Alain Charmeau runs ArianeGroup, the owner of rocket launcher ArianeSpace, a 50%-owned subsidiary of European aerospace giant Airbus (NASDAQOTH: EADSY).
That sounds like a fun job, but as Charmeau revealed in a recent interview with Germany’s Der Spiegel, it’s also a tough job — it requires Charmeau to compete with two of the biggest companies in spaceflight, America’s United Launch Alliance (ULA) and SpaceX.
Of the two, SpaceX is Ariane’s bigger headache. While ULA boasts bigger rockets and greater payloads than Ariane can offer, it also charges an arm and a leg for its launches, giving Ariane a big advantage on price when competing for launch contracts. SpaceX, on the other hand, charges a lot less for its launches than either ULA or Ariane charge.
Competing on price
In fact, SpaceX is so cheap that Ariane’s CEO worries SpaceX could eventually “kick Europe out of space” if Ariane cannot figure out a way to launch its rockets more cheaply. In an attempt to respond to the threat from SpaceX, Airbus and Ariane began designing a new family of rockets — dubbed “Ariane 6” — in 2012 to replace its venerable Ariane 5 line.
In his interview with Der Spiegel, Charmeau stated that Ariane needed to secure “seven contracts for guaranteed launches” aboard Ariane 6 “by the end of June.” The company has three contracts in the bag already, but if it doesn’t get the rest “we will have to halt production” for lack of work, says Charmeau.
Ariane is targeting a launch cost of 70 million euros ($82 million) for the smaller Ariane 62 version of the new launch system, which is expected to be capable of hoisting five metric tons of payload into geosynchronous transfer orbit (GTO) once it begins launching in 2020. This will represent a significant cut to launch rates for a similar-sized Ariane 5, which former Ariane head Jean-Yves Le Gall says average $137 million before subsidies. Ariane 62’s larger cousin, Ariane 64, will carry twice as much cargo at a targeted cost of 115 million euros, or $134 million.
Close, but no cigar
But here’s the problem: SpaceX’s Falcon 9, which is already in operation, lifts more cargo (8.3 metric tons) than Ariane 62 will be able to carry, and for 24% less money — $62 million. Priced per ton, the disparity looks even more obvious: SpaceX’s Falcon 9 moves cargo for $7.5 million per ton, while Ariane 62 costs $16.4 million — more than twice as much.
Similarly, SpaceX advertises a $90 million launch cost for its new Falcon Heavy rocket, which conducted its first launch in February. Falcon Heavy has a GTO payload of 26.7 million tons, which is more than twice the anticipated 10-ton payload of the Ariane 64. And once again, the SpaceX rocket costs less — nearly 33% less per launch, and more than 75% less per ton ($3.4 million for the Falcon Heavy versus $13.4 million per ton for Ariane 64).
So any way you slice it, even after the Ariane 6 enters service SpaceX is still going to be able to undercut its prices. What’s more, Airbus’s Ariane won’t even have its new rockets ready to fly before mid-2020. And who knows how much lower SpaceX will have driven its prices by then.
SpaceX already says it can offer rocket rides for as much as 30% below published list prices when customers elect to fly on reused Falcon 9s. The more often SpaceX flies reused rockets instead of expendables, the lower its prices can be expected to fall.
A double standard at SpaceX?
When Der Spiegel pointed out this continuing price disparity last week, however, Charmeau said that “this is not correct.” SpaceX is actually not cheaper than Ariane — at least not according to Ariane.
“SpaceX is charging the US government $100 million per launch,” argues Charmeau, “but launches for European customers are much cheaper.” Because of this, Charmeau doesn’t think SpaceX is playing fair.
In Charmeau’s opinion, SpaceX is intentionally undercharging for commercial Falcon 9 launches for one reason only: “To kick Europe out of space” by undercutting Ariane’s pricing. As the CEO argues, SpaceX “charges their government too much money.” Put another way, the U.S. government is subsidizing SpaceX. SpaceX then uses the excess profits it earns from these expensive government launches to cover its (presumed) losses on the ultra-low prices charged to commercial customers.
But is that correct?
Explaining the disparity
Not necessarily. The disparity between the prices the U.S. government pays for rocket launches and the prices that commercial customers pay is pretty glaring. For example, on its Capabilities & Services webpage, SpaceX lists a $62 million “standard” price for a commercial rocket launch. A recent contract with the Air Force, however, saw SpaceX charge the government an average of $96.9 million apiece for three GPS satellite launches — about 56% more.
A key distinction between commercial launches and government launches, however, is this: Red tape. A few years ago, I reached out to ULA head Salvatore Bruno to ask why ULA, which mainly launches satellites for the government, charges so much more (as much as $350 million per launch) than SpaceX charges for its mostly civilian launches. Among other factors affecting cost, Bruno pointed out that ULA is required to adhere to “FAR 15” federal acquisition regulations, which add multiple requirements for launch safety surety, along with increasing costs.
Sure, it’s debatable whether FAR 15 adds $300 million to the cost of a launch, but government regulations certainly add some cost — and that’s part of the reason SpaceX charges “$100 million” for a government launch, versus only $62 million for a civilian launch. In fact, when viewed in the context of Bruno’s comments, the higher cost of SpaceX government missions, relative to commercial missions, actually makes a lot of sense.
That’s probably cold comfort to Ariane, Airbus, and their investors, of course. But it does explain the disparity — and strongly suggests SpaceX will continue to win business from Airbus and ULA until they figure out a way to fix their pricing problem.
10 stocks we like better than Airbus
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Airbus wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of May 8, 2018