Virgin Galactic is the first company attempting to build a rocket company as a space tourism company. Every successful rocket venture has been funded through a mix of government satellite launches/ private space launches/ and government space agencies – NASA/ESA/Roscosmos. With the promise of space tourism, Virgin Galactic has a market cap of $4.2 billion built from its current proof of concept test flights. The company is proving its not vaporware just yet but maybe so for investors.
Companies that have been successful are payload to space operators primarily. Otherwise rockets to space have been government funded space programs (NASA/ESA/Roscosmos/Indian Space Program/Chinese Space Program). Short list of successful companies (none of them are for space tourism).
- United Launch Alliance
- Ariane Space
- Soyuz
- SpaceX #Winning
Why are rocket companies built for satellite launches or manned missions?
Cause its rocket science dummy!
– everyone
Realistically every rocket company has a very long development cycle (think 5+ years for a test launch) and coupled with many failures, rocket companies routinely spend multiple billions to get a space vehicle. Arguably, each of these vehicles are engineered to reach different orbits or multiple mission roles (launch a rover to Mars). Each of these design goals add complexity and complexity = more costs. However, multiple mission roles ultimately resulted in increased revenue from the various missions these rockets have delivered to space. Each of these rockets needed the satellite industry and government satellites/ space exploration missions.
Virgin Galactic will have only one mission profile tourism. Hoping that a tourism will be profitable to sustain the business requires mission ready vehicles. Currently, Virgin Galactic has had a couple successful tests. But, these launches are still tests. More testing will need to be done to prove reliability. Any manned space travel has to be engineered with no tolerance for failure.
Where exactly is Virgin Galactic going?
The company aims to go to near Low Earth Orbit before returning back to Earth. What exactly are all these orbits- Low Earth Orbit? Geosynchronous Orbits (GEO). See below highlighting the various orbits. Note how close LEO orbit is to Earth. And Virgin Galactic is not even getting there.
Virgin Galactic is proposing to reach 68 miles (109.4 KM). Low Earth Orbit starts at 100 miles (160 KM). Why is LEO orbit so important? At Low Earth Orbit an object will continue to expend energy but will be able to orbit the Earth. Achieving this orbit, would be the true experience of being in space – spacecraft in these orbits circle our planet once every ninety minutes or so (source: ESA). An individual aboard a spacecraft at this height would experience the size and scale of the Earth. The Virgin Galactic flight (see image 2), will reach the Thermosphere and touchdown. Lucky few who may fly these planes get a few minutes of weightlessness prior to touchdown.
Then we are not going to space, nor are we going to LEO, but we are going up really high. As potential or existing investors of Virgin Galactic its important consider that any spacecraft capable of offering launches to low earth orbit will dominate the Virgin Galactic Business. SpaceX is currently building the Starship rocket (100 person flight) which is at least Low Earth Capable. Elon Musk claims a launch will cost $2 MM. Each passenger would pay $20,000 for a Starship spaceflight. Even with a 10X cost inflation, the Starship would blast away Virgin Galactic’s craft. As investors, a major concern will be how fragile this company is to competition even with the generous assumption of its commercial craft success.
What about going really fast?
Fast commercial planes and why they failed
- Engineering is hard and expensive – see Lockheed Martin’s and exit of commercial plane manufacturing
- Concorde – Too expensive to operate
- American Super Sonic Transport Program Costs and Failure $13 billion in 2019 dollars
- Material Sciences – Titanium
Notable successful flights for Super Sonic Flights
- Boeing B1-B – $18,664 per hour of flight (Only supersonic capable heavy bomber)
- SR-71/ A-12 – $38,000 to $72,000 per hour of flight (Fastest known plane, used for surveillance)
Both of these flights have very expensive cost per flight hour. A comparable B-52 heavy bomber costs $5000 per flight hour. Its easy to understand why even the US Military has chosen not to make every flight to be supersonic. For the military only the fighter planes are almost always supersonic capable. But to go even faster, there has only been one – SR-71. While I cannot do justice to how difficult it was design and develop the SR-71, the plane was required to be almost be entirely made of titanium. Titanium is expensive compared to aircraft grade aluminum. And the fabrication process of titanium is much harder than aircraft grade aluminum. See NASA’s research paper on SR-71 : Design and Development of the Blackbird: Challenges and Lessons Learned for a more in depth study of the challenges of building the fastest plane. Faster planes need exotic expensive material.
