Hello everyone! It's good to see so many familiar names from the old MSNBC board.

I've been tinkering on an idea for a little while now in my spare time, and thought I'd amuse everyone with what I've got so far. I'm at the stage where I need to start comprehensively fleshing out the financial model, requiring a lot of research, so I thought I'd post what I've got so far for some feedback/constructive criticism.

Caveat: It's obviously not finished, and I'm not married to any of the ideas herein. Otherwise, enjoy!

Kadet Ken

I've been analyzing the "Concept of Privatization of the Space Shuttle Program" issued by the Space Shuttle program on September 28th, 2001. As someone whose professional experience was spent in companies not beholden to government funds flows for their business, analyzing the credit, legal and risk worthiness of clients, I find many of the details of the concept quite difficult to agree with, and would actually fault the Program for not being creative enough in their proposal.

The first difficulty I see is that NASA is unprepared to accept the role of customer. The proposal insists on, nay requires, the imposition of such a degree of NASA oversight and overall NASAness on the "privatized" shuttle company that true commercial business operations becomes well nigh impossible. Additionally, it demands the transfer of between 700 and 900 personnel from NASA to the private company, with long term employment contracts and golden handcuffs for current NASA shuttle program leaders, effectively imposing the same cost and operations structure on the company that NASA itself can't deal with.

One potential benefit of privatization is that the labor pool will consist of not only those who currently work on the Shuttle, but also all of those who have in the last thirty years. There's an awful lot of good talent that's left NASA over that time frame, and they didn't just fall off the face of the Earth. The ability to cherry-pick the cream of the employment pool will go a long ways to ensuring the long-term viability and success of a privatized program.

NASA is of course focused on 'safety and viability'. Note the order of the words. In NASA's mind safety is more important than viability. This is what has led to the impasse in which NASA currently finds itself. I remember one of the lectures at the STAIF 2000 conference was from a NASA guy, and he went on and on about "Five 9s of Safety", meaning that the Shuttle must be either 99.999% safe or 99.99999% safe. I don't remember which, but both are too much. No commercial airline could fly with that kind of requirement. It sounds great on paper, but in real terms it is ridiculously expensive. The shuttle is currently a little over 99% successful. I'd take that risk, but then again I'd take a 1 in 20 risk. 99.9% safe seems a nice compromise.

Another requirement noted for privatization is the "healthy tension between...hardware design and...operations and processing". My question is: After 30 years, the Space Shuttle is still a design vehicle? I thought it was an operational flight vehicle. They've already been built, what's being designed? (Answer, the safety mods that give it "Five 9s of Safety"). If the private company cannot fly the shuttle as is, why would they buy it. And after they did so, wouldn't the private company be the one that determines the necessity and type of further capital investment? Do airline passengers tell the companies how to service and upgrade their planes? (Okay, sometimes, but statistically insignificantly so). Do UPS customers tell the company how to fly their planes and deliver their packages? No, the company does what it says it is going to do and people approve by giving their business. It would probably be a good idea to hire some airline flight operations folks to provide a different insight into potential shuttle flight operations.

If NASA doesn't approve of the safety of the shuttle, they will of course be free to find other means of getting their stuff into space. I guess the ISS crew could go up in the Soyuz. That's one of the risks of privatization. If you don't own the assets, you can't tell the company that does what to do with them. If you don't like what they're doing, you go elsewhere. Unfortunately, the more likely result would be that NASA would go to their bosses and an act of government would regulate how the shuttle operates. The investors would flee in droves, and the lawyers would rush in to fill the void. This is why I question the all-or-nothing approach of the Concept outlined by NASA.

There are of course other things, like "Post employment restrictions must not affect the leadership team available for transition" and "Government influence at board of directors or advisory board level must be established to ensure essential safety features are maintained and that profit motive does not compromise long-term viability".

I'm still working on a comprehensive analysis, but from a corporate risk standpoint it looks dangerous, even if NASA is offering indemnification. In my humble opinion, it's basically USA capturing not only all of the shuttle related cash flows, but getting the assets as well. As far as expanding capabilities and uses beyond the current level, I'm not sure that the existing or proposed structures would permit that kind of vision.

