Competitiveness in the Launch Services Industry – Impact of Various Factors in the Launch Contract and in Liability Provisions of Government Launch Regulations

As I mentioned in my last blog, the ABA Air and Space Forum had an interesting Space Law Symposium last week.  Included among the panels was one on launch vehicle contracts that had representatives from SpaceX, Arianespace, and ILS.  One important perspective to examine and compare some of the topics covered and main points made at the ABA Symposium’s launch contracts panel is competitiveness.  Keep in mind price is likely the primary factor in customer decisions, but price can be influence by many other factors:

  1. Dispute Settlement: Arbitration is the typical dispute settlement mechanism chosen in launch contracts, although disputes are often settled more informally. No surprise given that many customers are repeat customers and arbitration has become a bit more litigation-like, in terms of increase costs, length of proceedings, etc. It used to be thought that arbitration was preferable to litigation in part because companies were better able to preserve existing business relations, but in the space industry launch companies are leery of even resorting to the arbitration clause except in the most extreme circumstances due to the desire to keep existing customers and the competition among launch companies (i.e. fear of customer contracting with a competitor).
  2. Export Credit: Both the US Ex-Im Bank and the French export credit agency (COFACE) are involved in satellite manufacture and launch financing. Indeed, Ex-Im’s satellite financing is the fastest growing sector in its portfolio. This development eliminates the competitiveness disadvantage that would occur to US launch companies and satellite manufacturers if COFACE was in the game and Ex-Im Bank was not. ILS in turn is interested in taking advantage of a new Russian export loan guarantee program. Interestingly, COFACE financing can even indirectly benefit US launch providers. For example, COFACE was involved in financing Iridium satellites built by Thales Alenia and launched by SpaceX. Sure enough, since the financial crises of 2008, export credit agencies are playing an increasingly important role in satellite deals.
  3. Space Insurance & Re-Launch Guarantees: Although launch companies often offer re-launch guarantees, they are rarely part of the launch contract as they are not a popular option among launch customers. Customers prefer to purchase launch insurance in a package of insurance coverages that might lessen total insurance cost and keeping in mind that re-launch guarantees do not come for free – one way or another they have to be built into the launch price. Thus, launch companies are not competing amongst one another through the offering of re-launch guarantees – offering such policies has little to no impact on competitiveness. (One additional interesting note – a few customers do not purchase launch insurance and simply self-insure against such a possibility or assume the risk).
  4. Third-Party Liability: France caps third-party liability of Arianespace launches at roughly 60 million euro. Arianespace purchases insurance for that amount but is not responsible for any damages exceeding that amount. Russia, in essence, caps liability for large rocket launches such as the Proton at $300 million dollars. In the United States, a three-tiered regime exists: In the first tier, launch companies must obtain insurance covering the Maximum Probable Loss (MPL) –it averages around $80-90 million, although recent SpaceX launches have MPL’s as low as $36 million. In the second tier, the US government promises to indemnify companies for the next $2.8 billion in third-party damages, although it is important to realize that in order for this promise to be realized it will take an appropriation law passed by Congress.  Further, this promise of indemnification has lapsed for short periods and has only been extended for one to three years when renewals have occurred recently. The current promise of indemnification expires January 2017. In the third-tier, that applies whenever third-party damage exceeds the first-two tiers ($2.8 billion plus MPL), the liability reverts to the operator. In short, US launch industry’s competitors benefit from a third-party liability cap while the US launch industry relies on limited promises of government indemnification. Since liability regimes impact contractual negotiations and could ultimately impact launch price, US industry is placed at a competitive disadvantage in this respect.

(c) Copyright: Matthew Schaefer.  All Rights Reserved.

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