Prospects for Financial Success of Commercial ... · U.S. Companies Commercial U.S. Companies...

SpaceWorks Engineering, Inc. (SEI)www.sei.aero

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WINNING IN THE NEXT SPACE MARKET:Prospects for Financial Success of Commercial Transportation Services to the International Space Station (ISS)26th International Space Development Conference (ISDC)Dallas, Texas25-27 May 2007

Mr. Dominic DePasqualeSystems EngineerSpaceWorks Engineering, Inc. (SEI)[email protected]+770.379.8009

Mr. A.C. CharaniaSenior FuturistSpaceWorks Engineering, Inc. (SEI)[email protected]+770.379.8006

Contents

Firm OverviewIntroduction and ProcessModeling Inputs and AssumptionsBaseline Scenario Results


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Firm Overview


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About SpaceWorks Engineering, Inc. (SEI)

Overview:- Engineering services firm based in Atlanta (small business concern)- Founded in 2000 as a spin-off from the Georgia Institute of Technology- Averaged 130% growth in revenue each year since 2001 - 85% of SEI staff members hold degrees in engineering or science

Core Competencies:- Advanced Concept Synthesis for launch and in-space transportation systems- Financial engineering analysis for next-generation aerospace applications and markets- Technology impact analysis and quantitative technology portfolio optimization


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Practice AreasSpace Systems Analysis | What is the System?Conceptual Level Engineering AnalysisConceptual Level Engineering DesignLife Cycle AssessmentCost EngineeringAdvanced / Robust Design Processes

Technology Prioritization | What are the Implications? Technology AnticipationTechnology Benefit AssessmentsTechnology Prioritization

Financial Engineering | Is the Project Viable?Business DesignFuture Venture Due DiligenceReal Options Analysis

Future Market Assessment | What is Next?Scenario PlanningMarket ForecastingMarket Analysis

Policy and Media Consultation | How to Express the Vision?Government InitiativesPolicy ConsultationTelevision, Film, Radio, Internet Presence


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Economic Engineering Group (EEG)

- The EEG and its affiliated consultants leverage advanced modeling techniques, state-of-the-art software tools, expert market forecasts, and a knowledgeable engineering technical staff to provide:

- Strategic insight into the global aerospace industry- Emerging business design and strategy formulation- Future venture due diligence- Flight and ground systems life-cycle cost estimating - Operations and top-level safety assessments- Market forecasting for emerging space markets - Space industry ROI analysis using advanced modeling including agent-

based and probabilistic simulation techniques- Technology investment cost-to-benefit assessments- Procurement evaluation and design review- Performance analysis and independent concept assessment (with

Advanced Concepts Group at SEI)

Artists: Phil Smith, Rhys Taylor for SpaceWorks Engineering, Inc. (SEI)


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Sample Economic Analyses by SpaceWorks Engineering, Inc. (SEI)

Human Exploration Cost Estimates Scenarios of Reusable Launch Vehicle (RLV) Price Sensitivity

500

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DDT&E AND TFU COST REDUCTION25% 75%

25%

75%

Components of LCC (FY06)

Other (Robotic/ISS/Shuttle)

CEV/CM

CLV

LSAM

CaLV-HLLV

EDS + CEV/SM

Technology Maturation Surface Systems

Facilities, Operations, and Flight Tests

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Year

$M

$111.3 B (2006-2018) $53.4 B (2019-2025)$164.7 B

NASA FY06 Exploration-Related Budget

See: http://www.sei.aero/library/technical.html for more information and technical papers on above analyses

Space Tourism Economic Modeling International Space Station (ISS) Support Market

-100M

-50M

0M

50M

100M

0 2 4 6 8 10 12

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ount

ed C

umul

ative

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sh F

low

(US

$)

Project Year

Effect of Competition

Higher-End Operator

In Competition with Higher-End

Lower-End Operator

Effect of Market Entry Date

0 2 4 6 8 10 12Project Year

-40M-20M

0M20M40M60M80M

-60M-80M 2 Year Market Delay

4 Year Market Delay

Higher-End Operator

Lower-End Operator

5 Commercial Competitors + min. 2 CEV/Yr + Russian Competition


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Introduction and Process


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Opportunistic Environment for Entrepreneurial Earth to Orbit Services

Government Policy Mandates:- U.S. National Space Policy (Aug. 2006)

“The United States is committed to encouraging and facilitating a growing and entrepreneurial U.S. commercial space sector.”

