Table of Contents

I. Introduction............................................................................................... Page 1

II. NASA’s Available Options...................................................................... Page 2

III. Evaluation of NASA’s Available Options.............................................. Page 3

IV. Analytical Review ................................................................................... Page 16

V. Conclusions & Recommendations........................................................ Page 24

VI. Risk Sharing: Structuring the Business Relationship...................... Page 28

VII. Exhibits, Tables & Appendices.............................................................. Page 36
Analysis of Potential Alternatives

to Reduce NASA’s Cost

of Human Access to Space

Hawthorne, Krauss & Associates, LLC

The Pilot House

Lewis Wharf

Boston, Massachusetts 02110

September 30, 1998
Hawthorne, Krauss & Associates, LLC September 30, 1998

Executive Summary: Reducing NASA’s Cost of Human-Access to Space

NASA’s strategic plan calls for “a renewed focus on scientific research and the development

and application of new cutting-edge technologies.” In light of the prospects of flat-todeclining agency budgets, NASA must re-allocate its limited resources to focus on its unique

core competencies (such as the development of advanced space technologies) and transition

operating activities, where possible, to the private sector. NASA should migrate to the role of

“customer” for these operating activities from its present role as “owner/operator.”

The Shuttle program consumes the largest portion, approximately one fourth, of NASA’s total

annual budget. The Shuttle is critical to the success of each of NASA’s strategic enterprises

and creates a thread of interdependencies throughout the agency. Clearly, NASA’s ability to

effectively implement its strategic plan will be a direct function of its ability to significantly

reduce the cost of human access to space.

The key to NASA’s success in significantly reducing launch costs over the long-term is the

active involvement of the private sector in a substantive risk-sharing role. The effective

introduction of private-sector incentives and disciplines, which are driven by the profit

motive, is achieved only through the assumption of risk by the private sector.

There are several potential options for NASA to evaluate in considering how to reduce the

cost of human access to space. HKA recommends that NASA pursue the Combination

Approach, a hybrid approach based on the following assertions: (i) NASA must continue to

operate the Shuttle until a proven low-cost alternative for human access to space emerges; (ii)

a new human-rated RLV, developed by the private-sector with limited NASA support,

represents the best long-term solution to reducing costs; and, (iii) transferring an underutilized

Shuttle to a credible private-sector entity may generate valuable commercialization

momentum for NASA by creating near-term market awareness of the commercial potential of

space and human-rated RLVs.

HKA recommends the Combination Approach for the following reasons:

• The Shuttle’s inherently high cost structure prevents it from competing in the commercial

market, thereby making it unattractive to the private sector.

• The Shuttle Upgrade will not generate meaningful long-term launch-cost savings.

• The next generation human-rated launch vehicle should be developed, owned and operated

by the private sector with commercial-market needs in mind, and NASA as one customer

among many.

• Given that NASA’s need for a human-rated launch vehicle is currently inconsistent with

the commercial market demand for low-cost satellite-launch systems, NASA needs to

enable the development of a vehicle that meets both needs cost-effectively.

• Significant private-sector risk sharing will best assure that the new RLV project delivers on

its projected costs and capabilities.

• Even if the new human-rated RLV effort does not succeed, the NASA/private-sector

research and development efforts can reasonably be expected to have at least accelerated

the eventual development of such a vehicle.

Our analysis suggests that the potential benefits to NASA of the new human-rated RLV more

than justify its investment in the project, but they can only be achieved through active

private-sector participation—NASA will not be able to realize such benefits by undertaking this

project on its own. Risk-sharing with the private-sector is far more critical to the success of

the new human-rated RLV project than the resources, technical, financial or otherwise, that

NASA can commit.
Exhibit I. HKA Background/Summary

HAWTHORNE, KRAUSS & ASSOCIATES, LLC

The Firm

Hawthorne, Krauss & Associates, a financial advisory firm, was formed in October 1997

by the former senior finance officers of Continental Cablevision, Inc. (recently re-named

MediaOne), one of the largest cable television operators in the world. The firm’s mission

is to enable and support the client’s competitive strategies by balancing cost, risk and

flexibility in its capital structure. The firm draws from the experience of its principals as

corporate finance practitioners to assist in developing financial strategy and tactics

including sequencing, structuring and executing financial transactions. Due to the

experience of its principals, the firm can add unique value in non-investment-grade, cashflow-driven businesses, leveraged finance and project finance.

The Principals

The firm’s principals are Nancy Hawthorne, Continental’s longtime Executive Vice

President and Chief Financial Officer; Eric Krauss, its Senior Vice President and

Treasurer; and Ben Gomez and Larry Christofori, both its Assistant Treasurers. Each

member of the team has several years of experience in corporate lending, and collectively

the team has over 45 years of experience in the area of highly structured, leveraged

financing. See page 3 for more detailed biographies of the principals.

Hawthorne, Krauss & Associates’ principals worked as a team to successfully guide

Continental, a highly leveraged $2 billion revenue company, through several capitalmarkets cycles, providing the necessary foundation for the business to aggressively create

shareholder value. This team has direct experience in domestic and international

transactions; public- and private-market transactions; equity, senior and subordinated

debt issuances; project financings, asset-based financings and parent-company financings.

The team has also executed numerous mergers and acquisitions, including the acquisition

of the Providence Journal Company’s cable television assets by Continental for

approximately $1.4 billion and the $11.5 billion merger of Continental with U S WEST,

Inc. In addition, the team has experience in creating and managing relationships with a

diverse set of financial resources including commercial and investment banks, equity

investors and analysts, bond investors and analysts, and the rating agencies.

Over the last three years alone, this team financed the following for Continental:

• over $2 billion in acquisitions of domestic cable television properties,

• over $700 million in domestic and international investments in broadband

services and related technologies, and

• over $900 million in capital expenditures.
Exhibit I. HKA Background/Summary

Representative Engagements

• We advised a U.S. government agency on capital-markets aspects of various

privatization/commercialization options for certain of its operations.

• In partnership with a New York-based investment bank, we advised a Brazilian

consortium on structuring and financing bids for cable television franchises in

several Brazilian cities.

• We assisted a major domestic telecommunications provider in structuring and

closing the divestiture of its major Latin American affiliate.

• We advised a Massachusetts-based telecommunications company in developing a

business plan which was used in the sale of the company to a large national

telecommunications company.

• We assisted a New York-based investment firm in evaluating an investment in the

cable-television industry.

Biographies of Principals

Nancy Hawthorne, CEO & Managing Partner

Nancy Hawthorne joined Continental in 1982 as Treasurer, after several years in media

lending at Citibank. She became Chief Financial Officer in 1992. During her career at

Continental, Ms. Hawthorne was the principal architect of the financial strategies that

fueled Continental’s growth from a $100 million regional cable television company to a $2

billion global telecommunications company.

She is a graduate of Wellesley College and Harvard Business School, and serves on the

boards of Avid Technology, Commercial Union Insurance Company, New England

Zenith Fund and Perini Corporation. Her not-for-profit interests include acting as Vice

Chair of the New England Medical Center board and as a board member and Finance Chair

of the Wellesley College Centers for Women. She was elected to the YWCA Academy of

Women Achievers in 1996.

Eric Krauss, Senior Partner

Eric Krauss served as Continental’s Senior Vice President and Treasurer until 1997. He

joined the company as Assistant Treasurer in 1990, after several years in media and

communications lending at Bank of Boston. During his career at Continental, Mr. Krauss

played a key role in the development of Continental’s financial strategies and was

principally responsible for the execution of a myriad of financial transactions over a

period in which Continental raised more than $9 billion in debt and equity funding and

made more than $2 billion in asset acquisitions.
Exhibit I. HKA Background/Summary

Mr. Krauss is a graduate of Dartmouth College. He is a member of the Treasurers’ Club

and the Financial Executives Institute. His not-for-profit interests include City Year, a

national youth community service organization.

Ben Gomez, Partner

Ben Gomez was a lender in the Bank of New York’s Communications, Entertainment and

Publishing Division before joining Continental in 1994 as Assistant Treasurer. Mr.

Gomez played a key role in the development and execution of Continental’s financial

strategy and was primarily responsible for several of the company’s financings, including

those in Latin America. He is a graduate of Georgetown University’s School of Foreign

Service and Columbia Business School.

Larry Christofori, Partner

Larry Christofori joined Continental as Assistant Treasurer in 1994 from Bank of Boston,

where he spent five years in Specialized Finance, focusing on structured transportation

transactions, including leveraged buy-outs and asset-based financings. Mr. Christofori

played a key role in the development and execution of Continental’s financial strategy and

was primarily responsible for several of the company’s financings, including those in

Australia and for PRIMESTAR, the company’s investment in direct broadcast satellite

technology. He is a graduate of Wesleyan University and the Fuqua School of Business

at Duke University.
The purpose of this report is to analyze NASA’s potential options for significantly

reducing the cost of human access to space. The opinions expressed in this report are

based on Hawthorne, Krauss & Associates’ (“HKA”) interaction with NASA and several

of its key contractors over the past nine months (See Exhibit I. for a background/summary

of HKA). This report is not intended to be an exhaustive quantitative analysis of the

various options available to NASA. Instead, its purpose is to outline key decision-related

issues that the agency should consider prior to making a decision as to which option to

pursue. This report attempts to bring a private-sector perspective to bear on the issue of

reducing the cost of human access to space. HKA believes that the key to NASA’s success

in reducing those costs over the long-term is the involvement of the private-sector in an

active risk-sharing role. The introduction of private-sector incentives and disciplines--

which is achieved only through the assumption of risk by the private sector, not through a

traditional contractor relationship-- is essential to achieve significant long-term cost

reductions.

I. Introduction

One of NASA’s key strategic objectives is to significantly reduce the cost of human access

to space over the long-term. Launch cost reductions would have wide-ranging

implications for the agency due to:

• NASA’s limited resources, driven by the prospect of flat to decreasing agency

budgets in the future;

• NASA’s numerous human space flight mission objectives related to servicing

the International Space Station (“ISS”);

• NASA’s underlying objective of transitioning its resources away from

operating activities and toward research and development;

• NASA’s goal of encouraging private-sector development and operation of the

next generation human-rated launch vehicle;

• NASA’s goal of commercializing numerous operating activities, including the

ISS; and

• the strong interdependencies among NASA’s major programs, due largely to

their reliance on launch services.

The extent to which NASA can reduce its cost of human access to space will have a

significant impact on all of its major programs and will shape its future well into the next

century.
2

II. NASA’s Available Options

It seems clear that NASA will rely on the Shuttle over the next several years to complete

the launch and assembly of the ISS. The question, therefore, is what options are available

to NASA to reduce the cost of human access to low-earth orbit (“LEO”) over the longterm? Potential options include:

• Existing Shuttle: Continue to operate the current Shuttle, undertaking nondiscretionary upgrades to maintain safety and reliability.

• Shuttle Upgrade: Invest in a major Shuttle upgrade, including the development

of liquid fly-back boosters (“LFBBs”).

• Shuttle-to-Private Sector: Transfer one or more Shuttles to private-sector

ownership and operation.

• New Human-Rated RLV: Invest in the development of a full-scale, humanrated reusable launch vehicle (“RLV”) as a follow-on to the existing X-33

project.

• Alternative RLV: Invest in alternative RLV technologies (Kistler, Kelly, etc.)

which may not necessarily fulfill NASA’s mission objectives, including human

access to space and servicing the ISS.

• Combination Approach: Pursue a carefully managed and structured approach

to the New Human-Rated RLV option while operating the Existing Shuttle until

such New Human-Rated RLV is fully operable. In addition, the agency would

explore opportunities to promote market-driven commercialization efforts in its

existing operations, such as the Shuttle-to-Private Sector option, so long as they

did not compromise NASA’s mission objectives or the development of the New

Human-Rated RLV.
3

III. Evaluation of NASA’s Available Options

Existing Shuttle: Continue to operate the current Shuttle, undertaking non-discretionary

upgrades to maintain safety and reliability.

Pros

• Capable of meeting NASA’s human space flight mission objectives

• Reliability and capability are proven

• ISS launch and assembly requires Shuttle’s unique capabilities

• Likely to get agency support since it represents business as usual

Cons

• High cost of Shuttle precludes private-sector involvement as owner/operator (i.e.

without subsidies)

• Operating activity which absorbs significant budget resources, potentially at the

expense of research and development efforts

• Aging asset which may compromise future safety and reliability

• Currently can not carry commercial payloads on a cost-effective basis

• Limited flight rate capability with increases in flight rates (greater than 11-12

annually) requiring significant investment in major upgrades and infrastructure

• Unique capabilities of Shuttle (i.e. human/cargo interaction) may be in less demand

post-ISS assembly

Analysis of Existing-Shuttle Option

The Shuttle has proven both its capabilities and reliability, however, the cost of operating

the Shuttle consumes a large portion of NASA’s resources, which is problematic in an era

of flat to declining agency budgets. In addition, continuing to operate the existing Shuttle

does not represent an effective way for NASA to reduce its future launch costs while

meeting its mission objectives.
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NASA’s existing human space flight operations depend entirely on the Shuttle. The bulk

of the Shuttle’s missions over the next several years are dedicated to the launch and

assembly of the ISS, an activity for which the Shuttle is uniquely qualified due to its

heavy-lift capabilities and its capacity for human/cargo interaction. Post-assembly, ISS

missions are unlikely to require these unique capabilities to such an extent, and several

launch providers may be capable of accomplishing certain of them (such as re-supply

missions, for example). In this environment, cost should be a significant consideration in

choosing a launch provider, and, thus, the Shuttle’s extremely high cost structure is likely

to make it unattractive relative to NASA’s other potential options.

Given that NASA’s goal as an agency is to further science and exploration through cuttingedge research and development, it seems clear that NASA should seek to reduce the

substantial portion of its budget that is primarily operational. A reasonable path for doing

this would be to commercialize the Shuttle by seeking to have the private sector own and

operate the Shuttle (much like expendable launch vehicles (“ELVs”) are handled today).

This transition to the private sector would result in cost reductions as well as the potential

creation of new markets as the private sector seeks to generate additional revenue streams

for human-rated RLV services.

Unfortunately, the private sector has no interest in owning and operating the Shuttle,

absent government subsidization, for the reasons cited below. The Shuttle is currently

restricted by law from carrying commercial payloads. Even if this law were to change, it is

unlikely that the Shuttle’s high cost structure would enable it to compete effectively in the

commercial launch industry. The Shuttle, with an average cost per flight of roughly $300

million*

, is not cost competitive with existing private- sector ELVs and RLVs and, in all

likelihood, will not be cost competitive with future ELVs and RLVs. The Shuttle program

has high fixed costs, which are a function of the nature of its activities and a lack of

market-driven, private-sector incentives and disciplines. NASA has historically operated

the Shuttle giving priority to safety, reliability and mission objectives but not to cost. The

Shuttle’s cost structure and associated bureaucracy do not encourage private-sector

involvement other than in a contractor role or with the benefit of government subsidies.

Additional private-sector involvement in the operations of and/or technology upgrades to

the Shuttle could yield some operating cost savings. However, any cost savings generated

(through private-sector operations, upgrading the Shuttle or both) are likely to be

insufficient to enable the Shuttle to operate as a viable stand-alone commercial asset.