My preference is to start with the privatization of the Columbia. Selling seats at $35Mn a pop, which should be easy enough given the relative luxury of a shuttle launch vis-à-vis that of a Soyuz. Having a specially built Spacehab module for passengers in the cargo bay, as well as selling mid-deck locker space, carrying cargo to ISS, and tons of other things can easily provide profitability within a ten-year time frame. I'm still working on a cost model for that scenario (Geez, what a pain. Trying to dig through a NASA budget for details is a bear! Oh for some basic GAAP accounting).

Space Shuttle Privatisation (the "Venture")

Privatize the Columbia. Sell it off. Let someone else make a go at it.

Even with the glass cockpit upgrade it's really too heavy to do cargo duty to the ISS. It should be able, however, to take up a number of passengers in a converted spacelab type module. She's a stout bird, worthy of a glorious career as a passenger liner.

Financing:
Equity issued through a 144A private placement. This would be a pool of institutional investors providing the start up capital to get through Year Zero (q.v. infra). This would basically be paying for the pools of lawyers, consultants and influence peddlers in Washington D.C.
Long-term Debt: Global Bond Placement with special characteristics
Hopefully: $5.0Bn
Goal: $4.0Bn.
Interest would likely be LIBOR + about 150 basis points. Swap it into fixed interest rate, maybe six or seven percent. It depends on where you are in the economic cycle, and the ten year life of the bond will go through a whole economic cycle.
Mix of Dollar and Euro denominations to appeal to different markets. Buy forwards to lock in the exchange rate on the annual interest payments and final bullet repayment.

What should an orbiter cost?

Well, the development costs would obviously be spread among the orbiters built (Enterprise, Columbia, Discovery, Challenger, Endeavour and Atlantis [6]). Then amortized either over a specific time frame (i.e. 40 years), or over the number of flights the orbiter is designed for (i.e. 100).

In then-year dollar costs, the R&D cost runs somewhere in the area of $10.0Bn. Divided amongst the six orbiters built that works out to roughly $1.67Bn per orbiter. Amortized over the expected forty year lifetime (i.e. through 2020), there is approximately $833Mn in remaining R&D value.

Question assumptions: Perhaps an independent auditor determines that the Columbia has only ten years remaining (the proposed initial lifetime of the Venture). This would work to the advantage of the buyer, as it would lower the residual R&D value to $555.0Mn, a 33% reduction in the cost to the buyer. This could be in part, hypothetically, because NASA continues to fly the shuttles as developmental vehicles, essentially stripping and testing everything between flights, regardless of the design specs. and thereby putting undue wear and tear on the chassis.

Total production costs through 1981 were about $2.4Bn in then year costs. Being generous and assuming that was half Enterprise and half Columbia (irrespective of the others beginning production), that works out to about $1.2Bn to be depreciated. Over forty years there's about $600Mn in value left, over 30 years about $400Mn

Total Cost so far: $955.0Mn - $1.43Bn

Construction costs through 1981 work out to about $421Mn, so again assuming half-and half that's $210Mn for Columbia. Over 40 years there's about $105Mn in undepreciated value left, over 30 years $70Mn.

Total Cost so far, about $1.25 - 1.5Bn.

Not bad. We should be able to afford that. The operations costs are of course excluded. When you sell your used car you certainly don't get any return for the gas you put in it, the taxes and fees, or the general maintenance. The money that has been sunk into operating the shuttle are sunk costs and shouldn't be included in the price for which the shuttle will be sold.

Thing is, when we buy the orbiter, we're going to want some of the auxiliary equipment as well. A Spacehab module for the cargo bay, mid-deck locker science equipment, airlocks for docking, and maybe even a couple of those old MMUs that NASA has in storage.

Given the approximate cost of the SpaceHab modules, and given the modifications required for use as a passenger compartment, with glass ceilings, etc., capacity for 10 persons, video interfaces, increased life support, etc., etc., a cost of $100.0Mn should be reasonable, $150.0Mn at the outside. The business model assumes that the module will be delivered in the fourth year of business, becoming operational in the fifth year.

