Boeing Lights Up Sea Launch
Richard McCaffery (TMF Gibson)
Aerospace and defense giant Boeing (NYSE: BA) started commercial operation of its long-awaited Sea Launch services company with the October 9 launch of a DirecTV satellite. The Sea Launch rocket successfully lofted the spacecraft into orbit after liftoff from its floating platform near the equator. Sea Launch, a rocket that's carried on a gigantic ship, takes advantage of the fact that it's cheaper to launch many satellites from the equator because the spacecraft burns less fuel getting into final orbit. Fuel plays a major role in how much a satellite weighs, which in turn affects its cost, capability, and life expectancy.
Boeing moved to capitalize on the Sea Launch idea in 1993, and a partnership was formed in 1995. Boeing is the majority partner in the venture with a 40% stake. Other partners include companies from Russia, Norway, and the Ukraine.
Space and communications is one of Boeing's three main businesses, and the Seattle-based company regards it as having the highest growth potential. As a result, investors should pay close attention to the company's success with its space-based ventures even though the division represented just $6.9 billion of the company's $56.1 billion in sales last year. Net income from the Space and Communications division in 1998 totaled $248 million.
Boeing's other space businesses include orbital systems and exploration, information and battle management systems, and missile and defense systems. Boeing expects revenue in this area to accelerate in part because of hot demand for launch services. This, of course, is being driven by the growth of the commercial satellite industry and lack of access to space. According to the Teal Group, a defense and aerospace consulting firm in Fairfax, Virginia, demand for launch services will continue to grow over the next decade. The Teal group estimates a total of 1,447 satellites will be launched aboard 850 to 900 rockets through 2009. The value of these launches is estimated at $49.5 billion. Shareholders should pay close attention to developing trends, however, since much of the recent demand for commercial satellite launches has been driven by growth of the low-orbitting satellite business.
Companies such as Globalstar (Nasdaq: GSTRF) and Iridium (Nasdaq: IRIQE) operate telephone systems that use low-flying satellites. Iridium's move into Chapter 11 raises questions about the health of the low-orbit satellite industry, and investors need to see how Globalstar fares when it rolls out service later this year. In addition to Sea Launch, Boeing offers satellite launch services from its family of Delta rockets, which it picked up through the August 1997 acquisition of McDonnell Douglas.
Currently, Sea Launch has contracts for 18 launches through 2004, including additional launches for Hughes Electronics (NYSE: GMH) -- the parent company of DirecTV -- and Loral Space & Communications (NYSE: LOR). It's good news for shareholders that Sea Launch has moved from development to commercial service. Boeing has set goals to greatly improve operating margins across all lines of business, and its Information, Space, and Defense Systems segment took a $127 million hit against operating profit in 1998 largely because of Sea Launch.
Boeing is trying to achieve double-digit operating margins in each business segment, which means operating returns on revenue will have to double in the company's Space and Communications unit. A string of successful Sea Launch contracts would add a boost.
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