In addition, the private sector has focused a significant amount of its own resources on

creating reliable, low-cost launch vehicles to meet the booming launch demand of the

commercial satellite market. As a result, absent sizeable NASA subsidies and expensive

upgrades, the Shuttle is not positioned to compete effectively in this market. There may be

some limited opportunities for the Shuttle to carry commercial payloads assuming the law

changes, demand for launches exceeds supply (which may be the case today but not likely

in the future since the private sector will find a way to meet the demand), or the

commercial missions require Shuttle-specific capabilities.

*

 Based on NASA assumptions of a $2.4 billion annual LEO-transportation budget and 8 flights per

year ($2.4 billion divided by 8 flights = $300 million per flight).
5

As a result, NASA does not currently have a true commercialization alternative for the

Shuttle. This may change in the future if new, more lucrative markets develop for

Shuttle’s unique capabilities, if significant cost reductions can be achieved through

technology breakthroughs or through a combination of both.

Shuttle Upgrade: Invest in a major Shuttle upgrade, including the development of LFBBs.

Pros

• Projected to result in increased flight safety and reliability, higher flight rates and

lower launch costs

• Projected to increase payload capabilities to all planned orbits

• Projected to provide first-stage heavy-lift capability (without orbiter) for potential

Lunar/Mars missions

Cons

• Upgrades are expensive, with LFBBs estimated to cost in excess of $5 billion

• Keeps NASA actively involved and potentially further entrenched in an operating

activity

• Private-sector is not incentivized to aggressively reduce costs or create new

markets

• Upgrade process is more likely to experience cost overruns and project

delays than if Shuttle were a private-sector asset subject to rigid risk/return

parameters

• The lack of a commercialization opportunity limits private-sector

involvement in Shuttle upgrade to a contractor role

• Increased flight rate may require additional infrastructure investment in excess of

$1 billion

• Shuttle not necessarily competitive from a full-cost or flight frequency perspective

after upgrade

Analysis of Shuttle-Upgrade Option

Upgrading the Shuttle does not represent an effective means for NASA to reduce its longterm costs of human access to space. NASA anticipates that a major upgrade of the

Shuttle, which includes LFBBs, would, among other things, reduce launch costs, yielding

NASA an estimated $400 million to $500 million in annual cost savings.
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The cost savings would not be generated without a significant up-front investment: the

upgrade is estimated to cost in excess of $5 billion. Another $1 billion would likely be

required for infrastructure upgrades if the annual flight rate were to exceed 12 per year. As

mentioned earlier, the private sector is not interested in owning and operating the current

Shuttle due to its high cost and limited revenue potential. The Shuttle upgrade, if

successful, would improve Shuttle’s cost structure and revenue potential; however, not to

the extent that it would be competitive with other launch service providers. Thus, the

upgrade does not encourage private-sector involvement other than as a contractor. For

instance, United Space Alliance (“USA”), a private-sector contractor which performs

Shuttle-operating and processing services for NASA, has expressed no interest in

participating in the upgrade investment. This inability to actively incorporate privatesector disciplines and incentives in the Shuttle upgrade raises the risk that the upgrade will

not be completed in a timely and cost-efficient manner, further reducing any potential

benefit to NASA.

Significant launch cost savings can be generated only if the private sector owns and

operates the launch vehicles. As mentioned earlier, the private sector is not interested in

investing in the current or upgraded Shuttle due to the high cost structure. NASA’s desire

and/or need for some level of operating control and supervision further reduces the private

sector’s interest in any Shuttle-commercialization process. There may be a role for NASA

to subsidize the private sector’s ownership and operation of the current or upgraded Shuttle

for a period of time until new market opportunities emerge. However, it is highly unlikely

that any future private-sector, stand-alone scenario would involve the current or upgraded

Shuttle, but rather, a new more cost-efficient launch vehicle.

Shuttle-to-Private Sector: Transfer one or more Shuttles to private-sector ownership and

operation.

Pros

• Encourages private-sector ownership and operation of a reusable launch vehicle

• Can be implemented over the near-term

• Demonstrates commercial-market applications for human-rated RLVs

• Could increase awareness of the benefits of commercial research in space, which

would benefit both the Shuttle and ISS

• Reduces NASA’s cost of maintaining a fourth Shuttle for which it appears to have

limited use over the next several years

• NASA/US government could benefit financially from an asset “sale” to the private

sector
7

• Potential to demonstrate the merits of private-sector disciplines and incentives,

which may yield benefits to NASA

• Potential lower-cost provider of a portion of Shuttle services to NASA in the future

• Potential catalyst in moving NASA out of Shuttle-ownership role over the longterm

Cons

• NASA would have to subsidize the private sector by providing launch-related

services to the private-sector owner/operator on a “direct and incremental cost”

basis as opposed to on a “full-cost” basis

• NASA likely to have to subsidize the purchase price of the asset

• Potential near-term cost reductions to NASA may be minimal

• Potential long-term benefit to NASA is unclear and highly speculative – may not

materially reduce NASA’s operating costs

• Potential to increase accident risk if private sector does not operate Shuttle as safely

as it is currently operated

• Could discourage other private-sector RLV initiatives if NASA subsidizes privatesector commercialization efforts

• Lack of availability of a Shuttle as a back-up could potentially compromise ISS

launch and assembly schedule

Analysis of Shuttle-to-Private-Sector Option

The Shuttle-to-Private Sector alternative has the potential to increase awareness of the

potential commercial benefits of human-rated RLVs. There are several critical issues to

consider in evaluating this alternative: (i) the extent to which NASA would have to

subsidize the private sector by providing certain launch- and mission-related services on a

purely direct and incremental cost basis (i.e. not on a full cost basis); (ii) the extent to

which NASA would have to subsidize the private sector’s purchase of the asset; (iii) the

potential benefits of applying private-sector disciplines and incentives to Shuttle

operations; and (iv) the private sector’s ability and willingness to create new commercial

markets and revenue streams for human-rated RLVs. These interrelated issues are of

particular importance because, while the Shuttle has proven in the past that it can

effectively deploy commercial payloads from a functional perspective, it has not proven

that it can do so on a cost-effective basis.
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On the issue of subsidization, it is instructive to note that in the mid-1980’s NASA

transferred ownership of certain government-developed ELV systems to the private sector

without recovering any costs. By law, the US ELV-launch industry currently receives

launch-related services from the US government on a “direct and incremental cost” basis.

Since these ELV companies would likely be the primary competitors of a

“commercialized” Shuttle, a “level playing field” approach would dictate a similar level

of subsidy to a private-sector entity who assumed the risk of owning and operating a

Shuttle on a commercial basis. None of the parties we spoke with provided us with any

data regarding the amount of such “acceptable” subsidies relative to the per-launch cost of

a commercialized Shuttle, so we are unable to predict whether this factor would have a

material impact on our analysis of this option.

Given the accelerating growth of commercial satellite systems, the Shuttle is a potentially

attractive launch vehicle in a market where demand for such services is expected to exceed

supply for the foreseeable future. Therefore, if the Shuttle were able to provide satellite

launch services at a market competitive price, it is not unreasonable to assume that the

Shuttle would be able to capture some portion of the satellite launch market. Assuming a

competitive satellite launch price of $200 million per launch and a current cost per launch

of approximately $300 million, the private-sector would have to find a way to reduce, at a

minimum, the current cost per launch by approximately $100 million (33%), either through

direct operating cost reductions and/or cost subsidies (with a heavy reliance on the latter).

Whether this can be achieved is unclear. If, however, a credible private-sector business

plan is proposed, NASA should take the following into account when reviewing it:

• NASA Long-Term Objectives. Transferring a Shuttle to the private sector is

consistent with NASA’s objective of transitioning away from operating activities in

order to focus on research and development. While such a transfer may not directly

reduce NASA’s launch costs in the near-term it would, if successful, lend

significant credibility to NASA’s objective of transitioning out of operating

activities and demonstrate the commercial-market potential for a human-rated

RLV. In the least, the transfer of a Shuttle from NASA to the private sector would

represent a very strong and significant statement regarding the direction in which

NASA is heading with regard to allocating its limited budget resources.

• Potential Short- and Long-Term Cost Reductions. The transfer of a Shuttle to the

private sector could generate short-term cost savings in the form of reduced

maintenance costs for a fourth Shuttle. In addition, proceeds from the outright sale

of a Shuttle to the private sector could have a positive direct or indirect effect on

NASA’s budget. Finally, the possibility exists that the transfer of a Shuttle to the

private sector, if successful, could ultimately result in NASA being out of the

Shuttle-ownership role entirely over the long-term, positioning the agency as a

“purchaser” of Shuttle services from the private sector, similar to the ELV situation

today.
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While there are merits to the transfer of a Shuttle to the private sector, they are not without

risk. Several risks to consider in connection with the transfer of a Shuttle to the private

sector are outlined below:

• Performance. The private sector’s need to operate profitably by optimizing

revenues and costs has the potential to increase the risk of a Shuttle accident.

While NASA’s focus is on risk minimization, not cost minimization, it is possible

the private sector might make tradeoffs between risk and cost that differ from those

of NASA. The residual effects of a private-sector Shuttle accident may be

unacceptable to NASA. However, the profit motive combined with an appropriate

level of risk sharing on the part of the private sector should be a strong incentive to

fly safely. In addition, NASA could ameliorate this risk by providing an oversight

function.

• Cost Subsidies and Logistics. The private sector would likely require a subsidy

from NASA in the form of purchasing launch- and mission-related services on a

purely direct and incremental cost basis. This may be acceptable provided there is

a balance between incentives and risk sharing. The NASA subsidy should be

structured so that the private-sector is motivated to actively create new commercial

markets and revenue streams for human-rated RLVs, while retaining a sufficient

level of downside risk to ensure safe operation of the Shuttle.

In addition, this option presents a potential logistics issue: (i) NASA’s own flight

rate is increasing over the next several years in connection with ISS launch and

assembly; and (ii) the transfer of a Shuttle to the private sector could leave NASA

without a back-up Shuttle should problems arise with its remaining Shuttles. As a

result, it is possible that the amount and duration of such a subsidy together with

ISS logistics may make a transfer of the Shuttle to the private sector problematic at

this time.

• Impact on Other Initiatives. The transfer of a Shuttle to the private sector may

discourage other private-sector RLV initiatives. As a result, it is possible that

private-sector ownership and operation of the Shuttle may work directly against

NASA’s long-term objective of fostering private-sector involvement in reducing the

cost of human access to space. However, a Shuttle that has been transferred to the

private sector is not likely to fly more than 3-5 times per year.

Any decision involving the transfer of a Shuttle to the private sector will be difficult. In

addition, because this option is not likely to be the long-term means by which to achieve

NASA’s goal of significantly reducing the cost of human access to space over the longterm, NASA should not pursue it if it adversely impacts its ability to achieve such a goal.

The key consideration for NASA in making such a decision is to determine whether the

potential benefits of private-sector ownership and operation of a Shuttle are outweighed by

the potential risks to NASA of taking such a step.
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New Human-Rated RLV: Invest in the development of a full-scale, human-rated reusable

launch vehicle as a follow-on to the existing X-33 project.

Pros

• Potential order of magnitude reduction in launch costs

• Private-sector development, ownership and operation of next-generation launch

vehicle introduces private-sector incentives and disciplines to the process

• Enhanced US competitiveness in the commercial-launch industry

• Increased commercialization of space (through low-cost access to LEO)

• Reduced ISS access costs and improved opportunities to commercialize ISS

operations and utilization

• Developed from the beginning with both NASA and commercial markets in mind

• Currently, no other private-sector initiatives to develop RLVs which meet NASA’s

human space flight needs

• NASA could benefit even in the event that the project is unsuccessful

Cons

• Large obstacles to be overcome, including significant technology and projectrelated risk

• New Human-Rated RLV, as currently designed, does not offer the same

capabilities as Shuttle

• Private sector is likely to rely on the government for help in funding all or a portion

of any potential cost overruns and delays

• Potential lack of competition in bidding process for the X-33 follow-on initiative

due to potential consolidation in aerospace industry

• Conflicts of interest exist within NASA as well as Lockheed Martin and Boeing,

due to their position as partners in USA and as the largest ELV manufacturers and

operators

• Government funding may discourage development of other (non-government

funded) RLVs
11

• Significant government participation/involvement (potentially on a multi-agency

basis) may reduce the benefit of private-sector incentives and disciplines

Analysis of New Human-Rated RLV Option

• Given the Shuttle’s limited commercialization potential as well as NASA’s goal of

transitioning resources away from operating activities, it seems clear that NASA

needs to pursue a replacement for the Shuttle. Any replacement for the Shuttle

needs to consider the lessons of the past in terms of strategy, development,

ownership and operation:

• Development. Systems that are developed predominately for NASA’s needs often

become very expensive due to the fact that the development process is not market

driven and does not incorporate private sector risk-return incentives and disciplines.

An example of this is the Shuttle, which was developed specifically for NASA use

and, as a result, has a cost structure that prevents it from effectively competing in

the commercial satellite launch market. The consequence of Shuttle’s failure to be

a competitive launch service provider is significant: NASA must continue to be the

major customer for Shuttle services and will find it very difficult to offset some of

its future funding requirements by generating revenues, or “reimbursable

expenses.” from multiple “customers.” As a result, the Shuttle’s operating costs

will continue to consume a substantial portion of NASA’s resources, which is

problematic in an era of flat to declining budgets. In response to this, NASA

should seek to facilitate the research and development efforts of those privatesector companies developing launch systems that are most likely to significantly

reduce the cost of human access to space.

• Ownership. Complex new systems developed by the government often run into

problems during development, such as cost overruns and significant delays, largely

due to the lack of market-driven economic incentives and disciplines. Both Shuttle

and ISS are examples of complex projects whose costs and completion dates went

significantly beyond their original estimates. This clearly indicates that government

ownership should be limited only to those projects the private sector will not

undertake on its own. Currently, Shuttle and ISS probably fit that definition;

however, the next generation of human-rated launch vehicles may represent an

opportunity for private-sector development and ownership.

• Operation. The private sector has proven that it is better suited to perform

operating activities than the government. The key question is: at what point do

NASA’s “cutting-edge” research and development efforts become operational in

nature and appropriate for transitioning to the private sector. At one time, Shuttle

operations did represent cutting-edge research and development, however, the

Shuttle now appears to have evolved fully into an operating activity.
12

After ELVs became operational in nature, their ownership and operation shifted

from the government to the private sector. The government, as a customer of ELV

services, has benefited significantly from that shift. New ELVs are currently being

developed and operated by the private sector (this excludes certain E-ELV projects

which are not purely private-sector developed), and several private-sector

companies are preparing to develop, own and operate non-human-rated RLVs. In

addition, we are aware of at least one “piloted” RLV (i.e. human rated, but not

necessarily for NASA purposes) that is currently being developed by the private

sector and other private sector-entities may develop human-rated RLVs in the

future. As a result, it seems unnecessary for NASA to be fully engaged in the

ownership and operation of launch vehicle systems. However, there is a role for

NASA in the “cutting-edge” research and development stages of these launch

vehicle systems, particularly those that address NASA’s needs when they may not

be consistent with the needs of the commercial market. Moreover, NASA will be a

prime beneficiary of these private sector efforts.

