(FORTUNE Magazine) – NO ONE IS OFFERING free tickets or frequent-flier bonuses yet, but a fare war of sorts -- with discounts in the millions of dollars -- has broken out in space. Newcomer Arianespace, a consortium of European governments and private companies that operates the European-built Ariane rocket, has been grabbing communications satellite launches away from the U.S. space shuttle by aggressively underpricing it. Since it launched its first commercial satellite four years ago, the Ariane has put 12 into orbit. The U.S. National Aeronautics and Space Administration (NASA) has launched 30 in the same period, nine aboard the shuttle and the rest atop the old reliable Delta and Atlas-Centaur rockets, which NASA is phasing out. NASA is still the satellite champ -- it has sent up 84 since ! 1962. But the Europeans will be major competitors from now on. While a satellite launch by shuttle costs $25 million, Arianespace charges $24 million. And Arianespace has cut that price by as much as $3 million to land some U.S. customers. (The prices don't include the cost of the satellites, which runs from $40 million to $100 million, depending on size and complexity.) Arianespace says its no-frills throwaway rockets are more efficient at the single task of launching satellites than is the wondrously complex shuttle, which was designed to perform a dazzling range of scientific and military missions. Says Charles Bigot, director general of Arianespace, ''Using the shuttle for launching satellites is like flying a supersonic Mirage jet fighter when all you need is a puddle jumper.'' American entrepreneurs who want to get into the satellite-launching business say that prices charged by both Arianespace and NASA are ridiculously low, thanks to government subsidies. Transpace Carriers Inc., a Greenbelt, Maryland, company founded by former NASA scientists, holds the rights to buy the Delta rocket from its manufacturer, McDonnell Douglas Corp. NASA has agreed to rent the launching site for a fee -- provided that Transpace Carriers can sign up customers. After more than three years of trying, the company has yet to land a single contract. It says it can't launch a satellite for less than $45 million. No one will pay such a sum as long as NASA and Arianespace are charging so much less. General Dynamics Corp., which wants to commercialize its Atlas-Centaur rocket, says it can't get into the launch business either unless prices rise. Arianespace insists that NASA is the culprit, that heavy subsidies enable the U.S. agency to keep rates artificially low and force Arianespace to price even lower to get business. Though Arianespace, unlike NASA, is in the business to make money, both operations are subsidized. Arianespace doesn't have to repay any of the $1.5 billion the 11-nation European Space Agency (ESA) spent to develop Ariane. But neither does NASA charge customers for the $10 billion it spent to develop the shuttle. ESA pays for capital improvements at the Ariane launch site in French Guiana, on South America's Atlantic coast, and kicks in more than a third of the launch site's operating budget. Arianespace pays for everything else, including the cost of producing seven or eight rockets a year. For the shuttle, the costs of launching commercial satellites are harder to pin down. The issue is cloudy because the shuttle does so many things, most of which are paid for by U.S. taxpayers. The total cost of a shuttle flight at the moment is about $150 million, according to the U.S. Congressional Budget Office. NASA argues that since commercial payloads tag along on military and scientific flights, most of what satellite customers pay is gravy. At today's prices, however, satellite customers seem to be getting a bargain. The price covers only a small fraction of the fixed costs of operating the Kennedy Space Center near Cape Canaveral, Florida, which launches the shuttle, and the Johnson Space Center in Houston, which controls the flight. And customers contribute not a cent to amortizing the production costs of the three shuttles, roughly $1 billion apiece. A storm now centers on the price NASA will charge for flights between 1988 and 1991, flights customers will start booking soon since they often make reservations about three years before a flight. For the years 1986 to 1988, NASA is charging the equivalent of $17.5 million in 1985 dollars to launch a standard-size satellite into a low orbit. Customers then have to pay one of the aerospace companies $7.5 million for a ''perigee kick motor'' that boosts the satellite into the higher orbit it must occupy to bounce telecommunications signals back to earth. NASA, which in the past set rates with little interference, has proposed a modest increase for the 1988-91 period, to $21.5 million. But the price is such a political hot potato that the decision is now in the hands of President Reagan, who is expected to act in the next few months. The Department of Transportation, which wants to encourage private companies like Transpace Carriers, is pushing for rates high enough to make the launch business profitable. Meanwhile, Arianespace is running neck and neck with NASA in booking reservations. Orders have come from European governments and postal, telegraph, and telephone agencies, and from a host of non-European customers, including such U.S. clients as General Telephone & Electronics and Satellite Business Systems, which is owned jointly by IBM and Aetna Life & Casualty. Enthusiasm for the Ariane in Europe is soaring. ''Ariane superstar!'' boasted French headlines after a successful flight last