Where do the cash flows come from?
Assuming an operating crew of 3 (Pilot, Co-pilot and Steward), five seats per flight would be available for sale. Given the relative luxury of the shuttle vs. a Soyouz, a price of $35.0Mn per seat seems reasonable, amounting to income of $175.0Mn right off the bat. Once a module is developed to carry passengers in the cargo bay, for example by SpaceHab using a variant of their science module but with windows in the top, an additional 10-15 passengers might be accommodated (we're assuming ten). This would generate revenues of $350.0Mn to $525.0Mn for the SpaceHab module over the $175.0Mn made above.

Docking rights at the station would of course have to be negotiated, and a fee is usually in order.

How is safety rated? Will the shuttle retain a "human rating" after sale? Generally, the company should commit to meet NASA standards of safety, and document their compliance with such NASA standards as Human-Rating Reqs. {JSC 28354, Jun 98}, and general standards (JSC 91), as well as Standard 3000 [NASA 95] and Space Flight Health Reqs. {JSC 96}. This of course would only be a side requirement exceeded by the company's own safety program.

Insurance would cost you a bit. Figure at minimum $300.0Mn, probably approaching $500.0Mn over the full ten-year life of the initial program. Discounts would have to be negotiated for safety efforts, as documented above, with perhaps a step-down feature in the premiums as the number of safe launches accrues. A portion of each passenger's payment would of course set aside for sizable life insurance policies for the families of each of the passengers. One accrued benefit to the space sector in general is that payment of these premiums would help to expand the overall pool of available risk capital to insure other space activities.

Where do you launch from? Access to the current launch pad would have to be leased from NASA. A competition could be held to build a new spaceport to house the private launches. Would Virginia be willing to finance a facility near Wallops Island for shuttle launches? It might be a politically astute move, not only for the owners of the shuttle, but also for the space industry in general, with the pride of American technology launching a short distance from the nation's capitol. And the 38 deg. latitude is great for ISS rendezvous

Texas might finally get the spaceport they've wanted, down at South Padre, although at 26 deg. it's a bit worse than Cape Canaveral for ISS rendezvous.

Perhaps out on Long Island, finally bringing space capability to the Capital of the World.

So how would you keep a dozen folks busy for one or two weeks in the close confines of the shuttle? It doesn't have quite the capaciousness of a luxury cruise ship, nor a swimming pool. Some time could be devoted to tethered excursions in the MMU. In the end, though, the ISS has to be a destination point. Perhaps some of the passengers could stay in MirCorp's hotel module as part of a $50.0Mn vacation package. The fact that yes, there would be people going to the module would free up a lot of the hesitation of investors to put their money into such a venture.

That's not to say that there couldn't also be Scientific Excursions, where consortia of companies, universities and NGOs buy an entire flight. Ten researchers spend two weeks, perhaps up to month in orbit, either free floating (saving on the ISS docking fees) or docked to the ISS to have access to additional resources. Imagine the possibilities of having ten researchers in orbit actively monitoring and changing their experiments, adapting to the results they're getting in real time. This contrasts greatly with the current paradigm of spending three years designing an effectively autonomous package that requires only of the astronaut that they push a button. If the experiment needs to be tweaked, a couple more years need to be frittered away before the package can fly again. I'm certain that by allowing scientists and researchers dynamic access to their experiments in the environment where they are being conducted, the results will be significantly compounded to the greater benefit of all. Here on Earth, where the decoding of the human genome can be done in a matter of a couple of years, scientists do not sit in little cubicles waiting for the download of results from their far distant automated experiment. They're hunched over lab benches carefully measuring out samples and what not. Why should space be different? Privatization of the shuttle makes real this possibility.

There're also a number of economic benefits to this approach as well. More research cash flows are directed into the space field, directly through the cost of the flight, say $450.0Mn., and indirectly through secondary purchases by the researchers in equipment and materials. Perhaps a subsidiary of the Venture could sell space-adapted research equipment designed and realized specifically for those excursions.