Comparing the Concorde cost of flight using actual 1971 flight costs of 747.
- “747 $26,200 or 2.4c per seat/nmi
- Concorde $14,250 or 4.5c per seat/nmi”
The Concorde cost over twice what it costs to operate a 747 flight. Currently, the 747 has become obsolete due to flight costs and replaced by more fuel efficient planes like the Boeing 777 or Boeing 787/ Airbus A350. Passenger planes are designed for efficiency and flight cost per passenger flight hour. A supersonic flight would naturally cost more than a regular subsonic flight. The question becomes what is the value to pay more to fly faster? For business users faster internet would allow continuing work when flying. Like it or not conference calls are coming to a plane near you. For non-business flights, it will be flight of fancy for the rich. Until further demand studies, it seems unlikely that individuals are willing to pay 50,000 to 100,000 per flight hour to go really fast regularly (multiple times the speed of sound).
In summary, we need exotic materials, lots of money, and appetite for a really long development cycle (Boeing 787 started development in 2003 and delivered in 2012). We don’t want another max (737 Max) costs in our wallets.
The serious stuff – financials
| Annual Financials for Virgin Galactic Holdings Inc. | ||||||
| View Ratios | ||||||
| Fiscal year is January-December. All values USD millions. | 2017 | 2018 | 2019 | 31-Mar-20 | ||
| Sales/Revenue | – | – | – | 2.85M | 3.78M | 238,000 |
| Cost of Goods Sold (COGS) incl. D&A | – | – | – | 7.01M | 9M | 2.28M |
| COGS excluding D&A | – | – | – | 1.2M | 2M | 173,000 |
| Depreciation & Amortization Expense | – | – | – | 5.81M | 7M | 2.11M |
| Depreciation | – | – | – | 5.81M | 7M | 2.11M |
| Amortization of Intangibles | – | – | – | – | – | – |
| Gross Income | – | – | – | (4.16M) | (5.22M) | (2.04M) |
| 2017 | 2018 | 2019 | 31-Mar-20 | |||
| SG&A Expense | – | – | 610,631 | 163.03M | 155.14M | 58.93M |
| Research & Development | – | – | – | 116.73M | 129.17M | 33.38M |
| Other SG&A | – | – | 610,631 | 46.3M | 25.97M | 25.55M |
| Other Operating Expense | – | – | – | – | – | – |
| Unusual Expense | – | – | 141,285 | (28M) | 52.9M | – |
| EBIT after Unusual Expense | – | – | -751,915 | 28M | (213.26M) | – |
| Non Operating Income/Expense | – | – | – | 571,000 | 128,000 | -172,000 |
| Non-Operating Interest Income | – | – | 2.08M | 633,000 | 2.3M | 1.18M |
| Equity in Affiliates (Pretax) | – | – | – | – | – | – |
| Interest Expense | – | – | – | 10,000 | 36,000 | 9,000 |
| Gross Interest Expense | – | – | – | 10,000 | 36,000 | 9,000 |
| Interest Capitalized | – | – | – | – | – | – |
| Pretax Income | – | – | 1.33M | (137.99M) | (210.87M) | (59.98M) |
| Income Tax | – | – | – | 147,000 | 62,000 | -46,000 |
| Income Tax – Current Domestic | – | – | – | 2,000 | 27,000 | – |
| Income Tax – Current Foreign | – | – | – | 142,000 | 50,000 | – |
| Income Tax – Deferred Domestic | – | – | – | – | – | – |
| Income Tax – Deferred Foreign | – | – | – | 3,000 | -15,000 | – |
| Income Tax Credits | – | – | – | – | – | – |
| Equity in Affiliates | – | – | – | – | – | – |
| Other After Tax Income (Expense) | – | – | 1.86M | – | – | – |
| Consolidated Net Income | – | – | 3.19M | (138.14M) | (210.94M) | (59.93M) |
| Minority Interest Expense | – | – | – | – | – | – |
| Net Income | – | – | 3.19M | (138.14M) | (210.94M) | (59.93M) |
| Extraordinaries & Discontinued Operations | – | – | – | – | – | – |
| Extra Items & Gain/Loss Sale Of Assets | – | – | – | – | – | – |
| Cumulative Effect – Accounting Chg | – | – | – | – | – | – |
| Discontinued Operations | – | – | – | – | – | – |
| Net Income After Extraordinaries | – | – | 3.19M | (138.14M) | (210.94M) | (59.93M) |
| Preferred Dividends | – | – | – | – | – | – |