year. President Francois Mitterrand often watches launches on a special screen at the Elysee Palace. The launch site in the French Guiana town of Kourou is used as a showcase to impress foreign VIPs. When Arabsat I, a telecommunications satellite commissioned by the 22-nation Arab League, blasted off last winter, Arab dignitaries, gathered in a tent, fell to their knees to proclaim: ''Allah is great.'' Arianespace was created by ESA in 1980 with 11 European governments, 36 European aerospace and electronics companies, and 13 European banks among the shareholders. French interests dominate Arianespace with a 63% stake, more than half of it held by the French space agency, Centre Nationale d'Etudes Spatiales. The stock does not trade publicly. Frederic d'Allest, 44, a nuclear physicist who led the team that developed Ariane, has headed Arianespace since the beginning. A rangy dynamo who unwinds by climbing mountains, d'Allest displays entrepreneurial talent rare in a scientist. Last year Arianespace turned a small profit on revenues of $74 million. Revenues in 1985 should jump to more than $200 million as the number of satellites launched rises. Profitability should improve markedly. At the moment, there is a glut of transponders in space. But companies will shortly begin planning the replacement of aging satellites, and orders for launches in 1986 and beyond should start picking up. Arianespace estimates that by the late 1980s about 30 satellites a year will be launched worldwide. It wants to put up at least ten of those. By the end of the decade it hopes to push revenues as high as $500 million a year. Few customers display much launcher loyalty; they tend to go where they can cut the best deal. Arianespace has wide latitude in negotiating prices, while the U.S. government gives NASA little room to bargain. ''We can't even pay for a customer's lunch,'' grouses Chester Lee, director of customer services for the shuttle. THE METHOD Arianespace uses to launch helps it win customers too. Communications satellites operate in geostationary orbit -- meaning that they revolve at the same speed as the earth, about 23,000 miles above the equator, and so remain over a fixed point. Ariane puts satellites into a non- geostationary orbit at about that altitude, where they use small thrusters to maneuver themselves into geostationary orbit. Ariane parks satellites so close to their final position that little fuel is required for adjustment. That's a plus, since orbiting satellites must fire their thrusters periodically to hold their position and are useless once their fuel runs out. The fuel saving from an accurate launch can add a year to a satellite's expected life span of seven or eight years, yielding as much as $15 million in extra revenues. Satellite Business Systems, which had launched exclusively with NASA, turned to Ariane last year partly for that reason. The space shuttle's approach is more unwieldy. One of three shuttles -- Columbia, Challenger, or Discovery -- dumps a satellite 150 to 200 miles above the earth. Then the satellite's kick motor powers it to the 23,000-mile altitude, where its thrusters have to do more maneuvering -- and use more fuel -- to get the satellite into geostationary orbit. Kick motors are not NASA's responsibility, and they have caused problems. In early 1984 two misfired during a single launch, sending a pair of satellites owned by Western Union and the Indonesian government into useless orbits. The mishap sent the cost of insurance into outer space. Insurers paid claims of $200 million on the two satellites -- more than all the premiums collected over the 15-year history of launch insurance. Though they may get back as much as $80 million of that when the satellites -- which the shuttle eventually retrieved in damaged condition -- are repaired and put back into orbit, insurers were so traumatized they boosted rates for flights on both the shuttle and Ariane. Premiums are now approaching the price of a launch. Moreover they are higher for Arianespace than for NASA, which is another reason the Europeans must undercut NASA's prices to win business. Insurers charge lower premiums for the shuttle because, despite the kick motor problems, no shuttle has blown up on the launch pad or in space. And shuttles, unlike Ariane, can retrieve lost satellites. Ariane has had seven straight successful launches, but it did lose two satellites in 1980 and two more in 1982. Premiums for a typical shuttle launch now run as high as 18% of the amount of the coverage -- which includes the cost of the launch and the satellite, and expected revenues from the satellite. That works out to about $15 million to $18 million in premiums per launch. Ariane's premiums can be as high as $20 million, which is enough to wipe out the price advantage Arianespace offers. Premiums for both Arianespace and the shuttle may jump again. Insurers were jolted when a military satellite launched by a shuttle in April failed to get into orbit because of a malfunctioning switch on the satellite. Whatever happens to insurance premiums, the future of the launch business mostly will be determined by President Reagan's decision on shuttle pricing -- and by Arianespace's reaction. It's a tricky call. The big boost Reagan's Transportation Department wants might win the President some applause from the entrepreneurs anxious to get into the space business. But that would give the Europeans a bigger opening in the space business than they've had so far. And nothing in Arianespace's performance over the last few years suggests it won't keep blasting off.