in 1998 with one failure. Atlas, Atlas-Agena launched 33 times in 1966, with 3 failures. 14 Atlas vehicles were launched in 1967 and 1978, 12 in 1995.
  8. 8. ISS Cargo & Crew Market (cont.) o The company operates with a net profit margin of 10% across all lines of business.  39% higher than the 7.2% average for the aerospace and defense sector. o No developmental failures resulting in additional expenditures or delays to the program occur. o No operational failures resulting in the interruption of service or additional expenditures occur in the course of the 179 flights (per the market capture assumptions above) in Years 5-20. o No modifications or upgrades requiring significant additional investment are necessary in Years 5-20.
  9. 9. ISS Cargo & Crew Market (cont.) • Results o Enterprise yields 20.5% IRR; well below “risky investment” expectations of 25-35%. o At a 10% discount rate (assumed cost of capital), payback occurs end of Year 10.  Year 6 of operations. o At the 10% discount rate, ISS crew/cargo yield negative returns; i.e., non-ISS launches are subsidizing the ISS business.  IRR increases to 21.5% w/o ISS market, even if no increase in other traffic. o Capturing the total crew market and half the cargo market yields 22.7% IRR, payback late in Year 9. o Capturing half the crew market and all of the cargo market yields 22.8% IRR, payback late in Year 9. o Entire US cargo, crew market for ISS yields 24.7% IRR, payback early in Year 9. • Observation: this is not a good business from a financial perspective, yet carries a high enterprise risk associated with potential human spaceflight accident(s). Typo fixed by SRF
  10. 10. Lunar Cargo Market • Assumptions o An international lunar base is developed with initial logistics requirements at least equal to ISS. o Cargo delivery to lunar surface priced at 10X that for ISS.  Reflects best-case “gear ratio” of cargo mass vs. lunar surface mass. o Same private venture as before, except now for cargo delivery to a lunar base. o Assume translunar stage and robotic lander can be developed for the same approximate cost as assumed for the ISS cargo/crew vehicle.  NPV of enterprise development expenditures remains $700 M. o The company captures half the lunar logistics market: 7500 kg/yr.  Delivered price is $590 K in the base year, inflated at 3.6% in out-years.  Revenues begin in Year 6 due to the greater difficulty inherent in the task. o Lunar base remains viable indefinitely.  No growth assumed in the initial business case analysis. o Other assumptions held constant.
  11. 11. Lunar Cargo Market (cont.) • Results o 27+% IRR for lunar cargo business alone.  Can be delivered with 7 launches annually. o Lunar base cargo delivery market should grow.  5% annual growth for first 15 years yields 30% IRR.  10% growth yields 33% IRR. o 6 launches/yr remain available for other payloads.  If sold for $150 M (as previously assumed) enterprise IRR increases to 30.5%. o If the ISS cargo mission is undertaken, the $200 M cargo vehicle development must be added to expenditures, and the enterprise IRR drops to 28.5%. • Comments o Much lunar cargo (water, food, other supplies) has relatively low intrinsic value.  Ideal market for new space companies; penalty for failure is small, enterprise risk is reduced, ample opportunity to refine designs through repeated use.  USG could guarantee a market for lunar base cargo prior to human return.
  12. 12. Conclusions • The ISS cargo/crew market by itself is insufficient to drive the development of a viable commercial space transportation industry. o Too small and too short-lived – cannot survive without front-end subsidies. o Even generous assumptions regarding non-ISS traffic do not close the business case.  Non-ISS traffic actually subsidizes the ISS business. • Supply of low-intrinsic-value cargo to a lunar base offers a substantially more attractive business opportunity than cargo or crew resupply of ISS. o Significantly higher IRR, lower enterprise risk, longer term – all the things necessary to attract investors. o Even a small lunar base (e.g., crew of 4 rotated twice per year) generates enough cargo demand to support at least two commercial space transportation companies. • Establishment of a lunar base aligns important strategic goals: it facilitates U.S. and international partners’ preeminence in cislunar space, and provides the “anchor market” for expansion of commercial space enterprises. o Many lunar base needs (power, comm, nav, mining) could be met via industry.

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