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Boeing, Lockheed Join Rocket Divisions
After Bitter Rivalry, The Two Will Share Government Work

By Renae Merle
Washington Post Staff Writer
Tuesday, May 3, 2005

Lockheed Martin Corp. and Boeing Co. said yesterday that they will merge their struggling government rocket businesses, an acknowledgment that tight federal budgets and growing costs made it difficult to operate independently.

The joint venture -- to be known as the United Launch Alliance -- will end a bitter two-year legal battle between the Pentagon's largest contractors in which Lockheed accused Boeing of cheating to win rocket launch work. It also eliminates competition in a market that includes launching weather satellites for the National Oceanic and Atmospheric Administration, science satellites for NASA, spy satellites for the National Security Agency and communications satellites for the Air Force.

The companies said they expect the joint venture to generate $1.5 billion to $2 billion in revenue per year from the government and save it $100 million to $150 million a year. The firms have a similar joint venture to manage the day-to-day operations of NASA's space shuttle program.

The combination is an acknowledgment that "it's too expensive to do it on your own, and there isn't going to be enough government money to support separate programs," said James A. Lewis, director for technology and public policy at the Center for Strategic and International Studies, a nonprofit think tank. "We may be in a situation where we can't afford competition without some heroic measures."

The announcement follows nearly 15 months of off-and-on negotiations. In December, James F. Albaugh, the head of Boeing's defense unit, flatly rejected the idea. "We don't have any interest in forming any kind of joint venture with Lockheed Martin," Albaugh said in an interview.

In the end, the companies said they needed to find a way to make the business profitable. "By joining together we are convinced that we can provide the customer with assured access to space at the lowest possible cost," James A. Bell, Boeing's chief executive, said in a statement.

Both of the company's rockets will still be produced -- Boeing's Delta and Lockheed's Atlas. But production will be consolidated at Boeing's Decatur, Ala., facility, while Lockheed's Denver office will serve as the headquarters and house the engineering and administrative functions. The combination will require some layoffs, both companies said.

"The venture will maintain two separate hardware families; that's really at the crux of the appeal to the government," said Jeffrey D. MacLauchlan, Lockheed's vice president of financial strategies. "Should there be a problem with either, the other is available as a backup resource."

The deal must be approved by the Pentagon and U.S. and international regulatory agencies and is expected to close by the end of the year.

Lockheed and Boeing have agreed to drop countersuits over a 1990s rocket launch competition once the deal is finalized. In 2003, Boeing admitted that some of its employees had proprietary Lockheed information during the competition. That prompted a lawsuit from Lockheed and a 20-month launch suspension from the Air Force.

In addition to the suspension -- lifted in March -- the Air Force transferred seven rocket launches, worth about $1 billion, to Lockheed. The stolen documents also spurred a criminal investigation by the U.S. attorney in Los Angeles, which led the indictment of two former Boeing employees and is ongoing.

The Air Force has been struggling to keep Lockheed and Boeing in the business since the commercial space market collapsed as the telecommunications boom ended. The companies began to complain that without commercial customers to shoulder some of the overhead costs, their government launches were not profitable.

Despite pressure from some in Congress to push one of the companies out of the market, the Air Force argued it needed two types of rockets just in case one didn't work. The Pentagon's 2006 budget proposal includes $340 million to keep both companies in the business.

"This could be a preemptive strike against Congress moving to go to one company," said Marco A. Caceres, senior analyst and director of space studies at the Teal Group.

The companies will continue to compete in the commercial market.

© 2005 The Washington Post Company