Leasing of specialized military communication satellites

Abstract

Traditional military procurement of communication satellites is a long-duration high-cost process. Growing demand for these assets and increased budget constraints are driving the investigation and development of alternative acquisition methods. Leasing of communication bandwidth or transponders is an established alternative to procurement in the commercial satellite industry and for some wideband military communication missions. In general, leasing has not existed for specialized military communication missions or for complete satellite systems. Current specialized military satellite communication technology, such as those systems used for communication with airborne intelligence surveillance and reconnaissance (AISR) assets, is not flexible enough to lease to customers beyond the United States Government (USG). This inability to lease to a larger market results in sole customer business models, which historically require long duration guaranteed contracts to manage the financial risks of the investment by contractors. Appropriation laws and established procurement cycles prevent the USG from signing lease contracts for durations greater than a few years, which under current arrangements, lead to prohibitively high financial risks for the satellite owners. Therefore, there is a need to identify plausible new leasing arrangements that decrease the acquisition schedule and minimize cost to the USG while simultaneously managing the financial risk to the satellite owner. Three primary leasing arrangements are explored in this paper - a full satellite service lease from a commercial operator, a service lease from a satellite manufacturer, and a lease-to-buy arrangement. To identify and evaluate these arrangements, a discounted cash flow (DCF) model was developed to price each of the architectures and to evaluate the business cases from the perspective of the satellite owner. An internal rate of return (IRR) threshold was set based on assumed risk and alternative investment opportunities for the various arrangements. The price of the leases were then set to meet the IRR threshold, and lifecycle costs of the systems were calculated based on the price. Sensitivity analyses were then performed to identify lease arrangements that allow the business model to close for the satellite owner while minimizing lifecycle cost for the USG. Overall, this paper demonstrates the viability of leasing specialized military communication satellites to the government as an alternative to traditional procurement.