So, NASA gets $2Bn in cash in exchange for:

1) The STS Columbia and associated spare parts, full documentation papers and computer records.
2) One MMU in working condition
3) One SpaceHab module
4) Ten-year option for the purchase of one additional orbiter at $1.5Bn
5) One complete stack, plus a voucher for one free load of LH and LOX for the first launch
6) A couple of satellite launch modules

The other half of the $4.0Bn financing would general be divvied amongst some of the big expenses, such as:
1) $280.0Mn for placement fees to the Investment Banks - total cost probably closer to $300.0Mn.
That's the standard 7% placement fee the IBs get on public issues.
2) $150.0Mn to SpaceHab for design and construction of the customized passenger module.
(Plush velvet reclining seats, a glass roof (about 12" thick at least), mountain fresh air recycling, and per passenger cargo of 10 kilos!)
3) $25.0Mn to sponsor scholarships and educational investments in future workers
4) $50.0Mn for something important
5) $200.0Mn for initial insurance policies.

The initial 144A private placement raises the capital to get through Year Zero. Companies and Institutions will be strongly encouraged during the roadshow to invest and make sure they're represented. Expenses will have to cover all the legal fees, salaries of initial staff, documentation costs, political favor currying, and so forth. At the end of Year Zero, title to the orbiter and other assets is transferred to the Venture, and the $4.0Bn bond issue is placed in the world markets. There's a beautiful catch in the bond issue that we'll get to later. The bond issue is to pay for the orbiter and secure funds for the first few years of preparation and operation before passengers start flying.

Let's take a look at the initial timeline:

Year 0:
- Probably closer to two-three years
- Negotiations for sale, receipt of documentation for analysis, hiring of initial management staff, determination of staffing needs, securing leases for access to launch facilities, and so forth
- Line up sponsors, science payloads, etc.
- Develop computer systems for Mission Ops
-

Year 1:
- First two flights are conducted to shake out the systems and determine necessary upgrades and changes.
- Computer software is run in parallel to existing systems for debugging
- Performance capabilities of existing systems analyzed for further operational parameters
- The second flight will test the SpaceHab Module and MMU
- Begin development of custom SpaceHab Module

Year 2:
- Two additional check-out flights
- First commercial payloads - science, GASCANS, ad opportunities, etc.
- First commercial passengers - scientists and engineers only
- First potential for commercial satellite checkout and launch
- Potential first ET carried to orbit
- Minimal revenues - <$50.0 - 100.0Mn (ex-ET delivery)

Year 3:
- Upgrade to three flights per year
- First private passengers - five per flight
- Continued science payload sales
- First potential visit to ISS
- Passenger revenues - 15 x $35.0Mn = $525.0Mn
- Science and commercial payload revenues - $100.0 - 150.0Mn
- Estimated revenues Year 3: $650.0Mn
- Interest payment - $280.0Mn
- First payments to sinking bond fund

Year 4:
- Three flights
- Five passengers per flight
- Receive delivery of customized passenger SpaceHab module for second flight
- Test unmanned SpaceHab for flights two and three
- Conduct first Science Excursion (five passengers)
- Passenger revenues - $525.0Mn
- Science and commercial payload revenues - $100.0 - 150.0Mn
- Estimated revenues Year 3: $650.0Mn
- Interest payment - $280.0Mn
-

Year 5:
- Upgrade to four flights per year
- Full passenger complement of 15 (ten in SpaceHab, five in orbiter)
- Initiate service to MirCorp hotel at the ISS
- One Science Excursion (ten passengers)
- Initiate bond bonus (detailed below)
- Passenger revenues: 3 x $490.0Mn = $1.470Bn
- Science Excursion: $450.0Mn
- Other science and commercial payloads (include. satellites) and services: $180Mn
- Total estimated revenues: $2.1Bn

Years 6 - 10:
- Essentially the same as year five.
- In year ten exercise option to purchase additional orbiter
- Finance with placement in global bond markets
- Fly two years of tests and then move into four flights per year mode
- Continue ad infinitum

Obviously, the main revenue driver is the passenger ticket receipts.
Some allowance for commercial sponsorships has been made for in the revenue estimates for such things as Starbucks paying to be the "Official" space coffee served to passengers, Nike paying to provide the high-tech comfort sweats worn by the passengers during the flight. Space phones by Iridium. "My parents went to space and all I got was this lousy t-shirt" t-shirts. &c.

