This article originally appeared in the Oct. 22, 2018 issue of SpaceNews magazine.

The U.S. Air Force is moving into the next chapter of military space launch — competitive procurement of launch services from a wider field of commercial vendors with entirely U.S.-made rockets.

While some observers were surprised to see SpaceX excluded from the first step of the new program, others explained it’s all part of the long-term strategy to ensure at least two launch providers are vying for national security orders.

Congress is supporting and driving this change, starting with giving the program a new name. Section 1603 of The John S. McCain National Defense Authorization Act for 2019 says that, effective March 1, the Evolved Expendable Launch Vehicle (EELV) program that’s been in existence for more than two decades will be known as the National Security Space Launch program.

The transition to a commercial model began several years ago when the Air Force sought to capitalize on private investment to help reduce launch costs. The Air Force in 2015 moved to end the monopoly held by United Launch Alliance by qualifying SpaceX as a new entrant into the EELV program. The following year, SpaceX won an $82.7 million contract to launch a GPS-3 satellite. To the Air Force’s dismay, ULA sat out the competition, saying it couldn’t win on price alone.

Efforts to open the market to new launch providers took a step further when Congress passed the 2015 National Defense Authorization Act. Section 1608 prohibited the Defense Department from awarding or renewing EELV contracts for rockets using engines designed or manufactured in the Russian Federation.

Congress amended the language in 2016 to avoid prematurely sidelining ULA’s Atlas 5, which uses a single Russian-built RD-180 engine for its main stage. The 2017 National Defense Authorization Act set a Dec. 31, 2022 end date for awarding national security launch contracts to ULA for RD180-powered Atlas 5 launches. To prevent the Air Force from circumventing the ban by placing a large last-minute order for Atlas 5 launches, the law also imposed a strict limit on the number of additional RD180 engines ULA could order on the Air Force’s behalf: 18.

ULA president and CEO Tory Bruno told SpaceNews last week the company already has used a share of those 18 engines for Air Force launches but has some left for orders that could be signed before the 2022 deadline. He would not say how many.

To curtail its dependence on the Russian engine while diversifying the U.S. industrial base, the Air Force embarked in 2016 on a major investment in new rocket propulsion systems. Roughly $1 billion in cost-sharing research-and-development contracts known as OTAs, for Other Transaction Authority agreements, were awarded that year to ULA, SpaceX, Orbital ATK (now Northrop Grumman Innovation Systems) and Aerojet Rocketdyne.

The next step called for selecting three companies this year to split more than $2 billion in so-called Launch Service Agreement (LSA) funding to develop commercially viable rockets that could be trusted to carry national security payloads.

On Oct. 10, the Air Force Space and Missile Systems Center announced that ULA would receive up to $967 million to develop the Vulcan Centaur rocket, Northrop Grumman would receive up to $792 million for its OmegA rocket and Blue Origin would receive up to $500 million for the two-stage version of its reusable New Glenn rocket.

Many were surprised to see SpaceX left out of the winner’s circle. The company, after all, had won Air Force funding in 2016 to continue development of Raptor, a reusable methane-fueled engine meant to replace the Merlin engines that power the upper stages of the Falcon 9 and Falcon Heavy. Analysts were quick to note that the Air Force chose three companies developing brand-new rockets, not pursuing performance upgrades for rockets already earning Air Force business.

Of course, SpaceX is developing a brand new launcher, the exploration-class Big Falcon Rocket that company founder Elon Musk unveiled in Mexico City in September 2016, nine months after the Air Force had agreed to co-fund development of a more powerful, reusable upper stage engine for Falcon 9 and Falcon Heavy. At the heart of the BFR: a core stage with 42 Raptor engines (Musk has since tweaked the BFR design to make do with fewer, less powerful Raptors and is aiming for initial orbital flights around 2020 or 2021).

According to one industry source, SpaceX submitted an LSA bid for the Big Falcon Rocket. SpaceX did not respond to requests for comment and Air Force officials declined to say whether the company bid.

Even without an LSA award this round, SpaceX is expected to be eligible to challenge ULA, Northrop Grumman and Blue Origin for launch contracts during the next round, which the Air Force calls phase 2.

Phase 2 is open to all U.S. rockets that can meet Air Force certification requirements, which will be detailed in a draft solicitation expected in 2019. “Anybody can compete,” an Air Force official told SpaceNews. But under the agreement with the three LSA winners, all three must bid for phase 2 and “anybody that is not chosen for phase 2 procurement will have their OTA funding terminated.”

If any of the three LSA winners fails to bid, they would also have to pay back any OTA money they had already received. “We chose three LSA partners to guarantee that there are three to compete for phase 2,” the official said. He said the Air Force will help bidders get their vehicles certified — meaning they must do at least one or two successful launches — so they are positioned to compete for the phase 2 launch contracts.

SpaceX’s Falcon 9 has flown more than 60 missions since its 2010 debut, including a half-dozen for DoD customers. Falcon Heavy, which debuted in February, was awarded a $130 million Air Force contract in June. United Launch Alliance, in contrast, expects Vulcan Centaur to make its first launch no sooner than mid-2020 while Blue Origin and Northrop Grumman don’t expect to conduct their first launches until 2021.

Duopoly, part deux

While the Air Force stands to inject an additional $2.3 billion into domestic launch vehicle development over the next few years to foster competition, only two providers will get actual launch contracts for a yet-to-be-determined number of missions to be flown between 2022 and 2025. The Air Force intends to split the awards 60/40 between just two providers. Losers would have to wait until the next round of procurement contracts to get another shot at Air Force launch contracts. The schedule for that round has not been set, and much depends on how phase 2 unfolds.

