Satellite operators are becoming increasingly indifferent to losses or delays -- if all goes well, the customer pays; if not, the insurer pays. Testing and redundancy levels are suffering as a result

The spirit of Matra Marconi's troublesome solar arrays tended to hover over Euroconsult's

recent Paris conference on "Financing for Satellite Communications and Broadcasting". It was not the only Bad Fairy present: the insolvencies of Iridium and Ice were discussed more frequently, but in the absence of anyone from either company, there was little information, factual or otherwise, on how restructuring was proceeding.

The consensus opinion was that ICe's problems were relatively manageable, and that its debt load was by no means excessive. The failure of existing investors to subscribe to this summer's twice-extended discounted rights issue in sufficient quantity was ascribed by some to an excessive number of investors, each with insufficient financial commitment to the project. Though most of them are established telcos and a number are routinely risking amounts that make ICe's needs look like pocket change, the slightest whiff of trouble (the Iridium effect) makes them lose interest.

One interesting concept which emerged in a presentation by Stanislas Chapron, from the Executive Committee of insurers Cecar & Jutheau (members of the Marsh Group), concerned the availability of cover for "failure of an expected market to emerge". Despite the often-quoted remark to the effect that "one can insure against anything, for a price", there was no real consensus on this. It was commented that the question could have been rephrased: "Can you insure against listening to consultants", most of whom had predicted booming markets for the Global Mobiles.

While Iridium and Ice (not to mention Globalstar) were absent from the conference, Armand Carlier, CEO of MMS, was there and on the platform. But he made no reference whatsoever to the current solar array problem, unless his remark that a "significant decline in profits from satellite manufacturing was to be anticipated" had some relevance here. He concentrated more on the question of going into operations to compete with existing customers, something which the past MMS (soon to be Astrium?) has not sought to do. Following the meeting, Carlier did give an interview to another paper, in which he acknowledged that the company still had not succeeded in explaining satisfactorily the power-loss problem, and that no other statement would be forthcoming.

Underwiter's cautious view

After the Euroconsult meeting, Interavia sought out one of Europe's best-known space underwriters -- who preferred to remain anonymous -- and tried in tactful terms to discover their views on MMS-type situations. This would involve a long chain of interlocking suppliers, a large number of customers all apparently suffering from the same problem, and no apparent solution. It was agreed that no names would be named.

As recently as 1995, two-thirds of satellite "accidents" could be attributed to the launch vehicle. By last year, almost the same proportion (64.82%) were satellite-related. Excluding apogee motor failures and deployment problems (the commonest causes of post-launch failures), a residual 10% of troubles occurred after the spacecraft was fully functioning.

There are plenty of things that can go wrong with a satellite. The discussion was triggered by the present array problems; but last year it was Hughes' onboard processors that were attracting unwelcome limelight. This was a problem more sudden and serious than a slow power degradation.

But regarding arrays, the underwriter said that satellites used to be produced with plenty of built-in power margins; 3dB -- equivalent to 50% -- was common. This gave manufacturers a 15% margin before any question of loss claims could arise. Now, there is effectively NO margin. Any parameter which does not "meet specs" almost automatically generates a claim, which all too often has been met by insurers anxious to retain business. "We would have paid out vast amounts if this policy had been operating five years ago," said the underwriter.

In theory, of course, the MMS array problem does not involve space insurance at all. Most of the satellites have not left the factory, let alone the launchpad, and so are covered by whatever arrangements have been put contractually in place between all members of the supply chain. The same would apply to any manufactured goods. It is to be hoped that these are adequate, and proper safeguards are in place.

Distinctions are often made between "off-the-shelf" components and those specially tailored to meet a customer's requirements. Here the responsibility of the customer becomes involved. In the past, virtually nothing in the satellite business was off the shelf. But this is changing. Satellites are becoming a commodity; but even with commodities, certain "fitness for use" principles apply. The trouble with satellite arrays is that power is generally specified as "End Of Life" power, which nowadays may mean in 15 years' time. It is very difficult to demonstrate this.

As the satellite business is being driven far more by competition, operator CEOs are tending to become more indifferent to losses or delays. If all goes well, the customer pays. If not, the insurer pays. Consequently, testing and redundancy levels both suffer, with the apparent acquiescence of certain insurers. The underwriter submitting to this interrogation pointed out that with military satellites, it is common for these to cost five times more than a near-equivalent commercial craft. Most of the difference lies in redundancy and testing. (How will this affect PPP projects such as Skynet 5?)

But even as satellites get bigger and more complicated, it is too often these more intangible items' which get discarded first, in an effort to drive costs down. There are now signs that insurers are waking up to this situation, and increasing rates, from typically 10% or even less (including launch), to 15%. Maybe brokers will demand longer in-orbit coverage periods in return. But it is certain that until quite recently, some underwriters have been thinking of getting out of the space insurance business altogether.

Regional GEO-mobiles on the way While the LEO/MEO mobile systems are perhaps temporarily under a cloud, the rival geostationary regional systems have at least the advantage of not yet having come to market. Of those to have emerged so far, only Satphone has failed to raise even sufficient money to start construction. AMPS of course had its construction interrupted by the US government, costing Hughes nearly $100 million. ACeS and Thuraya seem well on the way to launch; with the first Indonesian ACeS Garuda satellite set for launch this October. However, Aces operator Pasific Satelit Nusantara has reported a $30.4 million net loss in the first half of this year, compared with $11.3 million net income in the January-June period of 1998. This, coupled with the continuing disturbed situation in Indonesia, must give some cause for concern.