The sinking bond fund represents the purchase of zero-coupon bonds maturing at the bullet bond repayment at the end of Year Ten. At the maturity of the Venture bonds, bond holders will have the option of rolling over their investment into the new bond issue for the next shuttle purchased. Any difference between the value of the bonds issued (say $2.0Bn) and those being retired is paid to the investors. The cash for the purchase of the shuttle then comes from the sinking bond fund.

The option to purchase an additional shuttle might be exercised before Year Ten, allowing for a higher revenue stream earlier on in the financial picture. This would open up a whole new realm of possibilities. The bond issue to pay for the second shuttle could be offset in part by a public stock issue, creating a secondary market in the Venture's shares and allowing the original investors the opportunity to cash out.

The bond financing is the fun part. Unlike typical bonds, which are denominated in units of $1,000, these will be denominated in units of $100. This is a key aspect of making them affordable for investors all over the world. This not only helps to reduce the placement risk to the Investment Banks by ensuring demand from a global pool of capital, but also ensures that almost anyone can take advantage of the special bond feature.

The special bond bonus incorporates a lottery type feature whereby beginning in the fifth year and continuing through the tenth, each flight will include a free flight by a bondholder determined by the random selection of a bond serial number. The holder of that particular bond travels free of charge on the shuttle, or they can auction off the flight to the highest bidder (who in turn can either take the flight or auction it off). This effectively acts as a $35.0Mn interest payment on the $100 bond. One heck of a return on the investment. Even institutions holding $100.0Mn chunks of Venture debt would appreciate the added ROI once they auctioned off the flight.

The perceived interest in the debt issue is key to its overall size. A $4.0Bn debt issue is likely doable once the bonds are divvied up amongst mutual funds, pension funds, other institutional investors and millions upon millions of individual investors around the world with $100 and a dream. If there's adequate interest, a $5.0Bn debt issue might be feasible, which would significantly strengthen the financial position of the Venture, and ease the lean times in years three to six.

Several developments could serve to increase the workability of this plan. A Zero-G Zero-tax law would significantly ease the taxes on the $35.0Mn bond bonuses, which would otherwise serve to discourage individual investors, although I'm sure in many countries any taxes on the bond bonus would be waived for the honor of having one of their citizens fly to space. Additionally, the Venture would have to engage in less financial chicanery on the income statement to make sure they have zero net income on which to pay taxes. That makes it tough on the poor shareholders, who would essentially have to wait until the purchase of the second shuttle and the firm gaining a more solid financial condition before they can start getting dividends.

At four flights a year a total of twenty-four bond bonuses would be delivered. These have been deducted from the revenue figures above, and would actually cost an additional $15.0Mn payment per bonus to MirCorp hotel to stay there during the visit to ISS. Luckily, these "interest" expenses of $1.2Bn can be capitalized on the balance sheet and their amortization over the ten-year period of $120.0Mn per year goes a long way to reducing the Venture's taxable income. Also capitalized would be the Investment Bank placement fees ($280.0Mn).

Model ignores $15.0Mn to stay in the MirCorp hotel

Perhaps the flight rate could go up. By year seven or eight the ground crew might be confident enough in their handling of the shuttle between flights to propose going to five or six flights per year (I do believe the initiative should come from them, not management). The whole point of quarterly launches is that the ground crew won't seem as rushed, and Wall Street will get a quarterly boost in investment activity with each successful launch.