Technology Risk

A key issue regarding the New Human-Rated RLV is the technology risk associated with

the project. It remains unclear whether a single-stage-to-orbit RLV can be developed at

this time. The X-33, if successful, will mitigate some but not all of these risks. In fact, the

Lockheed Martin team was chosen to lead the X-33 effort partly due to the fact that its X33 proposal mitigated greater technology risk than any other proposal. However, even a

successful X-33 effort will leave significant technological risks to be overcome prior to the

development of a full-scale, human-rated RLV.

The active participation of the private sector in this effort introduces the positive tension of

market incentives and disciplines which increases the probability of successfully

developing such a vehicle. In a worst-case scenario in which the technological hurdles

associated with this project cannot be overcome at this time, this effort alone should

generate knowledge that enhances the prospects for developing such a vehicle in the future.

Additional momentum for the development of human-rated RLVs is being indirectly

generated by the private-sector’s investments in launch vehicles (both ELVs and RLVs) to

meet the booming demand for launch services by the commercial satellite market as well

as potential new commercial markets created by the successful commercial use of the ISS.
13

Differing Capabilities

There is a significant difference between the capabilities of the Shuttle and the proposed

New Human-Rated RLV. The Shuttle provides heavy-lift payload capability together with

human interaction (i.e. the ability of the crew to interact with the cargo). The proposed

New Human-Rated RLV, while providing heavy-lift capability, does not offer

human/cargo interaction. It will carry humans and cargo, but not both simultaneously.

The Shuttle has frequently been used as a microgravity research lab, with human

interaction being a key component of that process. A key issue to consider is whether,

given the availability of the ISS and its microgravity research capabilities, NASA will

continue to need to rely as much on Shuttle’s human/cargo interaction capabilities. Once

the ISS is assembled and operating, NASA’s space flight needs will likely focus on supply

and re-boost of ISS, services that do not necessarily require Shuttle’s unique human/cargo

interaction capabilities.

Alternative RLV: Invest in alternative RLV technologies (Kistler, Kelly, etc.) which may

not necessarily fulfill NASA’s mission objectives, including human access to space and

servicing the ISS.

Pros

• Potential to reduce certain launch costs

• May provide interim step in development of New Human-Rated RLV

• Private sector is currently developing technology on its own, and may not need

NASA’s assistance

Cons

• Does not necessarily meet NASA’s current need: low-cost human access to space

• Potential to delay or even pre-empt the development of a new human-rated RLV if

cargo-only capabilities satiate commercial-market demand

• Technological risk is still high, though less than that of a human-rated RLV
14

Analysis of Alternative-RLV Option

The critical issues to consider in evaluating this option are: (i) the value NASA places on

having access to a low-cost, human-rated RLV; (ii) the value NASA places on having

access to a low-cost, non-human-rated RLV; (iii) the extent to which the development of a

low-cost, non-human-rated RLV advances the ultimate development of a low-cost, humanrated RLV; and (iv) the potential for a low-cost human-rated RLV to be developed solely

by the private sector. While the development of a low-cost, non-human-rated RLV is

attractive to the private sector which sees it as a potential means of capturing a share of the

growing satellite launch market, it seems much less attractive to NASA due to the agency’s

human space flight needs. The long-term attractiveness of the commercial satellite launch

market is already sufficient to justify private investment in the development of a nonhuman-rated RLV, even without NASA involvement. However, there currently does not

appear to be sufficient market demand to encourage the private sector to develop, own and

operate a human-rated RLV on its own.

Thus, an investment by NASA in the development of a low-cost, non-human-rated RLV

seems unnecessary unless it represents a required interim step in the ultimate development

of a low-cost, human-rated RLV. If there is no significant correlation between the

development of a non-human-rated RLV and a human-rated RLV, then NASA should

apply its limited resources elsewhere.

Combination Approach: Pursue a carefully managed and structured approach to the New

Human-Rated RLV option while operating the Existing Shuttle until such New HumanRated RLV is fully operable. In addition, the agency would explore opportunities to

promote market-driven commercialization efforts in its existing operations, such as the

Shuttle-to-Private Sector option, so long as they did not compromise NASA’s mission

objectives or the development of the New Human-Rated RLV.

Pros

• Diversifies risk

• Creates sense of competition

• Creates redundancy during development

• Allows for transition to low-cost launch system over time

• Creates private-sector incentives to commercialize space

• Transitions NASA out of operating activities

Cons

• High risk associated with successful development of New Human-Rated RLV
15

• New Human-Rated RLV will not offer the same integrated capabilities (i.e.

human/cargo interaction) as the Shuttle

• Creates additional potential conflicts of interest within NASA, USA, Lockheed

Martin, Boeing, Congress and the Administration

• Could discourage other private-sector development of low-cost RLVs due to

NASA assistance to New Human-Rated RLV and NASA “subsidy” of Shuttle-toPrivate Sector

• Significant government participation/involvement may dilute the benefit of privatesector incentives and disciplines

Analysis of Combination-Approach Option

The Combination Approach is a hybrid approach based on the following assumptions:

• NASA must continue to operate the Shuttle until a viable and proven low-cost

alternative for human access to space emerges;

• the New Human-Rated RLV is a viable long-term solution to reducing NASA’s

cost of human access to space (see Analysis of New Human-Rated RLV Option);

and,

• transferring an underutilized Shuttle to a credible private-sector entity is a

potentially attractive means by which to generate awareness of the commercialmarket potential of space and the capabilities of human-rated RLVs.

The Combination Approach is attractive from a risk-diversification standpoint as it enables

NASA to take a multifaceted approach to reducing the cost of human access to space.

However, this approach is heavily reliant on the successful development of the New

Human-Rated RLV, which is inherently high risk.
16

IV. Analytical Review

Methodology

We have chosen to rely largely on a net present value approach in analyzing and

comparing several of the proposed alternatives to achieve NASA’s long-term objective of

reducing the cost of human access to space. In this case, “net present value” represents the

value, in current dollars, of the net cost savings that these individual alternatives could

generate for NASA relative to the current cost of operating the Shuttle (i.e. the higher the

net present value the higher the net cost savings to NASA) after taking into account the upfront investment required to generate such cost savings. We have developed this analysis

using assumptions based on readily available data and, in some cases, our own “best

estimates.” The purpose of this analysis is not to provide a precise quantitative

representation of each option, but rather, to provide a sense of the magnitude of the

potential cost savings these alternatives can achieve as well as a general understanding of

the potential “value” of one option relative to another. This analysis is intended purely to

be a tool to support the decision-making process, and should be considered along with a

range of other factors in arriving at a decision on how to best reduce the cost of human

access to space.

Our analysis includes:

• a net present value analysis of the Shuttle Upgrade option relative to the

Existing Shuttle option;

• a net present value analysis of the New Human-Rated RLV option (based

largely on a recent VentureStar business case) relative to the Existing Shuttle

Option;

• a sensitivity analysis of the key variables that impact NASA’s potential cost

savings.

Since the Existing Shuttle option represents NASA’s current Shuttle operations, we have

used it as the basis upon which to compare the other potential options which lend

themselves to such a comparison. The Alternative RLV option was not comparable to the

Existing Shuttle given that it does not appear that it will offer human-rated capabilities.

Key Assumptions

We have derived our assumptions from a variety of sources which include NASA and

related parties, the VentureStar program and related parties and, in some cases, our own

estimates based on readily available information. The key assumptions which drive our

analysis are outlined below along with the primary source for each such assumption:
17

Existing Shuttle Basic Assumptions

• Annual Shuttle LEO-transportation budget of $2.4 billion remains flat.

• 8 flights per year for the period 2004-2020.

• $300 million cost per launch for the first 8 flights in any given year.

• $90 million cost per launch for Shuttle flights 9 and 10 in any given year.

• Minimum “safe” flight rate of 5 per year; maximum flight capacity of 10

flights per year

• Aggregate $1 billion of required upgrades to be made over the four-year

period 1999-2003.

Source (1)

NASA

NASA

NASA

NASA

NASA

NASA

Shuttle Upgrade Basic Assumptions

• $5.2 billion aggregate investment made over the four-year period 1999-

2003.

• 8 flights per year for the period 2004-2020.

• $240 million cost per flight versus $300 million pre-upgrade (implied

annual post-upgrade launch cost savings of $60 million per flight, which,

based on 8 flights per year, equals $480 million).

• $75 million cost per launch for Shuttle flights 9 and 10 in any given year

versus $90 million per launch pre-upgrade (additional investment in

infrastructure may be required for more than 10 flights per year).

• Shuttle Upgrade is fully operational beginning in 2004 (assumes no

“Shuttle-overlap” flights while Shuttle Upgrade is being qualified as

human-rated for NASA purposes).

• 7% cost of capital.

Source

NASA

NASA

NASA

NASA

NASA

NASA

New Human-Rated RLV Basic Assumptions (2)

• $1.75 billion aggregate investment made by NASA over the three-year

period 1999-2001.

• A total of 13 NASA “Shuttle-equivalent” flights per year for the period

2006-2020, consisting of 10 ISS-related flights and 3 non-ISS related

flights. Given the fact that the New Human-Rated RLV can not fly

humans and cargo simultaneously, unlike the Existing Shuttle, it is

assumed that the New Human-Rated RLV would have to make 13 flights

for every 8 flights made by the Existing Shuttle.

• $75 million cost per flight for ISS-related missions; $25 million cost per

flight for non-ISS cargo-only missions.

(1) NASA = NASA, VS = VentureStar and related parties, HKA = Hawthorne, Krauss & Associates.

(2) New Human-Rated RLV Assumptions are derived in part from a recent VentureStar business plan.

Source

NASA

NASA

VS
18

New Human-Rated RLV Basic Assumptions (continued)

• New Human-Rated RLV is fully operational beginning in 2006. In both

2004 and 2005, it is assumed that the New Human-Rated RLV completes

3 non-ISS cargo-only missions at a cost of $25 million per flight. We

have also included three additional scenarios (see Appendix II.(a),

Appendix II.(b) and Appendix II.(c) under which it is assumed that the

New Human-Rated RLV’s human-transport capability is delayed beyond

2006).

• Existing Shuttle is required to make 5 “Shuttle-overlap” flights per year in

both 2004 and 2005 at a cost of $440 million per flight while the New

Human-Rated RLV is being qualified as human-rated for NASA purposes.

Due to the Existing Shuttle program’s high operating leverage, the $440

million represents the cost per flight if only 5 flights are made in a given

year (versus $300 million per flight if the flight rate is increased to 8 per

year).

• Existing Shuttle is retired after 2005. Shuttle “close-out” costs of $240

million are charged in 2006.

• 7% cost of capital.

Source

NASA

NASA

NASA

NASA

We have also assumed that NASA would operate the Existing Shuttle and make an

aggregate $1 billion of non-discretionary “upgrades” over the four-year period 1999-2003

regardless of whether it pursued the Shuttle Upgrade option or the New Human-Rated

RLV option. Therefore, our analyses of Shuttle Upgrade and New Human-Rated RLV do

not include the costs associated with operating and upgrading the Shuttle during the period

1999-2003 because it would be the same regardless of which option NASA chooses to

pursue.

Because substantially all of our key assumptions have been provided or confirmed by

outside sources, including NASA, we believe that our analysis presents a reasonable

representation of the relative “value” of each alternative. In addition, we have sought to be

as conservative as possible in our assumptions with the intention of understating, rather

than overstating, the potential financial implications of each alternative. It should be

noted, however, that the underlying data used to derive certain of our assumptions is

subject to change frequently and, as a result, this analysis should updated periodically to

reflect such changes.
19

Results

Shuttle Upgrade. Based on the Shuttle Upgrade Basic Assumptions, the Shuttle Upgrade

investment yields a projected negative net present value of approximately $931 million

(see Appendix I). Therefore, the $60 million of cost savings per launch generated by the

Shuttle Upgrade are not sufficient to justify its $5.2 billion up-front cost, assuming a flight

rate of 8 per year over the period 2004-2020. In order to justify such an investment,

NASA would need to achieve a lower cost per flight, in the $223 million range, a reduction

of approximately 7% from the current projection of $240 million per flight for the Shuttle

Upgrade.

Furthermore, while increasing the flight rate has the potential to generate additional cost

savings for NASA relative to operating the Existing Shuttle, it can not realistically justify

the $5.2 billion investment in Shuttle Upgrade from a net present value perspective. For

the net present value of the Shuttle Upgrade to be positive (thus, making the $5.2 billion

investment justifiable) the flight rate assumption would have to more than double, to

approximately 17 flights per year (versus the current assumption of 8 flights per year) over

the period 2004-2020. Based on current information, such an increase in the flight rate is

unachievable in the foreseeable future. As a result, this option is not an effective means for

NASA to reduce the cost of human-access to space over the long-term in order to reallocate budget dollars to research and development activities.

 See Appendix I. for detailed financial analysis of Shuttle Upgrade option.

New Human-Rated RLV. Based on the New Human-Rated RLV Basic Assumptions, the

projected net present value of the potential cost savings is approximately $7.4 billion (see

Appendix II). More specifically, $7.4 billion represents the current value of the net cost

savings that could be achieved by investing $1.75 billion incrementally in the New

Human-Rated RLV and flying 13 “Shuttle-equivalent” flights per year over the period

2006-2020, rather than operating the Existing Shuttle at a rate of 8 flights per year over the

same time period. Included in this calculation is the assumption that for a period of two

years (2004 & 2005) NASA would have to fly both the Existing Shuttle, at a rate of 5

times per year, and the New-Human Rated RLV, at a rate of 3 times per year (non-ISS

cargo-only flights at a cost of $25 million per flight), while the New Human-Rated RLV

was being “qualified” as a viable human-rated RLV for NASA purposes. If this

assumption was excluded from the calculation, and the New Human-Rated RLV was fully

human rated in 2004, the net present value of NASA cost savings would be in the $8.5

billion range.

See Appendix II. for detailed financial analysis of New Human-Rated RLV option.

Additional RLV Scenarios. We produced three additional scenarios in which all but two

of the New-Human Human-Rated RLV Basic Assumptions were held constant: (i) the date

upon which the New-Human Rated RLV was assumed to be fully operable (i.e. capable of

human transport) was extended beyond 2006; and therefore (ii) the “Shuttle-overlap”

period was extended accordingly. The impact of these changes is outlined below:
20

Basic Assumptions Scenario 1 Scenario 2 Scenario 3

RLV human-transport ready 2006 2007 2009 2011

Shuttle “Overlap” period (1) 2004-2005 2004-2006 2004-2008 2004-2010

NPV of Cost Savings $7.4 bil $6.1 bil $4.2 bil $2.5 bil

% Decrease vs. Basic Assump N/A (17.6%) (43.2%) (66.2%)

(1) Scenarios 1, 2 and 3 assume that the New Human-Rated RLV is capable of ISS cargo-only

missions beginning in 2005.

Even in the case of Scenario 3, whereby the New Human-Rated RLV’s human-transport

capability is delayed until 2011, the investment in the New Human-Rated RLV is

justifiable with a positive NPV of net cost savings $2.5 billion (assuming a $1.75 billion

up-front investment amount and RLV ISS-related launch costs of $75 million per launch).

See Appendix II.(a), Appendix II.(b) and Appendix II.(c) for detailed financial analysis of

Additional RLV Scenarios.