NASA Strategic Vision:- U.S. National Vision for Space Exploration (Feb. 2004)

“[The NASA Administrator will] Pursue commercial opportunities for providing transportation and other services supporting the International Space Station and exploration missions beyond low Earth orbit.”

- President’s Commission on the Implementation of U.S. Space Exploration Policy (June 2004)“The Commission recommends NASA recognize and implement a far larger presence of private industry in space operations with the specific goal of allowing private industry to assume the primary role of providing services to NASA, and most immediately in accessing low-Earth orbit.”

Gap between Space Shuttle retirement in ~2010 and CEV availability in ~2014:- NASA Administrator Dr. Griffin at a House Science Committee Hearing on the Future of

NASA (June 2005)“…we need a more robust logistics capability for crew and cargo than the United States or our international partners have readily available or on the drawing board. For this reason, we plan to leverage our nation's commercial space industry to meet NASA's needs for ISS cargo logistics and possibly crew support.”

Pressurized and Unpressurized Cargo CEV Variants Dropped- Orion CEV Contract Modification Press Release (April 2007)

“Production of a pressurized cargo carrier for the International Space Station has been deleted from the initial design phase.”


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Commercial Orbital Transportation Services (COTS)

NASA established the Commercial Crew/Cargo Project to oversee the Commercial Orbital Transportation Services (COTS) Program

- Create a market environment in which commercial space transportation services are available to Government and private sector customers

Phase 1 Demonstrations (2006-2010)- A period of development and demonstration by private industry in coordination with NASA of various space

transportation capabilities to and from low-Earth orbit (LEO) determined to be most desirable for the Government and other customers

Phase 1 capabilities (Fixed-price, pay-on-demonstration milestones)- A. External (Unpressurized) Cargo Delivery and Disposal- B. Internal (Pressurized) Cargo Delivery and Disposal

Phase 1 winners get development funds to demonstrate services by 2010- Rocketplane-Kistler: Capability A/B/C Award (US$207 M), Capability D Award (US$200 M)- Space Exploration Technologies (SpaceX): Capability A/B/C Award (US$278 M), Capability D Award

(US$308 M)Phase 2 (open bids for services starting in 2010)

- A potential competitive procurement of orbital transportation services to resupply the ISS with cargo and crew. [flexible services contracts for delivery orders]

Image sources: NASA COTS Office (NASA JSC)

- C. Internal (Pressurized) Cargo Delivery and Return- D. Crew Transport (OPTIONAL)


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Trying to Model the World (or even a small piece of it)

Source: Stephen Eubank, “Social Networks and Epidemics,” Basic and Applied Simulation Sciences, Los Alamos National Laboratory

The world is complex

Complex group interactions

Simple individual/agent behaviors

Conditions change -> agent behaviors change

Microsoft Excel – strains to model complexity


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Nodal Economic Space Commerce (NESC) Model

Agent-Based Modeling (ABM): allows heterogeneous agents with varied and dynamic behavior

- Simulation can represent plants and animals in ecosystems, vehicles in traffic, people in crowds, or autonomous characters in animation and games

- Qualities: natural description of the system, captures emergent phenomena, flexible

The Nodal Economic Space Commerce (NESC) model is a dynamic, agent-based space market simulation and financial engineering tool

Modeling space capitalism in NESC- Competition between firms, including current and future competitors- Entrance of new competitors within existing and new markets - Variations in customer preferences- Current markets: sub-orbital space tourism and ISS support

Companies compete for customers with the goal of maximizing revenues- Each company autonomously decides its pricing strategy given its unique capacity, costs,

and vehicle characteristics- Model outputs financial health of each company- Capable of capturing differentiation between products/services

RePast Sources: http://www.duncanrobertson.com/research/simulation.htm, http://sourceforge.net/projects/repast/, http://complexityworkshop.com/cw/tutorial/RePast/index.html


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Other Users of Agent-Based Modeling (ABM)

P&G to understand the impact of alternative shipment and payment terms on retail in stock positions and company inventory

Macy’s to generate new store layout options for maximizing customer satisfaction and spending

Hewlett Packard to understand the effect on organizational performance by a change in hiring practices

Electric Power Research Institute (EPRI) to create self-optimizing and self-healing capabilities for the electric power grid and the interconnected critical infrastructures