The basic model also assumes that the Columbia will fly for ten years and that's it. It will have passed the fifty flight mark and might be ready for museum duty. But it was built for 100 flights, and the ground crew is certainly going to pamper their baby. Their livelihoods, their mortgage payments, and their futures depend on it and they know it. This kid gloves treatment will likely make an extended life a definite possibility. Perhaps another ten years could be squeezed out of it, but by that point competitors will be entering the market, and flight frequency will decrease by the latter part of the second decade. By that point competitors will doubtless have entered the market, and even the second shuttle might be flying less. Flying two shuttles every other month each gives you an even dozen flights per year. Make two of them scientific and you're pulling in some serious bucks, about $15.5Bn per year. That's when the profits really start adding up.

So what can you do with your own private launch system?

An abundance of unrecognized revenue sources exist. While docked at the ISS the shuttle could potentially save the unused water generated by the fuel cells. While each individual trip might yield only a small amount, over the course of thirty shuttle flights (especially with extended stays) it could add up to several tons of ice just waiting to be used as rocket fuel. Other more illicit revenue streams exist as well. An erotic film maker might be willing to pay extra to have exclusive access to parts of the shuttle and MirCorp Hotel during the flight for certain, "artistic" purposes. Dutch agricultural companies might want to rent out locker space for hydroponic growth experiments. The possibilities are endless.

My favourite plan would be to charge to have the ET carried all the way to orbit, and have a couple of astronauts EVA to strap on some booster rockets carried up in the shuttle cargo bay (I'd get slow and steady ion engines). Slowly boost it up to or beyond the ISS orbit and retrofit it as a pressurized volume. Each ET has over three times the volume of Skylab. My idea is to core it like an apple, and then plug a Transhab balloon into the ET and inflate it like a balloon inside a plastic soda bottle. I wouldn't trust the tank wall by itself, and I certainly don't trust a balloon by itself, but the combination of the two would be okay. Additionally, the space between the transhab balloon and the tank walls could be filled with water to serve as additional radiation shielding. The LOX and LH compartments could serve two separate purposes, with equipment mounted in the intertank area. The company that purchases the shuttle may decide to make the investment itself, perhaps through a special purpose subsidiary set-up specifically for that purpose.

Imagine if you can microgravity kendo performed in such a huge space. Media companies could lease the space for movies (Hong Kong's new action hit: Crouching Tiger, Pouncing Taikonaut). Rich Asian industrialists could rent time to indulge a new thrill in 3D martial arts. Laser tag games would be much more fulfilling. Micro-gymnastics might become a new Olympic sport. Who knows what new ball games might develop?

Or it could serve a much more practical purpose. If COPUOS could convince the members of the UN to pony up for a global asteroid watch, some telescopes, radars, lidars, and whatever else could be mounted on the rigid body of the ET to scan the heavens while it orbits (preferably at EML-1, away from all the cis-GEO clutter). Breakdowns? No problem. Upgraded equipment? Sure, just ship it up and our boys will install it for you. They can take a little time from their coding and orbital analyses to fix you right up. And with your purchase of space on the ET station we'll throw in a free subscription to all of the data collected from all the different instruments, and you get half of the proceeds from subscribers to your data (it's guaranteed, we only sell the comprehensive package to our clients, so you're assured of cash flow).

Who subscribes? Universities with strong astronomy departments that want access to the latest orbital data of the inner solar system. Mining companies interested in data on the composition of the asteroids, with a mind towards future exploratory and exploitation missions. Governments via their contributions to the UN Global Asteroid Watch. Research programs wanting access to the best and most up to date gravitational ephemeredes possible for planning future missions. Insurance companies trying to assess the risk to assets they are insuring in space (or even on the Earth). The possibilities are endless, and many surprising ones can never be anticipated. Oh, and the Library of Congress also.

And that's not to say that the station will be used for that purpose alone. It's a big enough space that you could probably get a fair sized materials furnace in there (in pieces through the airlock). You should be able to squeeze four fair-sized stories at least into the hydrogen tank. It'd make a great space hotel for tourists. The list goes on and on.

All it takes is one external tank carried 100% of the way to orbit.

Not possible under NASA, entirely possible under private enterprise.