 Risk-Adjusted Net Cost Savings

The net $7.4 billion of potential net present value of cost savings to NASA from a $1.75

billion investment in the New-Human Rated RLV may not fully reflect the potential risk

associated with the project given the technological and project-related hurdles that must be

overcome (see “Analysis of New Human-Rated RLV Option”). This risk can be addressed

quantitatively by increasing the discount rate used in the net present value calculation,

which is a direct function of the risk/return parameters of the project. Our Basic

Assumptions assume a discount rate for both the Shuttle Upgrade and New Human-Rated

RLV options of 7%, on the basis of NASA’s funding costs and the arguably comparable

risk levels of each project. While it may be true that the New Human-Rated RLV faces

greater technology risk than the Shuttle Upgrade, it may also be true that the New HumanRated RLV faces less project-management risk (i.e. completion within projected time, cost,

performance, etc. parameters), due to its high degree of private-sector involvement relative

to the Shuttle Upgrade project.

Thus, the difficulty and subjectivity associated with assessing the overall risk of each

project emphasizes the need to understand the potential impact of the discount rate on each

project. For example, if we assume that the overall risk associated with the New HumanRated RLV is higher than that of the Shuttle Upgrade, we can increase the discount rate to

reflect the increased level of risk. If we increase the discount rate for the New HumanRated RLV option to 10.5% from 7% (a 50% increase), the net present value of cost

savings for the New Human-Rated RLV decreases by approximately 41%, to

approximately $4.4 billion. Similarly, a 14% discount rate (a 100% increase) yields a net

present value of approximately $2.5 billion. The “break-even” discount rate (where the

net present value of cost savings equals zero) for the New Human-Rated RLV project is

approximately 27%.
21

Similarly, we can sensitize the impact of the discount rate on the Shuttle Upgrade. For

example, if we assume that the overall risk associated with the Shuttle Upgrade is lower

than that of the New Human-Rated RLV, we can decrease the discount rate to reflect the

decreased level of risk. If we reduce the discount rate to 5.25% (a 25% reduction), the net

present value of cost savings would be negative ($367 million. The “break-even” discount

rate (where the net present value of cost savings equals zero) for the Shuttle Upgrade

project is approximately 4.4%.

Given the sensitivity of the discount rate, NASA must fully assess the overall risk

associated with the project, which includes both technology risk and project-related risk,

before making an investment decision. The sensitivity of the impact of changes in the

discount rate on the net present value of cost savings for both the Shuttle Upgrade and

New Human-Rated RLV options is demonstrated below:

NPV of Cost Savings ($millions)

-----------------New Human-Rated RLV-----------------

Discount Shuttle Basic

Rate Upgrade Assumptions Scenario 1 Scenario 2 Scenario 3

4.0% 163.0 11,706.5 10,047.5 7,480.5 5,107.2

7.0% (930.9) 7,423.9 6,147.4 4,221.1 2,538.6

10.0% (1,558.7) 4,719.5 3,741.2 2,288.1 1,087.2

13.0% (1,909.3) 2,971.9 2,227.3 1,126.4 264.2

16.0% (2,092.2) 1,819.3 1,258.8 421.7 (200.4)

19.0% (2,172.6) 1,045.5 630.7 (7.5) (458.2)

22.0% (2,189.7) 518.3 219.3 (268.1) (595.6)

25.0% (2,167.9) 154.8 (51.9) (424.3) (662.7)

Sensitivity Analysis

Shuttle Upgrade. Because the Shuttle Upgrade option can not be justified (from a net

present value perspective) using the Shuttle Upgrade Basic Assumptions, a sensitivity

analysis is less relevant than for the New Human-Rated RLV option. Any increase in the

amount of the up-front investment in excess of $5.2 billion will only make the project less

justifiable, and, based on the complexity of the project and a lack of private-sector

involvement, there is risk that NASA will not be able to accomplish the project for $5.2

billion. However, we can conclude that, for NASA to break-even on a $5.2 billion

investment, the Shuttle Upgrade option would have to yield a cost per flight in the $223

million range, assuming a flight rate of 8 per year. In the attached Table I., we have

sensitized the impact of changes in up-front investment and launch costs on the net present

value of cost savings associated with the Shuttle Upgrade option.
22

New Human-Rated RLV. Beyond the technology risk, which can be addressed in part

through the discount rate, the key variables to sensitize in analyzing the New HumanRated RLV option are: (i) the required incremental up-front NASA investment in the

project, which is currently assumed to be $1.75 billion; and (ii) the cost per launch that

such an investment yields, which we have projected to be $75 million (for ISS-related

missions). In the attached Table II, we have demonstrated the sensitivity of these variables

relative to their impact on the net present value of cost savings. There are two important

conclusions to be drawn from this table:

• Projected launch costs have the greatest impact by far on potential cost savings.

For every $10 million increase in projected launch costs, the net present value

of cost savings declines by approximately $637 million. This implies that the

projected launch costs could increase to approximately $192 million (a 156%

increase over the current launch cost projection of $75 million) before the net

present value of cost savings was reduced to zero (assuming NASA invests

$1.75 billion in the project).

• NASA can justify increasing its incremental up-front investment in the New

Human-Rated RLV significantly. For every $100 million increase in the upfront investment required to complete the project, the net present value of cost

savings decreases by approximately $87 million. This implies that the up-front

investment could be increased by 485%, to approximately $10.2 billion

(assuming the projected launch cost remains at $75 million) before the net

present value of cost savings was reduced to zero.

Additional RLV Scenarios. In addition, we have sensitized the impact of these variables

from an NPV of cost-savings “break-even” perspective, on Scenario 1, Scenario 2, and

Scenario 3, each of which assumes that the human-transport capability of the New HumanRated RLV is delayed beyond 2006. The results of this analysis are summarized below:

(000’s) Basic

Assumptions Scenario 1 Scenario 2 Scenario 3

RLV human-transport ready 2006 2007 2009 2011

NPV of Cost Savings $7,423.9 $6,147.4 $4,221.1 $2,538.6

Break-even Launch Costs $191.6 $169.4 $144.3 $119.4

% Increase vs. Basic Assump 155.4% 125.9% 92.4% 59.2%

Break-even Investment $10,236.7 $9,270.9 $7,126.5 $5,103.9

% Increase vs. Basic Assump 485.0% 429.8% 307.2% 191.6%

Even in the case of Scenario 3, in which the New Human-Rated RLV’s human-transport

capability is delayed until 2011, there is sufficient room to: (i) increase the investment

amount beyond $1.75 billion if necessary; and (ii) yield a cost per launch in excess of the

projected $75 million, while still generating net cost savings that are justifiable.

See Table II.(a), Table II.(b) and Table II.(c) for further details.
23

As a general rule, the forgone net cost savings resulting from extending the “Shuttleoverlap” period by an additional year (assuming 5 flights per year) is in the $900 million to

$1.2 billion range annually, which merely emphasizes NASA’s need to commit to

expediting the New Human-Rated RLV’s human-transport capability. However, NASA

would have to extend the “Shuttle-overlap” period to 2016 (from the current assumption of

2006 years), at a flight rate of 5 per year, in order to merely break-even (i.e. NPV of cost

savings is equal to zero) on its $1.75 billion investment in the New Human-Rated RLV (at

a flight cost of $75 million per flight).

Summary & Conclusions

From a financial perspective, the Existing Shuttle, Shuttle Upgrade and New Human-Rated

RLV options can be summarized as follows:

Existing Shuttle New HumanShuttle Upgrade Rated RLV

Up-front Investment $1.0 billion $5.2 billion $1.75 billion

Available Flights per Year <10 <12 (1) >15

Actual Flights per Year 8 8 13 (2)

Actual Cost per Flight $300 million $240 million $75 million/$25 million

Gross Flight Cost/Year $2.4 billion $1.9 billion $825 million

Total Flight Years (2004-2020) 17 17 15 (3)

Gross Cum. Flight Costs $40.8 billion $32.3 billion $16.9 billion

NPV of Cost Savings N/A ($931 million) $7.4 billion

(1) Annual flight rates in the 11-12 range will likely require an additional infrastructure investment.

(2) Assumes 10 ISS-related flights at $75 million per flight and 3 non-ISS flights at $25 million per flight.

(3) The New Human-Rated RLV scenario assumes that the New Human-Rated RLV will not be fully

operable (i.e. human transport capability) until 2006. Therefore, the Gross Cumulative Flight Costs include

Existing Shuttle costs of $2.2 billion and RLV costs of $75 million for the years 2004 and 2005 and New

Human-Rated RLV costs for the years 2006-2020.

Based on this information, the New Human-Rated RLV option appears to be the most

attractive option, despite the technology risk associated with this option. The reason for

this is clear: launch costs absorb a significant amount of NASA’s total annual budget, and

the New Human-Rated RLV has the potential to reduce launch costs far more than any

other potential option which meets NASA’s current mission requirements. At a Shuttle

equivalent flight rate of 13 per year, the New Human-Rated RLV has the potential to

reduce NASA’s annual launch cost budget by approximately 2/3rds, from $2.4 billion to

$825 million.

While the results of this analysis are compelling, it should be used to assist NASA in

understanding the potential magnitude of its currently available options and the economic

differences between them, but, clearly, not as the sole means by which to make a decision.

As a result, NASA must be sure to consider all factors, both qualitative (limited resources,

private-sector involvement, etc.) and quantitative, in arriving at a decision as to which

option to pursue.
24

V. Conclusions and Recommendations:

NASA’s strategic plan calls for “a renewed focus on scientific research and the

development and application of new cutting-edge technologies.” In order to achieve such a

renewed focus in light of the prospects of flat-to-declining agency budgets, NASA must reallocate its limited resources to focus on its unique core competencies (such as the

development of advanced space technologies) and transition operating activities, where

possible, to the private sector. NASA should migrate to the role of “customer” for these

operating activities from its present role as “owner/operator.”

Logically, NASA views “commercialization” as the primary means by which to transition

out of operating activities. Commercialization can engage the private sector in NASA

activities and reduce NASA’s long-term costs. The active involvement of the private

sector, which operates under an inherent set of disciplines and incentives driven by its need

to earn an adequate economic return on its investment, is critical to NASA’s ability to

successfully commercialize many of its operating activities.

The Shuttle program, with an annual budget of approximately $3.2 billion, consumes the

largest portion, approximately one fourth, of NASA’s total annual budget. The Shuttle is

clearly NASA’s most recognized asset and is critical to the success of each of NASA’s

strategic enterprises: Space Science, Earth Sciences, Human Exploration and Development

of Space and Aeronautics and Space Transportation Technology. Given the Shuttle’s

overall importance to the agency and its high cost, it seems clear that NASA’s ability to

reduce its overall costs through the commercialization of many of its operating activities

will be a direct function of its ability to significantly reduce the cost of human access to

space.

We have identified several potential options for NASA to evaluate in considering how to

reduce the cost of human access to space:

• Existing Shuttle: Continue to operate the current Shuttle undertaking nondiscretionary upgrades to maintain safety and reliability.

• Shuttle Upgrade: Invest in a major Shuttle upgrade, including the development

of liquid fly-back boosters (“LFBBs”).

• Shuttle-to-Private Sector: Transfer one or more Shuttles to private-sector

ownership and operation.

• New Human-Rated RLV: Invest in the development of a full-scale, humanrated reusable launch vehicle (“RLV”) as a follow-on to the existing X-33

project.

• Alternative RLV: Invest in alternative RLV technologies (Kistler, Kelly, etc.)

which may not necessarily fulfill NASA’s mission objectives, including human

access to space and servicing the ISS.
25

• Combination Approach: Pursue a carefully managed and structured approach

to the New Human-Rated RLV option while operating the Existing Shuttle until

such New Human-Rated RLV is fully operable. In addition, the agency would

explore opportunities to promote market-driven commercialization efforts in its

existing operations, such as the Shuttle-to-Private Sector option, so long as they

did not compromise NASA’s mission objectives or the development of the New

Human-Rated RLV.

HKA recommends that NASA pursue the Combination Approach.

The Combination Approach is based on the belief that: (i) NASA must continue to operate

the Shuttle until a viable and proven low-cost alternative for human access to space

emerges, (ii) the New Human-Rated RLV represents the best current long-term solution to

reducing NASA’s cost of human access to space (see Analysis of New Human-Rated RLV

Option and Analytical Review), and (iii) transferring an underutilized Shuttle to a credible

private-sector entity might generate attractive by-products, such as lower operating costs

and positive near-term awareness of space’s commercial market potential and the

capabilities of human-rated RLVs.

Clearly the agency has no alternative but to continue to use the Shuttle until at least the

completion of ISS assembly. Thereafter, the agency should transition to a lower cost

launch vehicle as quickly as possible. To the extent that the New Human-Rated RLV

development process is successful, there will likely be a transition period where the agency

continues to fly the Shuttle while also flying the new RLV, perhaps on a limited basis.

This allows the agency to retain human space flight capabilities until the safety, reliability

and capability of the new RLV is proven. Thereafter, it is highly likely that the new RLV

will supplant the Shuttle as NASA’s primary (and perhaps only) human-rated launch

vehicle.

In the interim, there may be an opportunity to broaden market awareness of the

commercial potential of space through the transition of a potentially underutilized Shuttle

to a private-sector owner/operator (the Shuttle-to-Private Sector option). Such a transfer,

though requiring initial and on-going subsidies from NASA, may accelerate the

commercialization of space, thus benefiting the NASA/private-sector New Human-Rated

RLV effort over the long-term. This option is not intended to provide an ultimate solution

for NASA, but rather, a means by which to foster market awareness and generate

momentum for the commercialization process. It should only be undertaken if it does not

compromise NASA’s on-going mission objectives and the development of the New

Human-Rated RLV.
26

The New Human-Rated RLV, if successful, has the potential to significantly reduce

NASA’s launch costs and enable movement by NASA away from operating activities and

toward research and development. Not only could it generate annual launch cost savings

in the $1.5-$2.0 billion range (see Analytical Review), but it could significantly enhance

the commercial potential of NASA’s other operating activities, particularly the ISS, whose

commercial success is heavily dependent on reduced access costs. This is especially

significant, given that, on a combined basis, ISS and the Shuttle are projected to consume

approximately $5 billion (or 38%) of NASA’s annual budget.

Even if the New Human-Rated RLV effort is not successful due to a failure to overcome

key technological hurdles, the significant research and development efforts of both NASA

and the private sector can be reasonably expected to have accelerated the eventual

development of such a vehicle. Thus, at a minimum, the New Human-Rated RLV has the

potential to move NASA further along the spectrum of reduced launch costs.

However, NASA must recognize that for the New Human-Rated RLV to be successful in

enabling this transition from operating activities to research and development, it must

partner at an early stage with the private sector. The New Human-Rated RLV is intended

to be a market-driven vehicle, owned and operated by the private sector, with NASA being

one of many customers. The private sector, by virtue of its need to realize a return on

investment commensurate with the risk associated with such investment, has a set of

disciplines and incentives that are critical to the success of this project. NASA’s role is to

foster the development of the New Human-Rated RLV by providing technical expertise,

capital and other resources.

