These Corporate Subsidies Could Cost You $1 Billion a Year. Are They Worth It?

By Markets Fool.com

Every year, the United States government signs an Evolved Expendable Launch Vehicle Launch Capability contract with United Launch Alliance.

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Yawn.

OK, let's try this again: "Every year, U.S. taxpayers pay United Launch Alliance a $1 billion subsidy -- whether ULA does any work or not."


"We have to have the NRO platforms up in the air -- and we can't pay you a billion dollars to do it." Rep. Trent Franks, chairing the March U.S. House Armed Services Committee, Subcommittee on Strategic Forces hearing. Image:YouTube screenshot.

Oh. That got your attention, did it?

Well, it was designed to. This inflammatory charge, leveled at ULA by its rivals from SpaceX during a wide-ranging Congressional investigation into the space launch process last month, seems tailor-made to draw taxpayer ire in the weeks leading up to Income Tax Day. After all, if two of the nation's biggest aerospace companies -- Boeing and Lockheed Martin , who together make up the United Launch Alliance -- are getting $1 billion a year to do exactly nothing, well, that seems like a suboptimal way to use taxpayer dollars.

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The truth, however, is more complex.

SpaceX launches a rocket attack
In the course of criticizing the U.S. Air Force for paying "$11 billion" to buy 28 satellite launches from ULA over the next several years, SpaceX drew a bull's-eye on one particular aspect of the contract: The "ELC," or Evolved expendable launch vehicle Launch Capability contract.

According to SpaceX, when it signs a contract to build and launch a rocket into space, it's very clear on what the service will cost. There's a price list right on SpaceX's website showing that, for example, a Falcon 9 rocket costs $61.2 million to send into orbit. A Falcon Heavy rocket (once in service) will cost about $85 million.


SpaceX publishes its launch prices right on its website. ULA... doesn't. Source: SpaceX.

Government space launches entail more costs and will be more expensive. But even so, SpaceX says it can do a medium-size Air Force mission on a Falcon 9 for between $80 million and $90 million, or send a Falcon Heavy up for $150 million to $160 million. Call it $120 million on average, assuming an even split between "9s" and "Heavies."

In contrast, SpaceX says that its rivals at ULA charge $400 million, and benefit additionally from a $1 billion subsidy paid only to ULA. ULA gets to keep this money whether it launches 10 rockets... or none.

It depends on what the meaning of "subsidy" is
What is this ELC subsidy? It's like this: When SpaceX quotes a rocket price, that price includes the cost of building and launching the rocket -- and the cost of R&D, of running the rocket factories, maintaining the launch pads, and everything else that goes into the rocket biz. Thus, as SpaceX COO Gwynne Shotwell told Congress: "If I'm not launching, my fixed costs are not covered."

In contrast, says Shotwell, ULA receives its $1 billion annual payment (technically, $938,372,859) "whether they launch or not." ULA gets paid once when it builds and launches a satellite -- and then gets paid a second time for its infrastructure costs.

Or not.

Opinions may differ
Hoping to get to the truth, I called up ULA CEO Salvatore "Tory" Bruno the other week to discuss the ELC. And as you may imagine, he had a somewhat different take on the matter.

In Bruno's view, the ELC is not a subsidy at all, but rather a sort of "best guess" by the Air Force as to how many satellites it will launch in a year, the cost of doing those launches, and a prepayment of those costs. As Bruno describes it, the situation is like this:

The current generation of U.S. government satellites (satellites for spying, for communications, for weather mapping, GPS -- you name it) is rapidly approaching obsolescence, and the government needs to replace these satellites as quickly as possible. Unfortunately, while it knows how many satellites it needs (about six dozen, at last count), it's not quite certain when the satellites' manufacturers will have them built. And so, in dealing with ULA, the Air Force breaks its contracts into two parts: First, it pays for the rockets it needs -- a number it knows. Then, it prepays for the launches it expects to make in a given year, based on when it thinks the satellites will be ready to launch -- a number the Air Force must guess at.

As Bruno tells it, the ELC is simply the second part of that two-part payment system -- and not a "subsidy" at all.

SpaceX's Shotwell begs to differ, pointing out that if ELC paid purely for launch costs, it would mean that ULA is charging between $100 million and $125 million per launch. (SpaceX charges as little as half that sum for launch and rocket combined!) Accordingly, Shotwell told Congress at the hearing that, by her calculations, as little as 10% to 15% of the $1 billion ELC is related to actual launch costs -- the rest being pure subsidy.

Inquiring minds want to know -- who is right?
Honestly, it's hard to say whether ULA's or SpaceX's theory of the ELC is closer to the truth -- and not just for us. Last year, SpaceNews.com (a site that does this stuff 24/7) threw up its hands and lamented that after reviewing "Air Force budget planning documents dating back to 2011" it was forced to conclude that "the Air Force and ULA do not disclose EELV program costs on a per-rocket basis."

To the contrary, "a significant portion of the EELV budget is classified." And even if we could get a fix on one solid number, "EELV budgets tend to ebb and flow as the number of expected launches in any given year changes."

In short, EELV in general, and ELC in particular, is a moving target -- and an invisible target to boot.

What we do know is this: SpaceX CEO Elon Musk thinks that the ELC will "be phased out over time, as that is obviously contrary to fair and open competition." And in all likelihood, we'll have to wait until the ELC goes away to know the truth of the matter.

If ELC goes away, and Boeing's 8.7% profit margin on its space work promptly plummets, and Lockheed Martin's 12.7% profit margin falls off a cliff -- well, that will be pretty conclusive proof that the ELC was (and now is) a $1 billion subsidy for ULA. On the other hand, if ELC goes away but Boeing and Lockheed keep making money hand over fist -- then it's ULA's position that will be vindicated.

Until then, we'll just leave you with this picture-perfect sum-up from one congresswoman, after she sat through an hour and a half of ULA and SpaceX debating the issue:"Mr. Chairman... The more I learn, the more confused I get!"


Rep. Loretta Sanchez, at the March U.S. House Armed Services Committee, Subcommittee on Strategic Forces hearing. Image:YouTube screenshot

You and us both, congresswoman. You and us both.

The article These Corporate Subsidies Could Cost You $1 Billion a Year. Are They Worth It? originally appeared on Fool.com.

Rich Smithdoes not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 303 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.