Humana, Inc. to predict how employees select health plans thus allowing the forecasting of costs

Daimler-Chrysler to allow individual workpieces to be directed dynamically around the production area resulting in a 10 per increase in productivity

NASDAQ to understand what happens when the “tick size” changes from 1/8 of a dollar to 1/100 of a dollar

U.S. Air Force Space Command to assess operational effectiveness (military utility) of future warfightingsystem concepts across spectrum of scenarios, missions, and threats

PricewaterhouseCoopers to predict CD sales in the Japanese pop (J-Pop) market using 75,000 agents (correlation coefficients of actual and predicted sales between 0.8 and 0.9)

Electronic Arts (EA) and their “The SIMS” game


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Awards and Payments

Bids and Prices

Revised Crew and Cargo Demands

Contract Type

Demand

International Space Station (ISS)

International Space Station (ISS)

Supply

NASA + International Partners (IP)

NASA + International Partners (IP)

Supply

Commercial U.S. Companies

Commercial U.S. Companies

Market Clearing

U.S. GovernmentU.S. Government

ContributionsBids (if needed)

Using the NESC Model for the ISS Support Market

Crew and Cargo Demands

Deliveries

Deliveries

Implementation of NESC Model on a Desktop PC

Outline of NESC Model Operation

SEI has developed the Nodal Economic Space Commerce (NESC) model which uses Agent-Based Modeling (ABM) techniques to simulate supply and demand for transportation services to the International Space Station (ISS)

Contract Type


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Modeling Inputs and Assumptions


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ISS Support Market: Modeling Assumptions

Can companies be financially successful in this market given uncertainty about the future?

General Modeling Assumptions- ISS Configuration after 14 additional U.S. Space Shuttle flights (remaining as of late November 2006)- Two companies (Firm A and Firm B) compete to deliver crew and cargo to the ISS- Market period from 2010 to 2017- US$993 M of NASA COTS funding applied to development costs of commercial companies

Supply of Transportation Services from Multiple Sources- International Partners (IP) ESA and JAXA provide one ATV and one HTV flight per year “free” to the U.S.

Government / NASA in accordance with assumed international agreements- NASA’s Orion Crew Exploration Vehicle (CEV) crew and pressurized cargo variants are available in 2014- Russian Soyuz and Progress are available as needed, but do not directly compete with commercial

companies

Probabilistic Simulation- Companies set prices each year and vehicle failures occur during the simulation- 1,200 Monte Carlo simulations performed

International Space Station (ISS) Planned Configuration in 2010

NASA Orion CEV on Ares I Launch Vehicle

Japanese H-II Transfer Vehicle (HTV)

ESA Automated Transfer Vehicle (ATV)

Russian Soyuz


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Service Capability and Cost Structure of Company Vehicles: Baseline Scenario

NOTE: Public data has been used as a reference in defining firms that are reasonable proxies of those that may participate in this market, input values that describe each firm were not provided to SEI by any specific companies and are estimates by SEI

Crew Vehicle

Pressurized Cargo

Vehicle

Crew Vehicle

Unpressurized Cargo Vehicle

Pressurized Cargo Vehicle

DDT&E Start Year 2010 2006 2010 2006 2006IOC Year 2013 2010 2013 2010 2010Crew Capacity 7 0 5 0 0Reusable (1=Yes, 0=No) 1 1 1 1 1Time b/t Flights (months) 2 2 2 2 2maxPress (kg) 200 2500 50 0 2500maxUnPress (kg) 600 600 0 3000 0maxWater (kg) 0 300 0 250 200maxGas (kg) 0 50 0 75 50maxPropellant (kg) 0 0 0 0 0maxTotalCargo (kg) 800 3100 50 3000 2500maxPressReturn (kg) 200 2500 50 0 900maxUnpressReturn (kg) 0 0 0 1400 0Development Cost ($M) 110 130 120 60 100Flight Test ($M) 135 120 130 50 60Production Cost ($M) 75 65 75 8 10LV Development Cost ($M) 0 100 0 80 120LV Cost ($M) 27 27 20 20 20Certification Cost ($M) 1 1 1 1 1ISS Configuration Cost ($M) 5 1 5 1 1Maintenance Cost ($M) 5 5 8 6 8Failure Cost ($M) 8 8 8 6 8Learning Curve Percent (%) 90% 90% 90% 90% 90%Cost Skewing Profile 3 5 3 5 5Fixed Operating Cost ($M) 5 3 8 3 3Cost Per Flight ($M) 6 4 8 4 5Launch Site Fee ($M) 2 2 2 2 2Insurance ($M) 2 2 4 4 4Historical Flights 3 3 3 3 3Maximum Flights (if reusable) 10 10 30 30 30Design Reliability 0.97 0.97 0.95 0.95 0.95Down Time if Failure (months) 12 6 12 6 6R