If no credible private-sector business plan for the New Human-Rated RLV is proposed

(that includes an acceptable level of risk-sharing between NASA and the private sector),

then one alternative for NASA would be to continue to invest in other “X-programs” that

further mitigate key technological risks. To the extent that the private sector is only

willing to undertake an X-33 follow-on project if NASA assumes substantially all of the

risk, it is unlikely that the critical benefits of private-sector involvement will materialize

over time. Private-sector incentives and disciplines, and the associated benefits of costefficiency and revenue generation, are significantly diluted (if not eliminated) when

government assumes essentially all of the risk related to a project. As a result, NASA

should avoid explicitly any partnerships in which there is not sufficient risk assumed by

the private sector.

As our sensitivity analysis suggests (see Analytical Review), NASA can justify increasing

its investment in the New Human-Rated RLV several-fold, if, for instance, incremental

capital is required to overcome the technology risk. However, without the incentives and

disciplines introduced when the private sector shares in the risk, NASA could spend

several billion dollars ineffectively, with no assurance that the New Human-Rated RLV

will succeed. NASA’s ability to partner with the private sector and maximize the level of

risk incurred by the private sector is far more critical to the success of the New HumanRated RLV project than the amount of capital that NASA can commit.
27

Significant private-sector risk sharing will best assure that the New Human-Rated RLV

delivers on its projected costs and capabilities. Gradually, as the project shifts from

development to operations, the private sector should assume increasingly more, if not all,

of the risk.
28

VI. Risk Sharing: Structuring the Business Relationship

The primary reason for NASA’s involvement in this effort is to significantly reduce the

cost of human access to space and, as a result, NASA will be a primary beneficiary of the

New Human-Rated RLV project. Ideally, the New Human-Rated RLV should be a

private-sector developed, owned and operated launch vehicle. Unfortunately, the private

sector is currently unwilling to invest in a human-rated RLV (i.e. meeting NASA’s current

mission requirements) on its own due to the current lack of appreciable commercial-market

demand for this capability. As a result, to the extent that NASA seeks to accelerate the

private sector’s active involvement in a new human-rated RLV, it needs to assume a

portion of the risk associated with the project. In all likelihood, the private-sector will seek

NASA assistance on research and development as well as financial assistance from the US

government. As mentioned previously, the private sector must also assume a substantive

share of the risk to ensure the presence of private-sector disciplines and incentives in the

project. Without the presence of these private-sector incentives and disciplines, the

likelihood of completing the project on budget and within its specifications decreases

significantly. NASA, however, should be willing to assume a portion of the risk only if it

can structure a business relationship with the private sector that maximizes the likelihood

of reducing the cost of human access to space.

Potential Risks to the NASA/Private Sector Business Relationship

Based on NASA’s underlying goal of significantly reducing the cost of human access to

space over the long-term, there are several potential “outcomes” of a business relationship

with the private sector that the agency should seek to avoid:

• Creation of a monopoly service provider with autonomy over pricing and availability

• Creation of an “unfair playing field” in the commercial-satellite launch market due

primarily to NASA subsidization of the New Human-Rated RLV

• NASA being solely responsible for funding the project’s potential cost overruns

• NASA assuming sole-ownership of the project in order to preserve the agency’s “sunk

cost” if the private-sector abandons the project

• Creation of a financial windfall for the private-sector owners of the New Human-Rated

RLV as a direct result of NASA’s contributions

.

• Making significant contributions to the project only to have the project yield an RLV

that does not meet NASA’s needs (from either a capability or cost perspective)
29

While not all of these potential outcomes can be avoided entirely, several measures can be

taken to help mitigate the likelihood of such outcomes. Certain of these measures are

consistent with what the agency is already doing:

• NASA should solicit proposals from several qualified private-sector participants for

the development, ownership and operation of a human-rated RLV.

• Generally, the private-sector participants should address the following in their

proposals:

• the specific capabilities of the planned RLV;

• the nature (amount, form, timing, duration, etc.) of the private sector’s

commitment to and involvement in the process; and

• the extent to which NASA support is required and the nature (amount,

form, timing, duration, etc.) of such support.

• the proposed ownership structure of the entity formed to undertake the

project and the financial wherewithal of such owners (assuming

multiple-party ownership);

• the background and qualifications of the key management personnel that

will be managing the project (including their relationships to the

owners; there may be merits to an independent management team

focused on the success of the entity), as well as information about

important contractors from which the entity might purchase services,

etc.;

• the extent to which owners will be providing goods and services to the

entity, and, if so, the terms and conditions of such goods and services

(which should be no worse than “arms-length”); and

• the trade-offs (cost, timing, technology, commercial-market

implications, private-sector willingness to fund, etc.) associated with

any “NASA-specific” requirements and different levels of NASA

support.

.

• NASA should communicate clearly why, and under what conditions, it is

willing to commit resources to such a project. For example:

• “NASA’s commitment will be made available to the RLV

developer/owner/operator whose proposed vehicle best meets

NASA’s long-term human space flight needs in a cost-efficient

manner and with a high likelihood of success.”

• As part of this communication, NASA should express its willingness to

rely on commercially available, “off-the-shelf” technologies in instances

where it is possible to do so, in order to achieve cost efficiencies.
30

In structuring a potential business relationship with the private sector, NASA should

consider incorporating several key requirements to its proposed commitment, including:

• Completion guarantees from private-sector entities with financial wherewithal

(“commitments with teeth”) after certain technological thresholds are met. Options

to consider are: (i) fixed-priced and/or performance-based contracts based on the

cost-efficient achievement of certain design parameters; (ii) a portion of the

compensation in the form of equity in the entity formed to undertake the project

rather than cash; and (iii) deferred payment arrangements.

• A commitment that future launch services to NASA be priced at the lesser of

“market” (i.e., the price at which the vehicle’s launch services are provided to

commercial customers for comparable services at any point in time) or a predetermined “cap.” NASA should benefit if market prices decline due to competitive

forces; however, NASA should also receive a cap on future launch prices in

exchange for providing critical support to the project at the outset. The predetermined cap could be set after certain technological thresholds are met, but

before significant NASA resources have been expended.

• Commitments that a minimum number of flights will be available (subject to the

proposed pricing structure discussed above) to NASA for some period of time (i.e.

10 flights/year for five years). NASA might explore a longer-term arrangement

(20+ years) depending on its projected needs, or seek to secure “options” to extend

flight commitments on similar terms or to purchase additional flights in a given

time period.

With respect to the actual funding of the project, NASA should consider incorporating

certain requirements such as:

• “staging” its funding over time as opposed to making a large “up-front”

advancement of funds;

• making funding contingent on the achievement of critical technological and

other project milestones over the course of the project;

• agreeing to fund only those incremental costs related to “NASA-specific”

enhancements (keeping in mind that agency should be willing to rely, where

possible, on commercially available technologies) and letting the private sector

fund the all costs related to “commercial-market” requirements (i.e. private

sector funds a commercial market vehicle, NASA pays incremental costs to

make it NASA-specific); and

• making contributions in “tandem” with (not before) those of the private sector,

perhaps on the basis of a pre-arranged “formula.”
31

These requirements help to mitigate the potential undesirable outcomes of (i) monopoly

pricing and control, (ii) a failure to meet minimum performance capabilities and standards,

and (iii) an unintended financial windfall to the private sector at NASA’s expense. The

issues that the agency may not be able to satisfactorily mitigate include: (i) technology

risk, (ii) potential cost overruns, and (iii) NASA’s involvement creating an unfair

commercial-market advantage for one launch provider.

In structuring a business relationship with the private sector, NASA should be prepared to

respond to the potential “needs” of the private sector in order to move forward, which may

include:

• an “anchor-tenancy” requirement under which NASA commits to “take-or-pay”

a pre-determined minimum number of RLV flights per year for some period of

time, possibly at fixed or market prices (NASA should give consideration to the

duration of this “anchor-tenancy” (i.e. a multi-year arrangement with a NASA

option to extend or a “mutual-agreement” to extend clause) and should also

consider “qualifying” it in other ways (i.e. remains in place as long as NASA

receives most favorable launch costs, etc.));

• a commitment on the part of the US government to guarantee the repayment of

a portion of certain debt or other financing that the private sector may incur in

developing the New Human-Rated RLV (if NASA agrees to provide such

guarantees, there should be mutual agreement in advance as to the appropriate

time for them to fall away (i.e. upon the achievement of certain performance

milestones));

• a commitment on the part of NASA to make all of its capital contributions “upfront,” which has the potential to significantly dilute (or even eliminate)

private-sector disciplines and incentives (however, the more NASA commits

up-front, the more certainty and savings it should demand when the project is

fully operational); and

• a commitment on the part of NASA to fund all or a significant portion of any

cost overruns in the project (NASA should consider applying the same “risksharing ratio” to cost overruns unless the private sector is primarily responsible

for such cost-overruns).

Each of these requirements seeks to shift risk away from the private sector and toward

NASA. For example, an anchor-tenancy arrangement, if not structured properly, could

enable a private sector owner/operator to realize an attractive, NASA-subsidized return on

investment without having to provide market-competitive RLV services to any other

customer. Similarly, loan guarantees, if not properly structured, could result in NASA (or

the US government) assuming the large majority of the risk of the project, perhaps even

being fully responsible for funding a failed project.
32

On the other hand, if properly structured, NASA could agree to modified versions of these

requirements in such a way so as to maximize the likelihood of the project’s success. For

example, NASA might agree to guarantee the repayment of a portion of certain debt

financing if the private sector participates in guaranteeing a portion of such financing as

well, or an anchor tenancy agreement may help mitigate problems associated with a

monopoly provider.

The key issue to consider for any type of government support for private-sector projects is

the impact of that support on the risk-sharing relationship between government and the

private sector. To the extent that the government needs to provide loan guarantees or any

other type of support to the private sector, the private sector is, in effect, stating that the

expected investment returns do not justify the risk. At that point, the government needs to

determine whether it is interested in supporting a project that the private sector is unwilling

to support on its own. In our view, government support should be limited to situations

where the project generates benefits for the government sufficient to justify a “jump-start”

to enable the private sector to enter into the project. The government needs to be clear,

however, that its role is to enable private-sector involvement, not to provide a long-term

subsidy to any given project.

The government should not provide such support in instances where the private sector is

willing to “go-it- alone”. The reason for this is that the introduction of government

support, even when intended as a jump-start, creates distortions that dilute the privatesector incentives and disciplines that are key to a project’s successful, timely and onbudget completion.

One often-used type of government support is a loan guarantee. The use of loan

guarantees as a method of government support begs the question as to why loan guarantees

are needed. The need for loan guarantees implies that the private sector believes that the

risk/return equation in a given project does not provide appropriate returns for the level of

risk being taken.

Our view is that the government’s provision of loan guarantees to a given project, unless

structured appropriately, can drastically alter the government/private-sector risk-sharing

mix, potentially resulting in the significant dilution of private-sector incentives and

disciplines. Loan guarantees, for purposes of analyzing the impact on the private-sector

risk-reward trade-off, have the potential to place the government in the position of

accepting all (or most of) the risk, with the private sector keeping all (or most of) the

reward. This would be a bad outcome.

Many in government view loan guarantees as essentially “low-cost” from a budget

perspective and therefore attractive as a tool to support projects the private-sector will not

undertake on its own. Loan guarantees, in our view, should be treated as an actual funding

commitment by the government. More importantly, loan guarantees, if structured

improperly, can have the effect of creating incentives for the private sector to take actions

that it otherwise would not undertake with its own resources (i.e. making bets with other

people’s money).
33

Spectrum of Potential Loan Guarantees

• Government as Primary Guarantor, with no recourse to the borrower or the project.

• Creditors can seek repayment directly from government, not from the original

borrower, and the government does not have recourse back to the original

borrower.

• Government as Primary Guarantor, with recourse to the borrower, the project or both.

• Creditors can seek repayment directly from government, not from the original

borrower, however, the government has recourse to the original borrower

and/or the project (i.e. the launch vehicle).

• Government as Primary Guarantor, with recourse to the borrower, the project and any

parent companies involved.

• Creditors can seek repayment directly from government, not from the original

borrower, however, the government has recourse to the original borrower, the

project (i.e. the launch vehicle) and the borrower’s parent company.

• Government as Secondary Guarantor, with no recourse to the borrower or the project.

• Creditors must seek repayment from the borrower before turning to the

government. In other words, the borrower has to be unable to pay before the

government gets involved. The government, in this case, does not have

recourse back to the original borrower.

• Government as Secondary Guarantor, with recourse to the borrower, the project or

both.

• Creditors must seek repayment from the borrower before turning to the

government. In other words, the borrower has to be unable to pay before the

government gets involved, however, the government has recourse to the

original borrower and/or the project (i.e. the launch vehicle).

• Government as Secondary Guarantor, with recourse to the borrower, the project and

any parent companies involved.

• Creditors must seek repayment from the borrower and any parent companies

before turning to the government. In other words, the borrower and any parent

companies have to be unable to pay before the government gets involved,

however, the government has recourse to the original borrower, the project (i.e.

the launch vehicle) and the borrower’s parent company.
34

In all six cases listed above, the government guarantees will result in improved access to

capital and lower costs for such capital. However, in the last two examples, the

government/private-sector risk-sharing equation is diluted the least (in other words, the

private sector assumes a higher level of risk and has a greater incentive to perform). In all

six of these examples, the government can alter the risk-sharing equation by providing the

guarantees for only a portion of the project (or for a limited period of time, or both), such

that the private sector retains significant capital “at-risk”.

When structured properly, loan guarantees can serve as a valuable tool to jump-start capital

intensive projects by (i) improving access to capital and (ii) reducing the cost of such

capital. The key to properly structuring loan guarantees is to achieve the benefits

identified above without significantly diluting the private sector’s level of risk and

incentive to perform in a given project.

Key points for properly structuring loan guarantees:

Do not create a risk-sharing equation where the government assumes all of the risk. Loan

guarantees may be useful to improve access to capital and to reduce the cost of that capital,

however, the government should not provide the loan guarantees without obtaining support

(sharing a portion of risk, collateral, parent guarantees, etc.) from the private sector in

return. If the government provides the loan guarantees without obtaining appropriate

private-sector support in return, the government will essentially be incurring all of the risk

of a given project. This skewed risk-sharing arrangement significantly dilutes the benefits

of private-sector incentives and disciplines. Even in situations where the underlying

collateral provided to the government is the launch vehicle under development, this does

not appear to create enough “risk” for the private sector.

Loan guarantees have the potential to create risk-sharing imbalances, therefore, their use

should be limited to situations where all other avenues of support (i.e. access to facilities,

research support, anchor tenancy, etc.) are exhausted. As important, the government

should view loan guarantees as actual funding commitments to a project, and not based on

credit-scoring criteria developed for budget purposes.

There are many other types of government support which may be used to “jump-start” this

effort. We have outlined several of these, including the risks and mitigants associated with

each, in Appendix III.

Clearly, any business arrangement between NASA and the private sector will have to be

structured to accommodate the needs of all of the parties involved. The purpose of these

recommendations is not to identify and mitigate every potential risk to NASA in entering

into such a business arrangement, but rather to highlight the types of risks that may arise

and to help direct NASA's approach to addressing such risks. As a result, NASA’s critical

focus should be on ensuring that the private sector shares substantively, throughout the life

of the project, in the risk associated with the project. Gradually, as the project shifts from

development to operations, the private sector should assume increasingly more, if not all,

of the risk, while retaining a commensurate level of the return on investment.
35

Given that the structure of the NASA-private sector business relationship will not fully

mitigate any or all of the risks associated with this project, future additional commitments

of resources (financial, human, technical) from both NASA and the private sector may be

required to complete the project. NASA’s decision to make such additional commitments

should be made in the context of its long-term objective – to reduce the cost of human

access to space – and with the recognition that this can only be achieved through ongoing

private-sector involvement.

