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IOTL, Morton Thiokol had identified the issue that led to the Challenger disaster as early as 1977(!) and told MSFC, but neither organization actually did anything about it or informed upper NASA management, instead preferring to ignore the problem. This, of course, ended in tragedy. So, suppose instead that the issue is noticed and reported to higher level management. Presumably, since the first flight wouldn't be for at least 2 years, the issue would be resolved before STS-1, and hence Challenger would never happen (although you can argue otherwise). What would happen?

Personally, given the apparently poor safety culture at NASA (many of the errors that led to the Columbia disaster were similar to the ones that led to Challenger--for example, tile and heat-shield damage had been a major concern since the first flight, there had been several examples of orbiters just barely surviving, and the foam had been mooted as an issue before--but no one did anything, instead preferring to ignore the problem), there would likely have been a different fatal failure at some other point, possibly even in 1986/1987 due to the high flight rate they wanted to maintain then. Even if there isn't, the uneconomic nature of the shuttles relative to ELVs will eventually become obvious, though it may take longer (Shuttles will be somewhat cheaper compared to OTL due to higher flight rates, and there will be more payloads manifested due to lack of disasters--OTL, after Challenger Reagan banned commercial payloads from the Shuttle), so likely by 2000 or so they are mostly doing what they did OTL, after all--free-flying research flights and space station assembly missions, maybe some DoD missions. The biggest difference will simply be that Challenger is flying and 7 people will (probably) still be alive.
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