elia

bilit

y

FIRM A FIRM B

CharacteristicSp

ecs

Cap

acity

Vehi

cle

Cos

tsO

ps C

ost


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Firm Development Schedule and Demand Overview

SimulationStart

Cargo Upmass Demand (MT):

FY 2006-2010 FY 2011-2015

Passenger Demand (6 Month Rotation): 3 Crew 3 Crew 3 Crew 5 Crew 5 Crew 5 Crew 5 Crew 5 Crew

MarketStart

CEV START

Simulation End

• Pressurized Cargo• Unpressurized Cargo• Propellant

FIR

M A

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

FY 2016+

18.5 MT19.0 MT

21.7 MT

22.6 MT

22.3 MT20.1 MT 20.1 MT 20.1 MT

Cargo Vehicle Development

Crew Vehicle Development

Crew Vehicle Development

Cargo Risk Reduction Flight

Cargo Demo Flight 1 to ISS


Cargo Vehicle Initial Operating Capability

Crew Demo Flight

Crew Vehicle Initial Operating Capability

Cargo Vehicle Development Cargo Demo Flight 1



Cargo Vehicle Initial Operating Capability

Crew Demo Flight 1

Crew Demo Flight 2

Crew Demo Flight 3

Crew Vehicle Initial Operating Capability

FIR

M B

DEM

AN

D

STS END


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Baseline Scenario Results


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Net Present Value of Firms: Baseline Scenario

Firm A is very likely to be financially successful even given uncertainty, while Firm B has a small probability of positive Net Present Value (NPV)

Firm A Mean NPV: US$49.8 M

Firm B Mean NPV: -US$11.8 M

Note: Cash flows are discounted by Weighted Average Cost of Capital (WACC), a measure of the cost of capital which takes into account the debt and equity financing structure of the company. The WACC of 26.9% is based on a debt to equity ratio of 0.33, equity beta of comparable industries (Aerospace, Air Transport, E-Commerce), tax rate of 28%, average nominal interest rate of 7.5%, inflation of 2.1%, and risk-free rate of 6%.

0.000

0.002

0.004

0.006

0.008

0.010

0.012

0.014

0.016

0.018

-$90M -$70M -$50M -$30M -$10M $10M $30M $50MNet Present Value of Firm B (FY06 $M)

Prob

abili

ty D

ensi

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0.0

0.2

0.4

0.6

0.8

1.0

Cum

ulat

ive

Prob

abili

ty

0.000

0.002

0.004

0.006

0.008

0.010

0.012

0.014

0.016

0.018

-$30M -$10M $10M $30M $50M $70M $90M $110MNet Present Value of Firm A (FY06 $M)

Prob

abili

ty D

ensi

ty

0.0

0.2

0.4

0.6

0.8

1.0

Cum

ulat

ive

Prob

abili

ty

-$175 M

-$150 M

-$125 M

-$100 M

-$75 M

-$50 M

-$25 M

$0 M

$25 M

$50 M

$75 M

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

Net Present Value (NPV) by Year [$M FY2006]:

Mean ± 1 Std. Dev. at 26.9% Discount Rate

Firm A

Firm B


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Total Cargo Delivered to ISS: Baseline Scenario

0

20

40

60

80

100

120

140

160

180

200

70 74 78 82 86 90 94 98

Percent of Cargo Delivered

Freq

uenc

y

0

0.05

0.1

0.15

0.2

0.25

0 2 4 6 8

COTS Vehicle Failures

Prob

abili

ty D

ensi

ty

0

0.2

0.4

0.6

0.8

1

Cum

ulat

ive

Prob

abili

ty

0

0.05

0.1

0.15

0.2

0.25

0 2 4 6 8

COTS Vehicle Failures

Prob

abili

ty D

ensi

ty

0

0.2

0.4

0.6

0.8

1

Cum

ulat

ive

Prob

abili

ty

COTS companies together with other suppliers are capable of delivering 95% (mean value) of demanded cargo


