Billion-dollar satellite deal could restore confidence: DirecTV hires Boeing in boost to reputation.

Boeing Co.'s nearly $1 billion contract to build three bus-sized satellites for El Segundo-based DirecTV Inc. could provide a much-needed shot in the arm for what had been the aerospace company's comatose commercial satellite business.

"It's not necessarily a sign that the market is rebounding or that there's a boom or that Boeing will have a string of additional satellites," said Marco Caceres, senior space analyst for Fairfax, Va.-based Teal Group Corp. "The best you can say is that it's a great order and will certainly keep them busy for the next few months."

Boeing will build three 702 model satellites, as well as one on-ground spare in case of failure. DirecTV also has an option for a fourth unit. The satellites, to be launched in 2007, will be used to deliver about 1,000 local and 150 national high-definition television channels to customers nationwide.

The Boeing 702 model is considered the most sophisticated design on the market for delivering video television service, and its solar collectors generate enough power to light a small city.

Satellites in Jeopardy

"It certainly helps them rebound from some challenging years for the satellite manufacturing industry," said Bob Marsocci, DirecTV's vice president of communications. "We're the largest provider in the country, so to receive an order like this has an upside for them and for us."

Boeing, which purchased the El Segundo-based satellite division of Hughes Electronics Corp. in 2000, discovered that six commercial satellites in orbit had flawed solar-powered generating systems. As a result, none of the spacecraft will complete the planned 15-year lifespan.

There was even speculation that Boeing officials were considering scrapping the commercial unit, which is expected to lose $50 million this year. Those rumors ended in June, when Boeing President Harry Stonecipher declared to an audience of investors, "I don't care if you lose $100 million bucks this year, I want this thing fixed."

A defect in the solar concentrators had reduced the spacecraft's power, causing it to lose propulsion and altitude. A typical Boeing 702 starts with about 16 kilowatts of power at the beginning of its life and drops to about 15 kilowatts after 15 years. The 702s in orbit, however, are expected to have only 12 kilowatts after 15 years. The new version of the 702 line is equipped with conventional solar arrays, as well as more advanced transponders--a combination receiver, frequency converter and transmitter package.

Boeing discovered the problems and notified clients, saying the technology was not concentrating as much solar energy as predicted. Analysts noted that a number of other satellite makers such as Lockheed Martin Space Systems and Alcatel Space encountered similar problems.

Despite Boeing's efforts to fix the problem, DirecTV--a former Hughes unit that had a decade-long history with Boeing--contracted Loral Space & Communications last fall to build two satellites.

Dave Ryan, Boeing Satellite Systems' vice president and general manager, said Boeing's new contract with DirecTV has been in the works since January, and that Boeing has already launched five satellites for DirecTV.

"With this next generation of satellite, they are entrusting their future in our hands and we are taking this very seriously," Ryan said.

Marsocci said DirecTV worked closely with Boeing on the new design, and that he is satisfied that the satellite flaws are "problems of the past."

The pay television provider's endorsement could boost the confidence of other potential customers. Last year, Boeing delivered 10 commercial space vehicles, down from a peak of about 25 annually in the late 1990s.

"When you drop a billion dollars it sends ripples through the whole industry," said John Edwards, a space systems analyst for Newton, Conn.-based Forecast International. "When people see a player get involved like DirecTV, which is powered by Hughes and Rupert Murdoch, it's huge for them."

(Hughes was purchased by Murdoch's News Corp. last year, and DirecTV was spun off as a publicly traded unit.)

Ryan noted that the industry's recovery so far continues to be modest. He doesn't expect orders to reach the giddy levels of the 1990s until at least the next decade.

Boeing's satellite design problems aren't entirely in the past. Four insurance underwriters recently began arbitration with the International Chamber of Commerce in Paris seeking $250 million in damages from the satellite maker for the defective 702 satellites. Among the companies involved in the suit are XM Satellite Radio Holdings Inc., PanAmSat Corp., Telesat and Middle Eastern concern Thuraya Satellite Communications Co. A total of $1.6 billion has been paid out by insurance companies to reimburse operators for the costly mistakes.

Ryan downplayed the issue as "old news" and said the case is without merit. Nevertheless, the legal troubles could cut into Boeing's financial projections, which include turning a profit as early as 2005 and doubling revenues by 2008 to $1.3 billion.

"The ball is in Boeing's court," Edwards said. "This is the contract they've been waiting for."