Other regional GEO-mobiles are the former EAST, originated by Matra Marconi Space but now relegated to a "deep freeze" status by the manufacturer. It is being continued by the Cyprus Development Bank under the name "Cyprus GEM". The banks Project Financing Division head, Savakkis C. Savvides, left it unclear who had dumped whom. He now lists Alenia Aerospazio (and Hughes S&CI) as "teaming participants", which does not necessarily mean investors. Alenia is of course set to join MMS and Dasa in Astrium; how much freedom to pursue ventures dropped by other group members will be allowed within Astrium is as uncertain as the date of its formal inauguration. Hughes has a policy of "in principle" not buying satellite contacts by investing in its customers; it may be now regretting departing from this principle in the case of ICO. The born-again Agrani GEO-mobile (Afro-Asian Satellite) is now headed by Jai P. Singh, previously with ICO but who "got out in time". It is still an Essel company (packaging and amusement parks). Agrani is initially heading for Indian coverage only, and will not carry (or at least not encourage) international traffic. "In principle" $230 million investment participation has been confirmed, chiefly from Indian telco VSNL and Lockheed Martin Global Telecommunications; the latter does not seem shy of rushing in where Hughes fears to tread. The company is planning to keep user costs low (9 US cents/minute), and looks to maintain a debt/equity ratio of 1:1. Thuraya, too, believes equity commitments are vital before starting-up. There seem to be signs that the GEO multimedia satellite manufacturers are finally cutting metal: at least Hughes Spaceway is, now backed by massive investments from General Motors and AoL. Michael J. Houterman, president of Hughes Space & Communications International, claimed that high-speed internet traffic -- in large measure broadcast to multiple sites -- would be the main focus of satellite industry growth, which would expand from its present level of $70 million to around $30 BILLION/year within a relatively short time.

Houterman acknowledged complaints that 1998 had been a very bad year for insurance claims especially for in-orbit failures -- and that satellite manufacturers had to take "steps to mitigate risk." These would include multiplying the number of test facilities (four satellite-sized thermal vacuum test chambers, for example, or five near-field antenna test ranges). But Houterman still spoke of turning round new satellites within a year, something recently applauded but now giving pause for second thoughts. Finally, just to make the point largely ignored in the conference itself, "affiliated but separate" brokers/dealers Salomon Smith Barney -- who did give a presentation -- also had on their stand a brochure issued in August 1998 which stated its belief that "there is a market willing and able to pay a premium for global mobility." It forecast at that time that "wireless satellite" subscribers would total 1 million by the end of this year, reaching 6 million by 2001 and 18 million by end-2004. It was forecasts like these which drove up the Big LEOs/MEOs share prices and allowed their debts to mount; it remains to be seen whether the forecasters will be proved right in the long run.

But in his presentation, John F. Otto of SSB acknowledged that "Wall Street can understand cable", and emphasized that companies like PanAmSat (now 81% owned by Hughes) is effectively "a cable network in the sky". It has multicasting advantages which far outweigh those of mobile telephony -- which are preeminently point-to-point systems.

RELATED ARTICLE: RENT A SPARE SATELLITE WITH ASSURESAT

Jerald Farrell, retired as president of Hughes Communications Services and responsible for its Galaxy operation, now merged into PanAmSat, came to Euroconsult's Paris conference to deliver an unwelcome message. "Satellites like the Hughes HS 376 used to be ultra-reliable; large, complex newer craft" the must have meant the HS 601; the 702 has no track record so far) "are failing at a much higher rate," largely because they carry 3-5 times more hardware. The total loss figure including loss of business -- for a total failure was escalating horrendously. The Telstar 401 loss a few years back cost its then owner AT&T $750 million in all, including a substantial sum docked from the price Loral was prepared to pay for the Telstar business it was in the course of acquiring. Galaxy 10 -- lost on the brief maiden flight of the Delta III last summer -- notched up a business loss to would-be operator PAS totalling $1.06 billion.

Farrell is to spend his retirement running AssureSat, in partnership with Mark Fowler (a former FCC chairman) and Securitas, the Swiss reinsurance company and securityguard service.

AssureSat will buy and fly spare satellites; the first two have already been ordered from Space Systems/Loral. Designed for maximum versatility, the FS-1300s will carry 36 all-active transponders (800MHz) in two C bands and 72 transponders (36 active) in four Ku bands (1500MHz), but they will not carry a 17GHz DBS uplink receiver. Variable switched polarization will be available. Antenna coverage from steerable dishes will be designed to reach all key markets. The satellites will each offer 10kW DC power. Sufficient fuel will be carried to ensure four extra years of active life; of course precise station-keeping will not be needed when no-one is using a satellite, but Farrell hopes this will not be often.

No new orbital slot allocations will be needed; when not required, the silent AssureSat will be quietly co-located with a subscriber's satellite. When needed, it will travel the GEO arc to wherever the defective spacecraft is located, and take over all or some of its frequencies. Farrell claims to have customers for one-third of AssureSat initial capacity, but he's not naming names. Nor does he cite prices. What he does say is that his service will be cheaper than having a wholly-owned, backup-only satellite like Aswtra-1 H; but this also carries a Ka-band interactive payload for the use of SES.