The Air Force official said the service wants robust competition but must narrow the field to two providers in phase 2 because it also needs stability in the launch market. “Having a well-understood partner to work with during that five-year period is important,” the official said.

Meeting Air Force mission-assurance standards costs money, so dividing the launch contracts among three or more firms isn’t seen as cost-effective for the government, or the providers themselves.

Bruno said he believes there is “enough space in the market for two domestic launch providers” but not enough work for more than two.

When the EELV program started in 1995, Bruno said, the satellite industry was anticipating that “data and internet would all go to space” creating robust demand for new launch vehicles. But fiber optic cable, not satellite links, built the bulk of the information superhighway “and the bottom fell out and the satellite industry collapsed,” he said. “We could face that again if we are not careful.”

Contenders, consequences

The Air Force’s LSA strategy sets up some intriguing scenarios for a launch industry that’s once again courting a growing number of ventures planning to put up hundreds or thousands of broadband satellites in the years ahead.

If ULA doesn’t win future national security launches, the Air Force’s most reliable launch provider could go out of business due to its long-standing dependence on military contracts. It remains to be seen whether Vulcan Centaur is any more successful than Atlas 5 or Delta 4 at winning commercial launch contracts.

SpaceX, with its diverse mix of commercial and government customers, isn’t facing the same sort of reckoning. While ULA will have no choice but to bid a new rocket, SpaceX presumably could offer the Air Force a mix of Falcon 9, Falcon Heavy and BFR launches. Passing over proven low-cost leader SpaceX could require the Air Force to award five-year contracts to new rockets with perhaps as few as one or two certification flights under their belts.

Charles Miller, a former NASA commercial space adviser, sees ULA and SpaceX as the phase 2 front-runners in part because they are the only two in the mix that have been through the Air Force’s certification process. Additionally, SpaceX’s Air Force-certified Falcon 9 and Falcon Heavy rockets will likely still be flying when it’s time for the Air Force to award LSA launch contracts. ULA’s dependence on Air Force funding becomes its own sort of competitive advantage. “You pick ULA because you know they won’t be around if you don’t,” Miller said.

Blue Origin could be easier for the Air Force to snub because its billionaire owner Jeff Bezos has said he’s willing and able to develop New Glenn at his own expense.

“If I were the Air Force, I would want Bezos in the background putting competitive pressure on the two companies I did select,” said Miller.

Similarly, Northrop Grumman — as one of the five biggest U.S. defense contractors — could afford to keep OmegA going even if it does not win phase 2 contract. While Northrop isn’t known for building launchers, its acquisition of Orbital ATK brought onboard considerable expertise — including a knack for keeping rockets in business with relatively few orders. OmegA vice president Mike Laidley said Northrop Grumman’s strength is that it is a “stable supplier that can handle fluctuating demands that are pretty typical in the space industry.”

The larger question about the Air Force’s win-big-or-go-home acquisition strategy is what it risks by locking out other competitors.

Avoiding EELV’s missteps

In the mid-1990s, the Air Force set up the EELV program with two competitors — McDonnell Douglas (later acquired by Boeing) and Lockheed Martin. Each received $500 million from the Air Force to subsidize development of new rockets to compete for government and commercial business. By the early 2000s, it was clear that the commercial business would not pan out as expected. When the Air Force decided in 2005 to forgo competition for its next two dozen launches and divide them roughly evenly between Boeing’s Delta and Lockheed’s Atlas rocket, the two companies made the case that merging their government launch operations would yield benefits that would offset the loss of competition. The United Launch Alliance joint venture began operating as a monopoly in 2006.

Cristina Chaplain, a senior analyst at the U.S. Government Accountability Office who has followed the EELV program since its inception, told SpaceNews the Air Force could end up in a similar situation if one or both suppliers chosen for LSA’s phase 2 don’t win enough commercial work to keep prices competitive. “The commercial market has always been hard to predict, and will continue to be hard to predict,” Chaplain said. “They run the risk of being too optimistic about how many launches these companies can win, particularly ULA, which hasn’t had many.”

Chaplain said if commercial demand falls short of expectations, the Air Force could find itself again paying higher prices for launches and potentially directly subsidizing its chosen providers to keep them viable, would have to subsidize suppliers to make sure they stay viable. Nobody now believes that will happen, she observed, but circumstances could change in the coming years.

“It’s going to be the same issues they’ve had in the past in being able to sustain two suppliers,” she said. In a worst-case scenario, the Air Force would have to spend money to prop up the industrial base, but that is a risk that the service decided it’s worth taking given the current private-sector activity.

An industry analyst who asked to not be quoted by name because he works with clients in the space sector said the LSA strategy has been carefully thought out by the Air Force, and stems from the service’s goal of being “one customer” of many commercial launch providers. The Air Forces is projecting that the two providers picked for phase 2 of LSA could win 20 to 25 launches on the commercial market between the two of them over the five-year period, the analyst said. This is not unreasonable, he noted, given that in 2017 there were 33 commercial launches worldwide and the United States performed 21 of them.

Part of the criteria for the LSA selection were the companies’ business cases, said the analyst. “We don’t have insights into the number of launches a company needs to stay in business on the commercial side and the national security side. But we know the Air Force looked into that information. They are aware that this is a factor they have to consider.”

The Air Force is aware that the commercial market fluctuates, which enhances the appeal of a company like SpaceX that is planning to put up a broadband constellation and could fill its own backlog. Similarly, Blue Origin is going to self-fund its way forward and would not need Air Force subsidies.

Compared to the original EELV competition, the Air Force is now insisting that the companies have a strong case that they can win commercial launches, the analyst said. “DoD wants a price competitive vehicle. They don’t want a repeat of EELV when they were banking on 30 commercial launches a year that never came to fruition.”