Rocket Monopoly Approved
Boeing-Lockheed Alliance Likely to Increase Costs

By Renae Merle
Washington Post Staff Writer
Wednesday, October 4, 2006

U.S. antitrust authorities yesterday approved a plan by Lockheed Martin Corp. and Boeing Co. to merge their government rocket businesses, creating a monopoly in a multibillion-dollar market that the Federal Trade Commission acknowledged will probably lead to higher prices and lower quality.

The decision came 16 months after the plan was announced, several months longer than both firms expected, signaling the concern within the Defense Department and FTC about eliminating competition in yet another part of the military market. Defense industry consolidation has already squeezed competition out of various parts of the market -- since the 1990s the number of aircraft makers has fallen to three from eight, for example.

"Monopolies almost always lead to higher prices, lower quality and inferior services," Michael R. Moiseyev, assistant director of the FTC's bureau of competition, said in a July letter that was made public yesterday. "Here, the competition that would be lost is significant, and the economic benefits that may materialize are unlikely to trump the transaction's harm to competition."

The Defense Department has expressed concerns that with only a few rocket launches each year, one of the two companies could have been pushed out of business. Loath to be dependent on one type of rocket, the Defense Department argued for the joint venture, to be known as the United Launch Alliance.

Under the agreement, both Boeing's Delta and Lockheed's Atlas rockets will still be produced. The companies will consolidate production at Boeing's Decatur, Ala., facility, while Lockheed's Denver office will serve as the headquarters and house the engineering and administrative functions. Some jobs will be eliminated.

The joint venture will launch a variety of larger satellites, including 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 firms have a similar joint venture to manage the day-to-day operations of NASA's space shuttle program.

The companies have 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.

Pentagon and FTC officials said the cost savings do not offset the impact of the loss of competition.

The department's "careful review of those savings leads us to conclude that the cost savings, while attractive, are not adequate to support the loss of competition," Kenneth J. Krieg, the Pentagon's acquisition chief said, in an August letter to the FTC.

Yet, in the end, Defense Department officials were more concerned that they could be left with only one company capable of launching their satellites, which have become an increasingly important part of fighting wars. Under the joint venture, there will be a busier single workforce and the firms can integrate their technologies, Krieg said.

"DoD has concluded that ULA would improve national security and that the unique national security benefits from the joint venture would exceed any anticompetitive harm," the FTC said in a statement yesterday.

Currently, Boeing and Lockheed are the only two U.S. companies that launch the heavier satellites needed by government agencies, though other companies can launch smaller versions. Approval was contingent on an FTC consent decree ordering the companies to cooperate with potential competitors such as Northrop Grumman Corp., which makes satellites but does not launch them.

Ordinarily such an agreement would not be considered an effective remedy to anticompetitive concerns, FTC Commissioner Pamela Jones Harbour said in a concurring statement. But, she added, "I lack the technical expertise to second-guess DoD's conclusion that allowing the formation of ULA is the best way to preserve national security and protect the public interest."

Lockheed and Boeing gave no timetable for closing the deal. "The FTC action is the final step in the government's regulatory process and brings the ULA closer to the goal of meeting the government's need for reliable, lower-cost launch services for national security, civil and scientific payloads," Boeing said in a statement.

The joint venture also will end a three-year legal battle between the Pentagon's largest contractors in which Bethesda-based Lockheed accused Chicago-based Boeing of cheating to win rocket launch work. Lockheed and Boeing 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.

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