| Net Income Available to Common | – | – | 3.19M | (138.14M) | (210.94M) | (59.93M) |
| EPS (Basic) | – | – | 0.04 | -0.71 | -1.09 | -0.3 |
| Basic Shares Outstanding | – | – | 80.87M | 193.66M | 194.38M | 202.41M |
| EPS (Diluted) | – | – | 0.04 | -0.71 | -1.09 | -0.3 |
| Diluted Shares Outstanding | – | – | 80.87M | 193.66M | 194.38M | 202.41M |
| EBITDA | – | – | -610,630 | (161.38M) | (153.36M) | (58.87M) |
| Source MarketWatch Copyright 2020 FactSet Research Systems Inc. All rights reserved. Source FactSet Fundamentals |
Lose someone else’s money and not your own is true here. To move into the black, the company needs 940 tickets sold with no increase in costs. The company needs 118 launches per year or 2 launches per week. Ticket prices will likely climb as the company nears launch which then reduces the number of people willing to pay for this flight. Investors should consider how long they are willing to fund this project with no plan to be profitable.
Its not your money; why are you complaining?
The premise of the company is simply ridiculous. $250,000 per person for each launch. Assuming a full manifest for one year with a weekly launch of 8 people per launch and launching for half the year the company hopes to make $52 million per year in revenue before any expenses. If the company realizes half the revenue, $4.2 billion dollar valuation is absurd.
I have purposefully ignored the other giant space tourism company – Blue Origin by Jeff Bezos. In addition to tourism, Blue origin is attempting to build a medium to heavy launch rocket (until its built we don’t know its actual size) to delivery payloads to space. Importantly its self funded by Jeff Bezos. I am not qualified to advise Jeff on how best to spend his own money. Finally, SpaceX may build a rocket for tourism but the company can trace its origins and primary success from its Falcon its payload to space business.
Super Sonic transport (SST) venture is a pipe dream and importantly distraction from failure of commercially viable space tourism business. Materials Sciences for SST generally involve heat shielding/ Titanium (see Blackbird) or advanced composites from future R&D. Each unit has high costs from reliance on titanium. Titanium is expensive due to material cost and material complexity. SST transport has incredible demand for fuel which increases the per flight costs. In an era of cost minimization, SST is unlikely to take off quickly.
In an era of funding long shots, prudence and financial responsibility is sorely missing from investors in this company. Investors should consider how fragile this company is to competition. Investors are better served investing in Rocket Launch companies that have a viable business model.
Author investments- I currently do not own have any investment positions (long or short) in Virgin Galactic.
Citations
- Virgin Galactic Holdings (SPCE) (2020). Profile, business summary. Google Finance. Retrieved from http://finance.google.com.
- Musk’s comments, SpaceX’s Starship May Fly for Just $2 Million Per Mission, Elon Musk Says Space.com https://www.space.com/spacex-starship-flight-passenger-cost-elon-musk.html
- Wikipedia contributors. (2020, April 3). List of orbits. In Wikipedia, The Free Encyclopedia. Retrieved 04:06, May 9, 2020, from https://en.wikipedia.org/w/index.php?title=List_of_orbits&oldid=948905108
- B1-B cost per flight hour FORECASTING FLYING HOUR COSTS OF THE B-1, B-2 AND B-52 BOMBER AIRCRAFT https://apps.dtic.mil/dtic/tr/fulltext/u2/a483271.pdf
- SR-71 cost per hour Blackbirds Myth & Fact, http://www.blackbirds.net/bbirdm&f.html
- American SST -The Cost of the SST New York Times https://www.nytimes.com/1971/05/18/archives/the-cost-of-the-sst.html May 18, 1971