Despite Air Force Concerns, Pentagon Says Space Force Is Affordable
The Pentagon has finally floated an estimate for how much it will cost to set up Space Force. The amount is good news for supporters of President Donald Trump's plan to create a sixth branch of the armed forces.
Deputy Secretary of Defense Patrick Shanahan on Nov. 15 told reporters that his team estimates the start-up costs for Space Force would be in the "single-digit" billions, and "could be" lower than $5 billion . That seems like a lot of money, but the estimate is well below Air Force projections for $13 billion in start-up costs.
There is reason to be skeptical about any start-up cost estimate, and the administration has ample motivation to downplay the cost. The question of whether a Space Force is even needed is expected to be taken up by Democrats now in control of the House of Representatives.
For defense investors, the update is a step in the right direction. While the cost and exact structure of Space Force is still up in the air, it seems increasingly likely that some sort of a new, space-focused organization will emerge from the effort. Shanahan said the Pentagon is already in the process of creating a unified Combatant Command for space and a development agency, with plans to pick leaders for the two groups in the months to come.
Battling for turf
The Air Force's initial estimate was greeted with significant skepticism when it was made public, as the Air Force today is where much of the Pentagon's space activities currently reside. The Air Force Space and Missile Systems Center in southern California currently oversees about 85% of Department of Defense space procurement, including satellite acquisition and launches.
Air Force officials including Sec. Heather Wilson have defended their estimate, saying that sum is what would be needed to realize the full scope of what President Trump has discussed. But critics note the estimate also includes a newly constructed headquarters and a total head count of about 13,000 highly paid engineers and support staff.
Todd Harrison, director of budget analysis at the Center for Strategic and International Studies in Washington, D.C., during a Sept. 20 news conference called the $13 billion figure "the highest estimate I think you could possibly come up with," noting it assumes building all new infrastructure and hiring a massive support staff from day one.
The Air Force's goal in trumpeting a high cost figure is to point out that much of what Space Force is meant to accomplish could instead be done by existing organizations. Wilson seemingly has a sympathetic ear in Rep. Adam Smith, the Washington Democrat set to chair the House Armed Services Committee, who has said that the U.S. must expand its military capability in space but has questioned whether the creation of a new bureaucracy is necessary.
Shanahan told reporters on Nov. 15 that his team is working to send a Space Force proposal to Congress by February that will "withstand the cost-scrutiny question."
What's an investor to think?
It's tempting to say the budget debate doesn't matter, because regardless of what becomes of Space Force, as Rep. Smith notes, space is going to be an area of priority for the Pentagon for years to come. The fiscal 2019 defense budget includes $9.3 billion for space programs, a jump from $7.8 billion in 2018, and top space contractors including Boeing (NYSE: BA), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC), Raytheon (NYSE: RTN), and Harris (NYSE: HRS) should all benefit.
It's also important to note that the divergent estimates are likely comparing different things. Wilson's is more of an all-in total, while Shanahan is likely excluding ancillary agencies, including the command and development agencies.
But costs do matter. Every dollar that goes toward constructing a headquarters building or staffing a new bureaucracy is a dollar that can't go toward research and development or procurement. With the 2020 Pentagon budget expected to be flat at best, the industry has to worry about Defense officials borrowing from other areas to fund Space Force start-up costs. There is a risk that the creation of a new space-focused branch would temporarily depress procurement spending as the government focuses on getting the branch up and running.
The best hope is that the public nature of this debate will increase scrutiny on Pentagon officials tasked with creating Space Force and help keep start-up spending to a minimum.
This turf war is no reason for investors to avoid exploring space, because long term, the sector is a winner. Just be wary of wild estimates as the battle plays out.
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