Is This the End of Boeing and Lockheed (in Space)?

On Thursday, July 21, 2011, at 5:57 a.m., America's last space shuttle landed safely at Kennedy Space Center, bringing to an end America's manned odyssey in space. 542 million miles traveled, 355 astronauts served, 1,333 days spent in space -- over and out. But what comes next?

Over at Vandenberg Air Force Base in California, PayPal founder Elon Musk is working hard to answer that question. When not busy tinkering under the hood at his Tesla (NAS: TSLA) "green" car venture, Musk spends his days working on a muscle car of truly cosmic proportions. His start-up Space Exploration Technologies company ("SpaceX") is taking on the big boys at Boeing (NYS: BA) and Lockheed Martin (NYS: LMT) , and beating their self-titled "United Launch Alliance" (ULA) at its own game.

What's better than "cheap?" Cheaper ... and better
For decades now, Boeing and Lockheed have dominated the race to space. They helped get the space shuttle airborne, and for missions not requiring "boots above the ground," developed heavy launch rockets to loft spacecraft into earth orbit and beyond. Delta IV, Atlas V -- United Launch Alliance's rockets are famed for their ability to lift multi-ton payloads into space.

Recognizing this, companies like Orbital Sciences (NYS: ORB) think that their best chance of breaking into this industry is by targeting a gap in "medium launch" rockets. Indeed, Orbital's "Taurus II" rocket is targeted at just this market niche. Northrop Grumman (NYS: NOC) , its eyes also on the cosmic prize, opted to take a route less traveled -- the "space tourism" market -- when it bought start-up Scaled Composites, maker of SpaceShipOne. SpaceX, however, is undaunted by the "Alliance." With NASA budgets due for a trim, Musk believes SpaceX can beat ULA at its own game by competing on both quality ... and cost.

Already, SpaceX has won contracts to service the International Space Station, and help Iridium Communications (NAS: IRDM) put its sat-phone satellites in orbit. Now, SpaceX is preparing a new "22-story Falcon Heavy" rocket for liftoff, hoping to convince NASA that it can do ULA's job even better than the big boys, and at a fraction of the cost. According to the LA Times, Falcon Heavy's revolutionary design and strict cost controls will allow the rocket to carry twice the payload of ULA's biggest rocket -- and do so at half the cost -- a mere $100 million or so per launch.

IPO dreams
Of course, "it takes money to make money." In contrast to his Tesla venture, Musk is said to have built a truly profitable business at SpaceX. Still, he's going to need a whole lot of profit if SpaceX is to complete development on Falcon Heavy and get it ready for demo by the end-of-2012 target date. Just getting Vandenberg upgraded to support the liftoff blast will cost $30 million, according to SpaceX. To help with the financing, SpaceX is said to be mulling an IPO that could come as early as this year.

As I said earlier this year, I'm excited at the prospect of investing in an honest-to-goodness profitable IPO like SpaceX -- but I have to wonder if Boeing and Lockheed will be as pleased at this development. I mean, if they're abandoning the medium lift market to Orbital, you have to figure that's because it's not as profitable for them as the businesses they're remaining in. And if ULA is picking up launch fees two to three times what SpaceX says it will charge for Falcon Heavy, you have to figure heavy satellite launches are profitable indeed.

Now, SpaceX is threatening to take that business away from them. Within less than two years, a business that just lost a major customer in the shuttle program could begin shrinking even further. You see, it doesn't really matter whether SpaceX wins contracts away from Boeing and Lockheed outright, or if it simply forces their prices down by offering lower-cost launches. Either way, ULA loses revenues, and Boeing and Lockheed see their profit margins shrink.

Foolish takeaway
It's no fun to be an incumbent in a profitable business, when an upstart disruptor appears on the scene. If Musk and SpaceX are able to make a go of Falcon Heavy, it won't be much fun to be a Boeing or Lockheed shareholder, either. For early investors in the SpaceX IPO, however, it could be one heckuva wild -- and profitable -- ride.

At the time thisarticle was published Fool contributorRich Smithholds no position in any company mentioned.Click hereto see his holdings and a short bio.The Motley Fool owns shares of Iridium Communications, Northrop Grumman, and Lockheed Martin.Motley Fool newsletter serviceshave recommended buying shares of Orbital Sciences. Try any of our Foolish newsletter servicesfree for 30 days.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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