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Breakdown of Cargo Delivered by Supplier: Baseline Scenario

Firm A dominates pressurized cargo, while Firm B dominates unpressurized cargo

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Pressurized Unpressurized Total Up Total Return

IP + RussiaFirm BFirm ACEV

Type of Cargo

% of Cargo Delivered


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00.010.020.030.040.050.060.070.080.09

0.1

5 10 15 20 25 30 35

Price per Passenger to ISS ($M)

Prob

abili

ty D

ensi

ty

0

0.2

0.4

0.6

0.8

1

Cum

ulat

ive

Prob

abili

ty

0

0.02

0.04

0.06

0.08

0.1

0.12

20 25 30 35 40 45 50

Price per Kilogram to ISS ($K)

Prob

abili

ty D

ensi

ty

0

0.2

0.4

0.6

0.8

1

Cum

ulat

ive

Prob

abili

ty

Price for Services: Baseline Scenario

Mean Price: $37.1 M / passenger

0.39 failures / yearAverage COTS Failures0.26 failures / yearAverage IP Failures

11 flights / yearAverage Flights Per Year72.6 flightsTotal Commercial Flights

0.65 failures / yearOverall Failure Rate

US$19.50 MAvg. Price per Passenger$1,300 MTotal Crew Revenue

66.7 passengersTotal Crew DeliveredUS$34,370 / kgAvg. Price per Kg

US$5,362 MTotal Cargo Revenue156,100 kgTotal Cargo Delivered

19 flightsTotal IP Flights

With Failures Case Study (Mean Values)

Price for delivery of cargo and passengers to the ISS are less than

prices obtained with government operated vehicles alone


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Cost to Support ISS Using Commercial Transportation (2010-2017): Baseline Scenario

$2,528 M

$3,489 M

$210 M

$6,654 M

$427 M

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

Firm A

Firm B

CEV

Russia

Total

Supplier Revenues (FY06 $M)

Roll-up of supplier revenues is equivalent to the cost of services to the United States government: US$6.65 Billion


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Potential for Savings to Government: Baseline Scenario

CEV plus IP Model Conditions: No Vehicle failures (w/ ESA + JAXA IP), Russian vehicles purchased 2010-2014, CEV vehicles from 2014-2017 (w/ Russia as needed), 14 STS flights ISS end-stateIn the Government only scenario, CEV and variants deliver a small percentage of cargo due to lack of unpressurizedcargo capability and limited period of operation from 2014 to 2017

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Government COTS

Suppliers

Cos

t to

Supp

ly fr

om 2

011-

2017

(Mea

n an

d ±

1 St

d D

ev, $

M F

Y06)

RussiaCEVCOTS

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Government COTS

SuppliersPe

rcen

tage

of C

argo

Upm

ass

Del

iver

ed to

ISS

(Mea

n an

d ±

1 St

d D

ev)

IP + RussiaCEVCOTS

Use of COTS providers can potentially save the Government more than US$8 Billion


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Conclusions: Baseline Scenario

Agent-based modeling using NESC allows for a more realistic and dynamic simulation of traditional and emerging space markets

When vehicle failures are considered probabilistically, a singlefirm is shown to be financially successful in terms of mean NPV after eight years of operation

- There is still some probability that the second company achieves a positive NPV- COTS companies should anticipate failure over the life of the program given the new

products being offered and flight rates required

Use of commercial providers for resupply represents a potential win-win scenario for US Govt. and emerging commercial companies

- Simulations show that NASA savings approach US$8 Billion over an eight year period (compared to using a government only solution such as the Crew Exploration Vehicle or CEV)

- A multi-billion dollar market is enabled for commercial companies providing space transportation services (total revenue of US$6.7 Billion in the baseline simulation case run by SEI)

- There is high reliance on ATV and Russian support for propellant re-supply, current study did not include any commercial company capable of providing such a service (could be a needed capability not addressed in the specific market segments requested by the COTS solicitation)


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www.sei.aero

Business Address:SpaceWorks Engineering, Inc. (SEI)1200 Ashwood ParkwaySuite 506Atlanta, GA 30338 U.S.A.

Phone: 770-379-8000Fax: 770-379-8001

Internet:WWW: www.sei.aeroE-mail: [email protected]

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