Therefore, NASA’s willingness to make incremental commitments to the development of a

new human-rated RLV should only be made in a situation where the private sector is

actively involved and has appropriate risk/return incentives. If the private sector is no

longer willing to be involved in the project, NASA must consider whether to make

additional investment to adjust the private sector’s risk/return profile (but not to the point

where the private sector’s risk is eliminated) or pursue other alternatives. While the

agency may be able to justify additional funding of the project as a reasonable investment

given its high existing launch costs, the removal of private-sector disciplines and

incentives from the project would increase the risk of cost overruns, delays, reduced

capabilities and, ultimately, higher than expected (or higher than acceptable) operating

costs. Any alternative NASA chooses to pursue should involve the private sector in an

active risk-sharing role.

The key to success for NASA is that the next generation launch vehicle be developed,

owned and operated by the private sector. The vehicle should be developed to address

commercial-market needs, and NASA should be viewed as one customer among many,

albeit a significant one. This is the only way that the agency will realize significant longterm cost savings. Given the complexity of the project as well as the fact that NASA’s

need for a human-rated launch vehicle may be somewhat inconsistent with the commercial

market’s need for low-cost satellite launch systems, NASA will need to facilitate the

development of a vehicle that meets both needs on a cost-efficient basis. However, to the

extent that NASA’s involvement/requirements result in the development of a vehicle that

does not address the needs of the commercial satellite market, the anticipated reductions in

the agency’s future launch costs may not materialize. In other words, the addition of

NASA-specific capabilities to the New Human-Rated RLV may limit the vehicle’s ability

to compete effectively in the commercial market, thereby limiting its potential benefits to

NASA. As a result, NASA’s involvement, though critical to the process, must be limited

and carefully managed so as not to substantially dilute (or even eliminate) private-sector

incentives and disciplines.
36

VII. Exhibits, Appendices & Tables

Exhibit I. HKA Background/Summary

Appendix I. NPV Analysis: Shuttle Upgrade

Appendix II. Basic Assumptions Scenario. NPV Analysis: New Human-Rated RLV

Appendix II. (a) Scenario 1. NPV Analysis: New Human-Rated RLV (human transport

capability in 2007)

Appendix II. (b) Scenario 2. NPV Analysis: New Human-Rated RLV (human transport

capability in 2009)

Appendix II. (c) Scenario 3. NPV Analysis: New Human-Rated RLV (human transport

capability in 2011)

Table I. Sensitivity Analysis of Net Present Value (“NPV”) of Shuttle Upgrade

vs. Existing Shuttle

Table II. Basic Assumptions Scenario. Sensitivity Analysis of NPV of New

Human-Rated RLV vs. Existing Shuttle.

Table II. (a) Scenario 1. Sensitivity Analysis of NPV of New Human-Rated RLV vs.

Existing Shuttle.

Table II. (b) Scenario 2. Sensitivity Analysis of NPV of New Human-Rated RLV vs.

Existing Shuttle.

Table II. (c) Scenario 3. Sensitivity Analysis of NPV of New Human-Rated RLV vs.

Existing Shuttle.
Table II.

BASIC ASSUMPTIONS

SENSITIVITY ANALYSIS: NPV OF HUMAN-RATED RLV VS. EXISTING SHUTTLE

(assuming RLV is human rated by 2006)

($000'S)

Total <================================================ Equivalent Launch Costs =================================

Investment 60,000 90,000 75,000 105,000 120,000 135,000 150,000 165,000 180,000 

 

1,250,000 7,861,312 8,816,521 6,906,104 5,950,896 4,995,687 4,040,479 3,085,271 2,130,062 1,174,854 

1,750,000 7,423,926 8,379,135 6,468,718 5,513,510 4,558,301 3,603,093 2,647,885 1,692,676 737,468 2,250,000 6,986,540 7,941,749 6,031,332 5,076,124 4,120,915 3,165,707 2,210,499 1,255,290 300,082 2,750,000 6,549,154 7,504,363 5,593,946 4,638,738 3,683,529 2,728,321 1,773,113 817,904 (1

(137,304) 

3,250,000 6,111,768 7,066,977 5,156,560 4,201,352 3,246,143 2,290,935 1,335,727 380,518 (1

(574,690) 

3,750,000 5,674,382 6,629,591 4,719,174 3,763,966 2,808,757 1,853,549 898,341 (1,012,076) (56,868) (1

 

4,250,000 5,236,996 6,192,205 4,281,788 3,326,580 2,371,371 1,416,163 460,955 (1,449,462) (494,254) (2

 

4,750,000 4,799,610 5,754,819 3,844,402 2,889,194 1,933,985 978,777 23,569 (1,886,848) (931,640) (2

 

5,250,000 4,362,224 5,317,433 3,407,016 2,451,808 1,496,599 541,391 (1,369,026) (413,817) (2,324,234) (3

 

5,750,000 3,924,838 4,880,047 2,969,630 2,014,422 1,059,213 104,005 (1,806,412) (851,203) (2,761,620) (3

 

6,250,000 3,487,452 4,442,661 2,532,244 1,577,036 621,827 (1,288,589) (333,381) (2,243,798) (3,199,006) (4

 

6,750,000 3,050,066 4,005,274 2,094,858 1,139,650 184,441 (1,725,975) (770,767) (2,681,184) (3,636,392) (4

 

7,250,000 2,612,680 3,567,888 1,657,472 702,264 (1,208,153) (252,945) (2,163,361) (3,118,570) (4,073,778) (5

 

7,750,000 2,175,294 3,130,502 1,220,086 264,878 (1,645,539) (690,331) (2,600,747) (3,555,956) (4,511,164) (5

 

8,250,000 1,737,908 2,693,116 782,700 (1,127,717) (172,508) (2,082,925) (3,038,133) (3,993,342) (4,948,550) (5

 

8,750,000 1,300,522 2,255,730 345,314 (1,565,103) (609,894) (2,520,311) (3,475,519) (4,430,728) (5,385,936) (6

 

9,250,000 863,136 1,818,344 (1,047,280) (92,072) (2,002,489) (2,957,697) (3,912,905) (4,868,114) (5,823,322) (6

 

9,750,000 425,750 1,380,958 (1,484,666) (529,458) (2,439,875) (3,395,083) (4,350,291) (5,305,500) (6,260,708) (7

 

10,250,000 943,572 (966,844) (11,636) (1,922,052) (2,877,261) (3,832,469) (4,787,677) (5,742,886) (6,698,094) (7

 
Table II (a).

SCENARIO 1

SENSITIVITY ANALYSIS: NPV OF HUMAN-RATED RLV VS. EXISTING SHUTTLE

(assuming human transport capability is delayed until 2007)

($000'S)

Total <================================================ Equivalent Launch Costs =================================

Investment 75,000 95,000 85,000 105,000 115,000 125,000 135,000 145,000 155,000 

 

1,250,000 5,905,245 6,556,136 5,254,355 4,603,465 3,952,575 3,301,685 2,650,795 1,999,904 1,349,014 

 

1,750,000 5,496,555 6,147,446 4,845,665 4,194,775 3,543,885 2,892,995 2,242,105 1,591,214 940,324 2,250,000 5,087,865 5,738,756 4,436,975 3,786,085 3,135,195 2,484,305 1,833,415 1,182,524 531,634 2,750,000 4,679,175 5,330,066 4,028,285 3,377,395 2,726,505 2,075,615 1,424,725 773,834 122,944 3,250,000 4,270,485 4,921,375 3,619,595 2,968,705 2,317,815 1,666,925 1,016,035 365,144 

(285,746) 

3,750,000 3,861,795 4,512,685 3,210,905 2,560,015 1,909,125 1,258,235 607,345 (694,436) (43,546) (1

 

4,250,000 3,453,105 4,103,995 2,802,215 2,151,325 1,500,435 849,545 198,654 (1,103,126) (452,236) (1

 

4,750,000 3,044,415 3,695,305 2,393,525 1,742,635 1,091,745 440,855 (860,926) (210,036) (1,511,816) (2

 

5,250,000 2,635,725 3,286,615 1,984,835 1,333,945 683,055 32,165 (1,269,616) (618,726) (1,920,506) (2

 

5,750,000 2,227,035 2,877,925 1,576,145 925,255 274,365 (1,027,416) (376,525) (1,678,306) (2,329,196) (2

 

6,250,000 1,818,345 2,469,235 1,167,455 516,565 (785,215) (134,325) (1,436,106) (2,086,996) (2,737,886) (3

 

6,750,000 1,409,655 2,060,545 758,765 107,875 (1,193,906) (543,015) (1,844,796) (2,495,686) (3,146,576) (3

 

7,250,000 1,000,965 1,651,855 350,075 (951,705) (300,815) (1,602,596) (2,253,486) (2,904,376) (3,555,266) (4

 

7,750,000 592,275 1,243,165 (709,505) (58,615) (1,360,395) (2,011,286) (2,662,176) (3,313,066) (3,963,956) (4

 

8,250,000 183,585 834,475 (1,118,195) (467,305) (1,769,085) (2,419,976) (3,070,866) (3,721,756) (4,372,646) (5

 

8,750,000 425,785 (875,995) (225,105) (1,526,885) (2,177,775) (2,828,666) (3,479,556) (4,130,446) (4,781,336) (5

 

9,250,000 17,095 (1,284,685) (633,795) (1,935,575) (2,586,465) (3,237,356) (3,888,246) (4,539,136) (5,190,026) (5

 

9,750,000 (1,042,485) (391,595) (1,693,375) (2,344,265) (2,995,156) (3,646,046) (4,296,936) (4,947,826) (5,598,716) (6

 

10,250,000 (1,451,175) (800,285) (2,102,065) (2,752,955) (3,403,846) (4,054,736) (4,705,626) (5,356,516) (6,007,406) (6

 
Table II (b).

SCENARIO 2

SENSITIVITY ANALYSIS: NPV OF HUMAN-RATED RLV VS. EXISTING SHUTTLE

(assuming human transport capability is delayed until 2009)

($000'S)

Total <================================================ Equivalent Launch Costs =================================

Investment 75,000 95,000 85,000 105,000 115,000 125,000 135,000 145,000 155,000 

 

1,750,000 3,612,315 4,221,114 3,003,516 2,394,717 1,785,918 1,177,119 568,320 (649,277) (40,478) (1

 

2,000,000 3,416,039 4,024,838 2,807,240 2,198,441 1,589,642 980,843 372,045 (845,553) (236,754) (1

 

2,250,000 3,219,763 3,828,562 2,610,964 2,002,165 1,393,366 784,568 175,769 (1,041,829) (433,030) (1

 

2,500,000 3,023,487 3,632,286 2,414,688 1,805,889 1,197,090 588,292 (629,306) (20,507) (1,238,105) (1

 

2,750,000 2,827,211 3,436,010 2,218,412 1,609,613 1,000,815 392,016 (825,582) (216,783) (1,434,381) (2

 

3,000,000 2,630,935 3,239,734 2,022,136 1,413,338 804,539 195,740 (1,021,858) (413,059) (1,630,657) (2

 

3,250,000 2,434,659 3,043,458 1,825,860 1,217,062 608,263 (609,335) (536) (1,218,134) (1,826,933) (2

 

3,500,000 2,238,383 2,847,182 1,629,585 1,020,786 411,987 (805,611) (196,812) (1,414,410) (2,023,208) (2

 

3,750,000 2,042,108 2,650,906 1,433,309 824,510 215,711 (1,001,887) (393,088) (1,610,685) (2,219,484) (2

 

4,000,000 1,845,832 2,454,630 1,237,033 628,234 19,435 (1,198,163) (589,364) (1,806,961) (2,415,760) (3

 

4,250,000 1,649,556 2,258,355 1,040,757 431,958 (785,640) (176,841) (1,394,438) (2,003,237) (2,612,036) (3

 

4,500,000 1,453,280 2,062,079 844,481 235,682 (981,915) (373,117) (1,590,714) (2,199,513) (2,808,312) (3

 

4,750,000 1,257,004 1,865,803 648,205 39,406 (1,178,191) (569,393) (1,786,990) (2,395,789) (3,004,588) (3

 

5,000,000 1,060,728 1,669,527 451,929 (765,668) (156,870) (1,374,467) (1,983,266) (2,592,065) (3,200,864) (3

 

5,250,000 864,452 1,473,251 255,653 (961,944) (353,145) (1,570,743) (2,179,542) (2,788,341) (3,397,140) (4

 

5,500,000 668,176 1,276,975 59,377 (1,158,220) (549,421) (1,767,019) (2,375,818) (2,984,617) (3,593,416) (4

 

5,750,000 471,900 1,080,699 (745,697) (136,898) (1,354,496) (1,963,295) (2,572,094) (3,180,893) (3,789,691) (4

 

6,000,000 275,625 884,423 (941,973) (333,174) (1,550,772) (2,159,571) (2,768,370) (3,377,169) (3,985,967) (4

 

6,250,000 79,349 688,147 (1,138,249) (529,450) (1,747,048) (2,355,847) (2,964,646) (3,573,444) (4,182,243) (4

 

6,500,000 491,872 (725,726) (116,927) (1,334,525) (1,943,324) (2,552,123) (3,160,921) (3,769,720) (4,378,519) (4

 

6,750,000 295,596 (922,002) (313,203) (1,530,801) (2,139,600) (2,748,399) (3,357,197) (3,965,996) (4,574,795) (5

 

7,000,000 99,320 (1,118,278) (509,479) (1,727,077) (2,335,876) (2,944,674) (3,553,473) (4,162,272) (4,771,071) (5

 

7,250,000 (96,956) (1,314,554) (705,755) (1,923,353) (2,532,151) (3,140,950) (3,749,749) (4,358,548) (4,967,347) (5

 
Table II (c).

