Space flight and development is becoming an increasingly important investment field. This article, from a wealth management business, examines some of the trends.

Anyone scanning the news lately will, amid the geopolitical gloom, have noted a buzz around private-sector space flight and innovation. This represents something of a shift from the days when space flight was done almost entirely by government agencies such as NASA and its French, Russian and Chinese counterparts. Like it or not, the state is likely to remain a major player in such activity for military and other reasons, and for the foreseeable future. But the commercial side of “space faring” has been a talking point for some time. It appears to be gathering pace. So, what should investors and advisors conclude? This article, by Shilen Shah, a bond strategist for Investec Wealth & Investec, examines the market. The editors of this publication are delighted to share these insights on this topic. We invite readers to respond with their views.

For many investors, space remains a moonshot – i.e. a potentially ground-breaking but highly speculative investment. The commercialisation of space, however, can be traced back to the origins of the original Moonshot (the Apollo project) and the competition between the US and USSR. After Sputnik was launched by the Soviets in 1957, the US government launched a massive investment programme which, in competition from the USSR, eventually started the space race.

However, since the end of the Cold War, and amid financial constraints, the US and USSR/Russian governments’ commitment to space has waned somewhat. A number of other countries – notably China, India and some in Europe – have developed significant civil space programmes, although they are dwarfed by that of the US (see chart 1 below).

Even with the spending power of the National Aeronautics and Space Administration (NASA) the US is still reliant on other nations, having recently signed a contract with the Russian Federal Space Agency for the transportation of US astronauts to the International Space Station (ISS) via the Soyuz spacecraft. On a per-seat basis, NASA is estimated to be paying the Russian government around $81 million for each astronaut it sends to the ISS.

NASA’s main focus is on its hugely ambitious Space Launch System (SLS), a long-term programme to produce a rocket system that will penetrate further into the solar system via the Orion spacecraft. In view of this priority, and to address the reliance on the Russian Federal Space Agency for sending astronauts to the ISS, the US government has started to look to the development of private sector alternatives, with companies such as SpaceX and Boeing actively developing new launch systems.

In Europe, the key player in the rocket sector remains Ariane, which is owned by a consortium of European aeronautical companies. It was established in 1980 and has a long track record in the satellite launch business. Today it faces significant competition from SpaceX – the private space company formed in 2002 by Elon Musk.

As with Musk’s NASDAQ-listed Tesla Motors, the electric car manufacturer, SpaceX is positioned as a disruptive business with Musk aiming to alter the market significantly. Although the Ariane V rocket system has a significantly higher payload capacity than SpaceX’s Falcon, the latter is significantly cheaper per kilo (see chart 2). SpaceX is also looking at the potential to re-use Falcon 9 rockets, which would bring the cost per launch down from tens of millions of dollars to $5 million-$7 million. 

The group is also developing a Falcon Heavy rocket system, with a scheduled first launch in 2016. At launch it will be the most powerful rocket system since Apollo, with a significant lower cost per kilo of payload.

Satellites
Another feature of the commercial use of space is satellites. Historically, the costs associated with developing satellites have been high because of the use of bespoke parts; however advances in smartphone technology have also disrupted the satellite development and launch model. One significant area of innovation is the commercialisation of Cubesat – a 10cm cubed satellite weighing no more than 1.33kg.

Cubesats were initially developed as a low cost scientific research tool but in view of their flexibility (e.g. multiple cubesats can be placed in space via a single rocket launch) the commercial sector is now looking at their potential use. Cubesats are currently at the commercial infancy stage, but forecasts suggest around 1,000 nanosatellites (weighing 1-10kg) will be launched in the next five years.

One company that has been leading the development of nanosatellites is Surrey Satellite Technology (SST), initially a spin-out of the University of Surrey’s aerospace department and now majority owned by Airbus (AIR). The group has a dominant position in the small satellite sector (3.5kg-600kg) with a 40 per cent share of the global market. In contrast to larger, expensive satellites, nanosatellites can have specific uses with their limited lens resolution making them a cost effective solution for applications such as crop and geographic monitoring.

Another area in which SST is making inroads is the development of geostationary satellites for Eutelsat (a French competitor to Inmarsat) that are ideal for voice and data communication.

The company is also building equipment for the Galileo Project (the EU’s alternative to the US Global Positioning System). Leftfield developments in the sector include Facebook recently signing an agreement with Eutelsat to launch a satellite in 2016 to provide internet access to remote communities in 14 Sub-Saharan African countries. Other players in the UK satellite sector include AIM-listed Avanti Communications (AVN), which focuses on providing communication services to a number of telecom companies on a global basis.

Future endeavours, political and practical issues

Although space has been accessible for more than 50 years, space tourism is at the limits of practicality, with many looking at the sector with a degree of scepticism. However, from a broader perspective, the combination of lower-cost rocket launches and cheaper satellites suggests space has entered the commercial mainstream.

As with other new sectors, risk factors around space are ever present. One key factor is regulation, with governments licensing individual rocket launch systems. In contrast to earth-based regulation, space itself remains an unregulated area with no sovereign state or corporation able to "own" any part of it. From a practical perspective, issues such as space debris will become a growing concern, especially if the number of vehicles orbiting the earth increases in the near future. Practical steps such as minimising space junk and the manoeuvring of defunct satellites so that they can be burned harmlessly in the atmosphere still require the co-ordination and agreement  of commercial and government operators.

Notwithstanding the challenges, after a period that saw the Space Shuttle programme decommissioned and government interest in space waning, the private sector has picked up the baton and is running with it.