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What’s the Business Case for Private Space Flight?

Private companies Orbital Sciences and SpaceX are putting rockets into space to resupply the International Space Station. According to Orbital’s Bill Claybaugh, the only thing tougher than rocket science may be making the rocket business work.

On April 21, 2013, a 133-foot-tall, 600,000 pound rocket blasted off from a Virginia launch pad and within ten minutes was coasting 350 kilometers above the earth. The successful launch, the first for Orbital Sciences’ Antares rocket, opens the way for a demonstration rendezvous of the company’s cargo vehicle with the International Space Station (ISS). If that goes well, the company will conduct cargo missions every 3-6 months until it completes a $1.9 billion contract in 2016.

Another firm, Elon Musk’s SpaceX, has already completed two resupply missions to the ISS as part of its 12-mission, $1.6 billion contract. SpaceX's vehicle, Dragon, is reusable, unlike Orbital’s, which burns up on re-entry. In March 2013, Dragon splashed down 200 miles off the coast of California carrying a range of material, including scientific samples, from the ISS back to Earth.

Are these private space flights the beginning of a trend? Is this an example of an industry moving from government to the private sector? We talked with Bill Claybaugh ’83, senior director of human space systems for Orbital Sciences, about the role of private companies in manned and unmanned space flight. He suggested that the recent flights are an incremental shift, rather than a dramatic change in the model for space flight. Aerospace companies have been critical to building every U.S. rocket and space vehicle from the earliest days of the space program. And government remains the main customer today.

While the cargo business is taking off, Claybaugh argues that there is a long way to go before there is a market for private human space flight. While many dream of space vacations, the realities are that costs need to fall by 90% to create sufficient demand to support a business.

While acknowledging that anything is possible in the long term, Claybaugh doesn’t see space travel as a clearly viable business, given past private investment losses, current costs, the intense technological requirements, and the potential for failure. “Every single time we launch a rocket we take a pretty much binary risk on outcome,” he says. “It’s high risk, low return. Why would you do that?”

 

TRANSCRIPT

Q: Are there areas of the manned space program that are well suited for private companies to expand into?

Bill Claybaugh: The cargo business makes a lot of sense. There’s a lot of it and there’s enough of it to justify substantial private investment, which can be recovered against the available contracts. One could in theory and even at some level of meaningfulness in fact argue that there ought to be a business carrying people. The problem is for the existing market for human transport to orbit, the entire business is basically two to four missions a year, depending on how big your spacecraft is. But for a three-to-four-person spacecraft, there’s a maximum four missions a year for complete supply of everybody how has to get to and from the space station. And half of those missions are going to be sovereign to the Russian government, so the commercial case is two missions. It’s very, very difficult to justify building a human-rated spacecraft in order to fly twice a year on a private sector basis. I do not see how it works out.

Now, that’s the near term. There is data indicating extremely large unmet demand for human space flight but that demand is at price points way below current prices—like a factor of 10 at least. So, today there’s no way of accessing that demand. But in the long run there is clear-cut opportunity for somebody, if they can figure out how to cut costs by a factor of 10, to generate literally many tens of billions of dollars a year in revenue transporting folks into earth’s orbit for it, to be blunt, vacations.

And the problem here is although there’s a good business case, there’s a time-value-of-money problem. It costs so much money to develop a commercially funded spacecraft that could fly into orbit at low cost and return—human rated, safe enough to do this job. The kind of investment is in the tens of billions. And trying to get that money back in six or seven years is basically impossible, so you’re left with a market failure. You can’t get there on a private investment basis. And the government politically cannot justify spending tens of billions of dollars developing a spaceship so that rich people can take vacations in earth orbit, even though there is enormous demand for that and it would significantly add to the economy. But we don’t justify these kinds of investments based on their return to the economy, so for the moment things are stuck.

Q: Do you see opportunities in the long run for private space exploration?

Claybaugh: In the long run, anything’s possible. Some of the issues become technological. Chemical rockets are probably not the right technical choice for getting much beyond earth orbit. It can be shown that if it costs as little as a $100 a pound to put things in earth orbit—and that’s near as low as it could get with chemical rockets—that it would still cost $5,000 a pound to send things to the moon. That’s just the physics. And $5,000 a pound is about the current cost of getting things into earth orbit and at that price there is very, very little, it’s something that—there’s very little transport. It is something that is largely reserved for governments and extremely large corporations. It’s just—in any reasonable time frame, even a lunar colony is not a likely outcome as long as we’re dependent on chemical rockets. And that in turn implies the requirement for new technology and there’s some potential technologies but nothing today that is going to pay off in the next 50 years.

Q: What are the lessons in the experiences of privately developed space flight?

Claybaugh: It’s arguable that people who invest in space transportation as a business lose their shirts. And I can show—not counting the partially government funded evolved expendable launch vehicle program—I could count at least $2 billion of private investment that’s gone into private development of space launch systems over the last, well, since 1980. Of that you can count about 40-plus revenue launches of the Pegasus launch vehicle, which was privately developed, and a couple of launches of the Athena launch vehicle, which was also privately developed, totaling maximum a few hundred million dollars, six, seven hundred million dollars of revenue back. So ignoring the time value of money or anything else, that $2 billion would have been better spent if it had been out in a checking account. I mean we’ve spent about $2 billion of private resources getting about $700 million of private return. It doesn’t make sense. It’s not a good investment. And it’s not likely to be a good investment.

On the flip side, it’s necessary. There are certain things, certain payloads, that simply must fly, almost irrelevant of the price. And given that there is national security demand, somebody has to do it. So even though it’s a lousy business—I have a friend who does strategic planning for one of the major launch companies and he says if we could figure out how to get out of this business we would. But somebody does have to do it. And so you see a handful of companies that stay in, but nobody is making a fortune in the aerospace business. It’s a low-margin, intensely technical business that involves a lot of risk. Literally every single time we launch a rocket, we take a pretty much binary risk on outcome. You can lose them for almost any reason every launch. It’s high risk, low return. Why would you do that?