SCENARIO 3

SENSITIVITY ANALYSIS: NPV OF HUMAN-RATED RLV VS. EXISTING SHUTTLE

(assuming human transport capability is delayed until 2011)

($000'S)

Total <================================================ Equivalent Launch Costs =================================

Investment 55,000 75,000 65,000 85,000 95,000 105,000 115,000 125,000 135,000 

 

1,750,000 3,110,615 3,682,650 2,538,580 1,966,546 1,394,511 822,477 250,442 (893,627) (321,593) (1

 

2,000,000 2,921,387 3,493,422 2,349,352 1,777,318 1,205,283 633,249 61,214 (1,082,855) (510,821) (1

 

2,250,000 2,732,159 3,304,194 2,160,124 1,588,090 1,016,055 444,021 (700,049) (128,014) (1,272,083) (1

 

2,500,000 2,542,931 3,114,966 1,970,896 1,398,862 826,827 254,793 (889,277) (317,242) (1,461,311) (2

 

2,750,000 2,353,703 2,925,738 1,781,668 1,209,634 637,599 65,565 (1,078,505) (506,470) (1,650,539) (2

 

3,000,000 2,164,475 2,736,510 1,592,440 1,020,406 448,371 (695,698) (123,664) (1,267,733) (1,839,767) (2

 

3,250,000 1,975,247 2,547,282 1,403,212 831,178 259,143 (884,926) (312,892) (1,456,961) (2,028,995) (2

 

3,500,000 1,786,019 2,358,054 1,213,984 641,950 69,915 (1,074,154) (502,120) (1,646,189) (2,218,223) (2

 

3,750,000 1,596,791 2,168,826 1,024,756 452,722 (691,348) (119,313) (1,263,382) (1,835,417) (2,407,451) (2

 

4,000,000 1,407,563 1,979,598 835,528 263,494 (880,576) (308,541) (1,452,610) (2,024,645) (2,596,679) (3

 

4,250,000 1,218,335 1,790,370 646,300 74,266 (1,069,804) (497,769) (1,641,838) (2,213,873) (2,785,907) (3

 

4,500,000 1,029,107 1,601,142 457,072 (686,997) (114,962) (1,259,032) (1,831,066) (2,403,101) (2,975,135) (3

 

4,750,000 839,879 1,411,914 267,844 (876,225) (304,190) (1,448,260) (2,020,294) (2,592,329) (3,164,363) (3

 

5,000,000 650,651 1,222,686 78,616 (1,065,453) (493,418) (1,637,488) (2,209,522) (2,781,557) (3,353,592) (3

 

5,250,000 461,423 1,033,458 (682,646) (110,612) (1,254,681) (1,826,716) (2,398,750) (2,970,785) (3,542,820) (4

 
Table I.

SHUTTLE UPGRADE

SENSITIVITY ANALYSIS: NPV OF SHUTTLE UPGRADE VS. EXISTING SHUTTLE

($000'S)

Total

Investment 210,000 220,000 230,000 240,000 250,000 260,000 270,000 280,000 

4,000,000 1,168,722 1,725,605 611,838 54,955 (1,058,812) (501,929) (1,615,695) (2,172,579) 

4,100,000 1,086,563 1,643,447 529,680 (584,087) (27,204) (1,140,971) (1,697,854) (2,254,738) 4,200,000 1,004,404 1,561,288 447,521 (666,246) (109,362) (1,223,129) (1,780,013) (2,336,896) 4,300,000 922,246 1,479,129 365,362 (748,405) (191,521) (1,305,288) (1,862,171) (2,419,055) 4,400,000 840,087 1,396,971 283,204 (830,563) (273,680) (1,387,447) (1,944,330) (2,501,214) 4,500,000 757,929 1,314,812 201,045 (912,722) (355,838) (1,469,605) (2,026,489) (2,583,372) 4,600,000 675,770 1,232,653 118,886 (994,880) (437,997) (1,551,764) (2,108,647) (2,665,531) 4,700,000 593,611 1,150,495 36,728 (1,077,039) (520,156) (1,633,923) (2,190,806) (2,747,689) 4,800,000 511,453 1,068,336 (602,314) (45,431) (1,159,198) (1,716,081) (2,272,965) (2,829,848) 4,900,000 429,294 986,177 (684,473) (127,590) (1,241,356) (1,798,240) (2,355,123) (2,912,007) 5,000,000 347,135 904,019 (766,632) (209,748) (1,323,515) (1,880,398) (2,437,282) (2,994,165) 5,100,000 264,977 821,860 (848,790) (291,907) (1,405,674) (1,962,557) (2,519,441) (3,076,324) 5,200,000 182,818 739,701 (930,949) (374,065) (1,487,832) (2,044,716) (2,601,599) (3,158,483) 5,300,000 100,659 657,543 (1,013,108) (456,224) (1,569,991) (2,126,874) (2,683,758) (3,240,641) 5,400,000 18,501 575,384 (1,095,266) (538,383) (1,652,150) (2,209,033) (2,765,917) (3,322,800) 5,500,000 493,226 (620,541) (63,658) (1,177,425) (1,734,308) (2,291,192) (2,848,075) (3,404,959) 5,600,000 411,067 (702,700) (145,817) (1,259,583) (1,816,467) (2,373,350) (2,930,234) (3,487,117) 5,700,000 328,908 (784,859) (227,975) (1,341,742) (1,898,626) (2,455,509) (3,012,392) (3,569,276) 5,800,000 246,750 (867,017) (310,134) (1,423,901) (1,980,784) (2,537,668) (3,094,551) (3,651,435) 5,900,000 164,591 (949,176) (392,293) (1,506,059) (2,062,943) (2,619,826) (3,176,710) (3,733,593) 6,000,000 82,432 (1,031,335) (474,451) (1,588,218) (2,145,101) (2,701,985) (3,258,868) (3,815,752) 
Appendix I.

NPV ANALYSIS: SHUTTLE UPGRADE (1)

SHUTTLE UPGRADE

(000's)

Line(2) Estimate of Current Shuttle Launch Costs

1 Annual Shuttle LEO Transportation Budget $2,400,0002 Number of Shuttle Flights per Budget 8

3 Est. Launch Costs per Flight (first 8 flights) $300,0004 Est. Variable Launch Cost per Launch (9 thru 12) $90,000

Shuttle Upgrade

5 Number of Shuttle Flights per Budget 86 Est. Post-Upgrade Cost per Launch (up to 8 flights) $240,0007 Est. Post-Upgrade Variable Cost/Launch (9 thru 12) $75,000

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-0

8 Projected Number of Shuttle Launches - Post-Upgrade - - - - - 8 8 8 8 

9 Estimated Shuttle Upgrade Investment $5,200,000 10.00% 30.00% 25.00% 25.00% 10.00% 0.00% 0.00% 0.00% 0.00% 0.

10 Proj Shuttle Upgrade Investment Funding Schedule (520,000) (1,560,000) (1,300,000) (1,300,000) (520,000) - - - - 

 

11 Proj Launch Costs Based on Current Shuttle Costs - - - - - 2,400,000 2,400,000 2,400,000 2,400,000 2,400,

12 Proj Launch Costs - Post-Upgrade - - - - - (1,920,000) (1,920,000) (1,920,000) (1,920,000) (1,920,

 

13 Shuttle Upgrade Net Cash Flows (520,000) (1,560,000) (1,300,000) (1,300,000) (520,000) 480,000 480,000 480,000 480,000 480,

 

14 Discount Rate 7.00%15 Net Present Value of the Shuttle Upgrade Program (3) ($930,949) Represents the Present Value of Estimated Cost Savings Generated by Shuttle Upgrade less the Present Value of the Initial Funding Costs 

"Breakeven" Analysis - Shuttle Upgrade Launch Costs

16 Current Assumed Cost Per Launch - Shuttle Upgrade $240,00017 Maximum Increase/(Decrease) in SU Cost per Launch ($16,717)

18 Breakeven Shuttle Upgrade Cost per Launch $223,28319 Max SUCosts per Launch/Current Proj. Launch Costs -7.0%

"Breakeven" Analysis - Shuttle Upgrade Investment

20 Current Assumed Up-Front Investment - Shuttle Upgrade $5,200,00021 Maximum Increase/(Decrease) in SU Investment ($1,133,111)

22 Breakeven SU Up-Front Investment $4,066,889

23 Max Up-front Investment/Current Proj. Up-front Investment -21.8%

Footnotes:

(1) This model was developed for demonstrative purposes only and contains many assumptions which are simply "best estimates" and not based on factual data. (2) See attached page for explanations of key line items numbered 1-23 above.(3) Shuttle Upgrade Net Cash Flows have been discounted over the period 1999-2020. This includes the period 2011-2019, which does not appear in this Appendix I for presentation purposes only.

11/5/98: (1:50 PM) 
Appendix II.

NPV ANALYSIS: NEW HUMAN-RATED RLV (1)

BASIC ASSUMPTIONS SCENARIO (RLV is human-rated by 2006)

(000's)

Line(2) Estimate of Current Shuttle Launch Costs

1 Annual Shuttle LEO Transportation Budget $2,400,0002 Number of Shuttle Flights per Budget 8

3 Est. Launch Costs per Flight (first 8 flights) $300,0004 Est. Variable Launch Cost per Launch (9 thru 12) $90,000

New Human-Rated RLV

5 Estimated NHRRLV Cost per Launch - ISS $75,0006 Estimated NHRRLV Cost per Launch - Other $25,000

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 

7 Proj Number of Shuttle "Overlap" Launches (until NHRRLV is Human Rated) - - - - - 5 5 - - - 

 

8 Projected Number of Existing Shuttle Launches - - - - - 8 8 8 8 8 9 Equivalent Number of New Human-Rated RLV Launches - ISS - - - - - - - 10 10 10 

10 Equivalent Number of New Human-Rated RLV Launches - Other - - - - - 3 3 3 3 3 11 Required NASA Up-Front Investment in NHRRLV $1,750,000 33.33% 33.33% 33.33% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 12 Estimated Equity Funding Schedule (583,333) (583,333) (583,333) - - - - - - - 

 

13 Proj Launch Costs Based on Current Shuttle Costs = Cost Savings - - - - - 2,400,000 2,400,000 2,400,000 2,400,000 2,400,000 14 Estimated Shuttle "Overlap" Launch Costs (until RLV is Human Rated) - - - - - (1,500,000) (1,500,000) - - - 

 

15 Incremental Shuttle "Overlap" Costs and Shuttle Closeout Costs - - - - - (700,000) (700,000) (240,000) - - 

 

16 Projected New Human-Rated RLV Launch Costs - - - - - (75,000) (75,000) (825,000) (825,000) (825,000) 

17 New Human-Rated RLV Net Cash Flows (3) (583,333) (583,333) (583,333) - 125 - 125 ,000 1 ,000 1 ,335,000 1 ,575,000 

,575,000 

18 Discount Rate 7.00%19 Net Present Value of the NHRRLV Net Cost Savings $7,423,926 Represents the Present Value of Estimated Cost Savings Generated by NHRRLV less the Present Value of NASA's Share of 

"Breakeven" Analysis - NHRRLV Projected Launch Costs

20 Current Assumed Cost Per Launch - NHRRLV $75,00021 Maximum Incr/(Decr) in NHRRLV Costs per Launch $116,581

22 Breakeven NHRRLV Cost per Launch - ISS $191,58123 Max NHRRLV Costs per Launch/Current Proj. Launch Costs 155.4%24 Breakeven NHRRLV Cost per Launch - Other 63,860

"Breakeven" Analysis - NHRRLV Up-Front Investment

25 Current Assumed Up-Front Investment - NHRRLV $1,750,00026 Maximum Incr/(Decr) in NHRRLV Investment $8,486,698

27 Breakeven NHRRLV Up-Front Investment ##########28 Max Up-front Investment/Current Proj. Up-front Investment 485.0%

Footnotes:

(1) This model was developed for demonstrative purposes only and contains many assumptions which are simply "best estimates" and not based on factual data. (2) See attached page for explanations of key line items numbered 1-26 above.(3) New Human-Rated RLV Net Cash Flows have been discounted over the period 1999-2020. This includes the period 2012-2019, which does not appear in this Appendix II for presentation purposes only.

11/5/98: (1:54 PM) 
Appendix II. (a)

NPV ANALYSIS: NEW HUMAN-RATED RLV (1)

SCENARIO 1 (RLV human-transport capability delayed until 2007)

(000's)

Line(2) Estimate of Current Shuttle Launch Costs

1 Annual Shuttle LEO Transportation Budget $2,400,0002 Number of Shuttle Flights per Budget 8

3 Est. Launch Costs per Flight (first 8 flights) $300,0004 Est. Variable Launch Cost per Launch (9 thru 12) $90,000

New Human-Rated RLV

5 Estimated NHRRLV Cost per Launch - ISS $75,0006 Estimated NHRRLV Cost per Launch - Other $25,000

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-0

7 Proj Number of Shuttle "Overlap" Launches (until NHRRLV is Human Rated) - - - - - 5 5 5 - - 

 

8 Projected Number of Existing Shuttle Launches - - - - - 8 8 8 8 8 

9 Equivalent Number of New Human-Rated RLV Launches - ISS (3) - - - - - - 6 6 10 10 

 

10 Equivalent Number of New Human-Rated RLV Launches - Other (4) - - - - - 3 3 3 3 3 

 

11 Required NASA Up-Front Investment in NHRRLV $1,750,000 21.43% 21.43% 21.43% 11.90% 11.90% 11.90% 0.00% 0.00% 0.00% 0.00% 0.12 Estimated Equity Funding Schedule (5) (375,000) (375,000) (375,000) (208,333) (208,333) (208,333) - - - - 

 

13 Proj Launch Costs Based on Current Shuttle Costs = Cost Savings - - - - - 2,400,000 2,400,000 2,400,000 2,400,000 2,400,

2,400,000 

14 Estimated Shuttle "Overlap" Launch Costs (until RLV is Human Rated) - - - - - (1,500,000) (1,500,000) (1,500,000) - - 

 

15 Incremental Shuttle "Overlap" Costs and Shuttle Closeout Costs - - - - - (700,000) (700,000) (700,000) (240,000) - 

 

16 Projected New Human-Rated RLV Launch Costs - - - - - (75,000) (525,000) (525,000) (825,000) (825,000) (825,

 

17 New Human-Rated RLV Net Cash Flows (6) (375,000) (375,000) (375,000) (208,333) (208,333) (83,333) (325,000) (325,000) 1 1,335,000 1 ,575,000 

,575,

18 Discount Rate 7.00%19 Net Present Value of the NHRRLV Net Cost Savings $6,147,446 Represents the Present Value of Estimated Cost Savings Generated by NHRRLV less the Present Value of NASA's Share of the Initial Funding Cost

"Breakeven" Analysis - NHRRLV Projected Launch Costs

20 Current Assumed Cost Per Launch - NHRRLV $75,00021 Maximum Incr/(Decr) in NHRRLV Costs per Launch $94,447

22 Breakeven NHRRLV Cost per Launch - ISS $169,44723 Max NHRRLV Costs per Launch/Current Proj. Launch Costs 125.9%24 Breakeven NHRRLV Cost per Launch - Other 56,482

"Breakeven" Analysis - NHRRLV Up-Front Investment

25 Current Assumed Up-Front Investment - NHRRLV $1,750,00026 Maximum Incr/(Decr) in NHRRLV Investment $7,520,915

27 Breakeven NHRRLV Up-Front Investment $9,270,915

28 Max Up-front Investment/Current Proj. Up-front Investment 429.8%

Footnotes:

(1) This model was developed for demonstrative purposes only and contains many assumptions which are simply "best estimates" and not based on factual data. (2) See attached page for explanations of key line items numbered 1-26 above.(3) In years where 6 flights are projected, it is assumed that the human-transport capability does not exist. Where 10 flights are projected, it is assumed that 6 are cargo-only and 4 are manned.(4) These are non-ISS flights at a cost of $25 million per flight.(5) All investment after 2001 is for human-transport capability.(6) New Human-Rated RLV Net Cash Flows have been discounted over the period 1999-2020. This includes the period 2012-2019, which does not appear in this Appendix II.(a) for presentation purposes only.

11/5/98: (1:57 PM) 
Appendix II. (b)

NPV ANALYSIS: NEW HUMAN-RATED RLV (1)

SCENARIO 2 (RLV human-transport capability delayed until 2009)

(000's)

Line(2) Estimate of Current Shuttle Launch Costs

1 Annual Shuttle LEO Transportation Budget $2,400,0002 Number of Shuttle Flights per Budget 8

3 Est. Launch Costs per Flight (first 8 flights) $300,0004 Est. Variable Launch Cost per Launch (9 thru 12) $90,000

New Human-Rated RLV

5 Estimated NHRRLV Cost per Launch - ISS $75,0006 Estimated NHRRLV Cost per Launch - Other $25,000

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-0

7 Proj Number of Shuttle "Overlap" Launches (until NHRRLV is Human Rated) - - - - - 5 5 5 5 5 

 

8 Projected Number of Existing Shuttle Launches - - - - - 8 8 8 8 8 

 

9 Equivalent Number of New Human-Rated RLV Launches - ISS (3) - - - - - - 6 6 6 6 

 

10 Equivalent Number of New Human-Rated RLV Launches - Other (4) - - - - - 3 3 3 3 3 

 

11 Required NASA Up-Front Investment in NHRRLV $1,750,000 21.43% 21.43% 21.43% 0.00% 0.00% 11.90% 11.90% 11.90% 0.00% 0.00% 0.12 Estimated Equity Funding Schedule (5) (375,000) (375,000) - (375,000) - (208,333) (208,333) (208,333) - - 

 

13 Proj Launch Costs Based on Current Shuttle Costs = Cost Savings - - - - - 2,400,000 2,400,000 2,400,000 2,400,000 2,400,000 

2,400,

14 Estimated Shuttle "Overlap" Launch Costs (until RLV is Human Rated) - - - - - (1,500,000) (1,500,000) (1,500,000) (1,500,000) 

 (1,500,000) 

15 Incremental Shuttle "Overlap" Costs and Shuttle Closeout Costs - - - - - (700,000) (700,000) (700,000) (700,000) (700,000) (240,

16 Projected New Human-Rated RLV Launch Costs - - - - - (75,000) (525,000) (525,000) (525,000) (525,000) (825,

 

17 New Human-Rated RLV Net Cash Flows (6) (375,000) (375,000) - (375,000) - (83,333) (533,333) (533,333) (325,000) (325,000) 

1,335,

18 Discount Rate 7.00%19 Net Present Value of the NHRRLV Net Cost Savings $4,221,114 Represents the Present Value of Estimated Cost Savings Generated by NHRRLV less the Present Value of NASA's Share of the Initial Funding 

"Breakeven" Analysis - NHRRLV Projected Launch Costs

20 Current Assumed Cost Per Launch - NHRRLV $75,00021 Maximum Incr/(Decr) in NHRRLV Costs per Launch $69,335

22 Breakeven NHRRLV Cost per Launch - ISS $144,335

23 Max NHRRLV Costs per Launch/Current Proj. Launch Costs 92.4%24 Breakeven NHRRLV Cost per Launch - Other 48,112

"Breakeven" Analysis - NHRRLV Up-Front Investment

25 Current Assumed Up-Front Investment - NHRRLV $1,750,00026 Maximum Incr/(Decr) in NHRRLV Investment $5,376,505

27 Breakeven NHRRLV Up-Front Investment $7,126,505

28 Max Up-front Investment/Current Proj. Up-front Investment 307.2%

Footnotes:

(1) This model was developed for demonstrative purposes only and contains many assumptions which are simply "best estimates" and not based on factual data. (2) See attached page for explanations of key line items numbered 1-26 above.(3) In years where 6 flights are projected, it is assumed that the human-transport capability does not exist. Where 10 flights are projected, it is assumed that 6 are cargo-only and 4 are manned.(4) These are non-ISS flights at a cost of $25 million per flight.(5) All investment after 2001 is for human-transport capability.(6) New Human-Rated RLV Net Cash Flows have been discounted over the period 1999-2020. This includes the period 2012-2019, which does not appear in this Appendix II.(b) for presentation purposes only.

11/5/98: (1:58 PM) 
Appendix II. (c)

NPV ANALYSIS: NEW HUMAN-RATED RLV (1)

SCENARIO 3 (RLV human-transport capability delayed until 2011)

(000's)

Line(2) Estimate of Current Shuttle Launch Costs

1 Annual Shuttle LEO Transportation Budget $2,400,0002 Number of Shuttle Flights per Budget 8

3 Est. Launch Costs per Flight (first 8 flights) $300,0004 Est. Variable Launch Cost per Launch (9 thru 12) $90,000

New Human-Rated RLV

5 Estimated NHRRLV Cost per Launch - ISS $75,0006 Estimated NHRRLV Cost per Launch - Other $25,000

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-0

7 Proj Number of Shuttle "Overlap" Launches (until NHRRLV is Human Rated) - - - - - 5 5 5 5 5 

 

8 Projected Number of Existing Shuttle Launches - - - - - 8 8 8 8 8 

 

9 Equivalent Number of New Human-Rated RLV Launches - ISS (3) - - - - - - 6 6 6 6 

 

10 Equivalent Number of New Human-Rated RLV Launches - Other (4) - - - - - 3 3 3 3 3 

 

11 Required NASA Up-Front Investment in NHRRLV $1,750,000 21.43% 21.43% 21.43% 0.00% 0.00% 0.00% 0.00% 11.90% 11.90% 11.90% 0.12 Estimated Equity Funding Schedule (5) (375,000) (375,000) - (375,000) - - - (208,333) (208,333) (208,333) 

 

13 Proj Launch Costs Based on Current Shuttle Costs = Cost Savings - - - - - 2,400,000 2,400,000 2,400,000 2,400,000 2,400,000 2,400,

14 Estimated Shuttle "Overlap" Launch Costs (until RLV is Human Rated) - - - - - (1,500,000) (1,500,000) (1,500,000) (1,500,000) (1,500,000) (1,500,

15 Incremental Shuttle "Overlap" Costs and Shuttle Closeout Costs - - - - - (700,000) (700,000) (700,000) (700,000) (700,000) (700,

16 Projected New Human-Rated RLV Launch Costs - - - - - (75,000) (525,000) (525,000) (525,000) (525,000) (525,

 

17 New Human-Rated RLV Net Cash Flows (6) (375,000) (375,000) - (375,000) - 125,000 (325,000) (533,333) (533,333) (533,333) (325,

18 Discount Rate 7.00%19 Net Present Value of the NHRRLV Net Cost Savings $2,538,580 Represents the Present Value of Estimated Cost Savings Generated by NHRRLV less the Present Value of NASA's Share of the Initial Funding 

"Breakeven" Analysis - NHRRLV Projected Launch Costs

20 Current Assumed Cost Per Launch - NHRRLV $75,00021 Maximum Incr/(Decr) in NHRRLV Costs per Launch $44,378

22 Breakeven NHRRLV Cost per Launch - ISS $119,378

23 Max NHRRLV Costs per Launch/Current Proj. Launch Costs 59.2%24 Breakeven NHRRLV Cost per Launch - Other 39,793

"Breakeven" Analysis - NHRRLV Up-Front Investment

25 Current Assumed Up-Front Investment - NHRRLV $1,750,00026 Maximum Incr/(Decr) in NHRRLV Investment $3,353,865

27 Breakeven NHRRLV Up-Front Investment $5,103,865

28 Max Up-front Investment/Current Proj. Up-front Investment 191.6%

Footnotes:

(1) This model was developed for demonstrative purposes only and contains many assumptions which are simply "best estimates" and not based on factual data. (2) See attached page for explanations of key line items numbered 1-26 above.(3) In years where 6 flights are projected, it is assumed that the human-transport capability does not exist. Where 10 flights are projected, it is assumed that 6 are cargo-only and 4 are manned.(4) These are non-ISS flights at a cost of $25 million per flight.(5) All investment after 2001 is for human-transport capability.(6) New Human-Rated RLV Net Cash Flows have been discounted over the period 1999-2020. This includes the period 2012-2019, which does not appear in this Appendix II.(c) for presentation purposes only.

11/5/98: (1:58 PM) 
Appendix I (page 2). Explanation of Key Line Items for NPV Analysis: Shuttle Upgrade

Line Item Explanation of Line Item Source (4)

1 Estimated annual budget for Shuttle Program NASA

2 Estimated number of Shuttle flights annually based on annual budget dollars NASA

3 Shuttle Annual Budget divided by Estimated Number of Shuttle Flights per Budget (Line Item 1/Line Item 

2)

NASA

4 Estimated variable cost per Shuttle flight after 7 flights have been flown - the projected cost per flight of 

flights 8-12 in a given year

NASA

5 Same as Line Item 2 NASA

6 Estimated Cost per Launch post-Shuttle Upgrade NASA

7 Estimated variable cost per flight, post-Shuttle Upgrade, after 7 flights have been flown NASA

8 Projected number of annual Shuttle Upgrade flights NASA

9 Estimated up front investment required for Shuttle Upgrade NASA

10 Estimated period over which up-front investment is to be made HKA

11 Estimated cost savings from not having to operate Existing Shuttle (Line Item 3 x Line Item 8) N/A

12 Cost of Shuttle Upgrade Launches (Line Item 6 x Line Item 8) N/A

13 Annual Net Cash Flows representing the annual cost savings less the up-front investment amount less the

launch costs for the Shuttle Upgrade (Line Item 10 + Line Item 11 + Line Item 12)

N/A

14 The discount rate at which the Net Cash Flows (Line Item 13 ) are being discounted in the Net Present 

Value calculation.

NASA

15 The Net Present Value of Cost Savings (the present value of Line Item 13) N/A

16 The current assumption for Shuttle Upgrade Cost per Launch (same as Line Item 6) NASA

17 The amount by which the Shuttle Upgrade cost per Launch (Line Item 16) would have to 

increase/(decrease) to make the Net present Value of Cost Savings (Line Item 15) equal to zero.

N/A

18 The Shuttle Upgrade Cost per Launch which makes the Net Present Value of Cost Savings (Line Item 15) 

equal to zero

N/A

19 The percentage increase/(decrease) in the Current Assumed Cost per Launch (Line Item 16) required to 

make the Net Present Value of Cost Savings (Line Item 15) equal to zero ((Line Item 18/Line Item 16) - 1)

N/A

20 The assumed amount of NASA investment required to complete the Shuttle Upgrade (Same as Line Item 

9)

NASA

21 The amount by which the Current Assumed Up-front Investment (Line Item 20) would have to 

increase/(decrease) to make the Net present Value of Cost Savings (Line Item 15) equal to zero.

N/A

22 The Estimated Shuttle Upgrade Investment amount which makes the Net Present Value of Cost Savings 

(Line Item 15) equal to zero

N/A

23 The percentage increase/(decrease) in the Current Assumed Up-front Investment (Line Item 20) required 

to make the Net Present Value of Cost Savings (Line Item 15) equal to zero ((Line Item 22/Line Item 20) - 

1)

N/A

Footnotes:

(4) HKA = Hawthorne, Krauss & Associates; NASA = NASA; N/A = Not Applicable (a calculation)
Appendix II (page 2). Explanation of Key Line Items for NPV Analysis: New Human-Rated RLV

(Based on VentureStar Assumptions)

Line Item Explanation of Line Item Source (4)

1 Estimated annual budget for Shuttle Program NASA

2 Estimated number of Shuttle flights annually based on annual budget dollars NASA

3 Shuttle Annual Budget divided by Estimated Number of Shuttle Flights per Budget (Line Item 1/Line Item 

2)

NASA

4 Estimated variable cost per Shuttle flight after 7 flights have been flown - the projected cost per flight of 

flights 8-12 in a given year

NASA

5 Estimated New Human Rated RLV Cost per Launch represents the recent projected VentureStar cost per 

launch of $75 million. This represents the estimated cost of access to ISS.

VS/HKA

6 The estimated cost per launch for access to non-ISS destinations. Assumed to be one third the cost of 

ISS launches, even for sensitivity analyses.

NASA

7 Shuttle "Overlap" launches to be flown while the New Human-Rated RLV is being qualified as humanrated for NASA purposes (see Analytical Review: New Human-Rated RLV Basic Assumptions)NASA

8 Projected number of Existing Shuttle Launches per year assuming no development of a New HumanRated RLVNASA

9 Estimated New Human-Rated RLV launches for access to ISS. NASA

10 Estimated New Human-Rated RLV launches for access to non-ISS destinations. NASA

11 Estimated up front investment required for RLV VS/HKA

12 Estimated period over which up-front investment is to be made. Investment made after 2001 is for humantransport capability.

NASA

13 Estimated cost savings from not having to operate Existing Shuttle (Line Item 3 x Line Item 7) N/A

14 Cost of Shuttle "Overlap" Launches (Line Item 3 x Line Item 7). See Line Item 15. NASA

15 Other costs associated with the operation of the Existing Shuttle at less than its "optimum" capacity of 8 

flights per year. For example, if the Existing Shuttle were to be launched only 5 times per year the cost 

per flight would be $440 million per laun

NASA

16 Cost of New Human-Rated RLV Launches ((Line Item 5 x Line Item 9) + (Line Item 6 x Line Item 10)) N/A

17 Annual Net Cash Flows representing the annual cost savings less the up-front investment amount, less 

Shuttle "overlap" costs, less the launch costs for the New Human-Rated RLV (Line Item 12 + Line Item 13 

+ Line Item 14 + Line Item 15 + Line Item 16)

N/A

18 The discount rate at which the Net Cash Flows (Line Item 17) are being discounted in the Net Present 

Value calculation.

HKA

19 The Net Present Value of Cost Savings (the present value of Line Item 17) N/A

20 The current assumption for New Human-Rated RLV cost per Launch (same as Line Item 5) VS/HKA

21 The amount by which the New Human Rated RLV cost per Launch (Line Item 15) would have to 

increase/(decrease) to make the Net present Value of Cost Savings (Line Item 19) equal to zero.

N/A

22 The New Human-Rated RLV Cost per ISS Launch which makes the Net Present Value of Cost Savings 

(Line Item 19) equal to zero

N/A

23 The percentage increase/(decrease) in the Current Assumed Cost per Launch (Line Item 20) required to 

make the Net Present Value of Cost Savings (Line Item 19) equal to zero ((Line Item 22/Line Item 20) - 1)

N/A

24 The estimated "breakeven" cost per launch for access to non-ISS destinations. Assumed to be one third 

the cost of ISS launches (Line 22 divided by 3)

NASA/HKA

25 The assumed amount of NASA investment required to complete the New Human-Rated RLV (Same as 

Line Item 11)

N/A

26 The amount by which the Current Assumed Up-front Investment (Line Item 25) would have to 

increase/(decrease) to make the Net present Value of Cost Savings (Line Item 19) equal to zero.

N/A

27 The Required NASA Up-front Investment amount which makes the Net Present Value of Cost Savings 

(Line Item 19) equal to zero

N/A

28 The percentage increase/(decrease) in the Current Assumed Up-front Investment (Line Item 25) required 

to make the Net Present Value of Cost Savings (Line Item 19) equal to zero ((Line Item 27/Line Item 25) - 

1)

N/A

Footnotes:

(4) VS = VentureStar and related parties; HKA = Hawthorne, Krauss & Associates; NASA = NASA; N/A = Not Applicable (a 

calculation)