by Douglas Messier
After 15 years of making extravagant but unkept promises to fly more than 600 “future astronauts” to space, Richard Branson must now please an entirely new group of people who are usually much shorter on patience: shareholders.
Following the completion last week of a merger with Social Capital Hedosophia (SCH), the British billionaire’s Virgin Galactic suborbital “space line” will begin trading under its own name on the New York Stock Exchange (NYSE) on Monday.
Going public now is an unusual move for a space tourism company that hasn’t flown a singlet tourist to space since Branson announced the SpaceShipTwo program in 2004. Some might see it has putting the cart before the horse.
SpaceShipTwo has flown only two suborbital flights to date. Powered flights total a mere nine, with one failure. Commercial missions originally promised for 2008 will now take place sometime next year. Suborbital space tourism doesn’t even exist as an industry..
Adding to the investors’ concerns: flying aboard rocket-powered vehicles is inherently dangerous. Boosters have a tendency to explode, wander off course and otherwise fail spectacularly. The SpaceShipTwo program has already claimed three lives in a test stand explosion, and one more in an in-flight breakup.
Given all this, what did Virgin Galactic promise to SCH shareholders to get them to approve the merger? And what is it offering people who might decide to buy shares on Monday?
In a word, alot.
Would you believe Branson’s company expects to safely launch one SpaceShipTwo every 32.4 hours in 2023? That it would be profitable in the second year of operation? And that the company is pursuing the development of hypersonic (Mach 5+) civilian transports that would take passengers from New York to Tokyo in a couple of hours?
Virgin Galactic and SCH spelled out these ambitious plans in investor and analyst presentations filed with the Securities and Exchange Commission (SEC) to support the merger.
Before we dig into the numbers, let’s first take a look at the disclaimer that was the second slide in the analyst presentation. (Read a clearer version here.)
To summarize, the presentation is for informational purposes only, is not all inclusive of costs and risks, and includes a lot of “forward looking statements” that Virgin Galactic might never deliver on. The financial and operating forecasts and projections also have not been reviewed by independent public accountants.
In other words, caveat emptor. Buyer beware. Now let’s look at what Sir Richard’s company promised.
An Unprecedented Number of Flights
Virgin Galactic plans to begin flying passengers in June 2020 on its lone completed spacecraft, VSS Unity. The vehicle would carry four passengers initially, increasing to five in 2021.
SpaceShipTwo-02 and SpaceShipTwo-03, which are now under construction at the Mojave Air and Space Port in California, would be completed by the end of 2020 and 2021, respectively. They would begin carrying five passengers per flight before moving to full capacity with six.
Virgin Galactic is also planning to build two additional SpaceShipTwos taht would carry six passengers apiece from the beginning of commercial service. Those ships would begin flights in 2022 and 2023.
The chart above shows the number of passengers rising from 66 next year to to 1,565 in 2023. In total, Virgin projects flying a total of 3,242 passengers over the four-year period.
|SpaceShipTwo Flight and Passenger Projections by Fiscal Year|
|Total Number of Flights per Year||16||115||170||270|
|Total Number of Passengers Flown||66||646||965||1,565|
|Launch Cadence||22.8 days||3.18 days (76 hours)||2.14 days (51.5 hours)||1.35 days (32.4 hours)|
|Average Number of Flights per Vehicle||8||38.33||42.5||54|
|Average Number of Passengers per Flight||4.1||5.6||5.7||5.8|
|Sources: Virgin Galactic/Social Capital Hedosophia data and Parabolic Arc calculations|
The number of flights would increase from 16 next year to 270 in 2023, with a total of 571 over four years. The launch cadence would rise from roughly once every 22.8 days to once every 32.4 hours during that period. The five spaceships would need to launch 54 times apiece to conduct 270 flights in 2023.
These numbers would be unprecedented in the history of human spaceflight since 1961. Nobody has even tried to launch as often or fly as many people. Since 1961, there have been 321 orbital and 20 suborbital crewed launches.
|HUMAN SPACE LAUNCHES, 1961-2019|
|PROGRAM||LAUNCHES||FAILURES (INFLIGHT LOV/LOC)||ABORTS||FATALITIES|
|Soyuz||143||2||3 (2 in-flight, 1 launch pad)||4|
|Suborbital Launches (Above 50 Miles/80.4 Km)|
|* The flight of SpaceShipTwo VSS Enterprise on Oct. 31, 2014 did not involve an attempt to reach space. The flight resulted in the loss of the vehicle and the death of co-pilot Mike Alsbury.|
The X-15, which is the world’s most flown rocket-powered space plane, flew 199 times in 9.5 years. Only 13 flights reached suborbital space above 50 miles (80.4 km). One of them crashed, destroying the vehicle and killing pilot Michael J. Adams.
SpaceShipTwo has flown nine times under power, with two flights above 50 miles (80.4 km). Additional flight tests to space are planned before commercial service begins next year.
VSS Enterprise broke up on its fourth flight test — destroying the ship, killing co-pilot Mike Alsbury, and landing pilot Pete Siebold in the hospital with serious injuries.
The SpaceShipTwo program also suffered three casualties in a ground test accident in 2007. Engineers Eric Blackwell, Todd Ivens, and Charles “Glenn” May died when a nitrous oxide tank exploded on a test stand at Mojave.
Branson’s rocket plane is a much larger version of SpaceShipOne, which flew to space three times and under power only six times. Two of the three spaceflights experienced serious problems during flights.
A Bad Day
In 2005, a team at New Mexico State University wrote a business plan for the planned Southwest Regional Spaceport. The facility, since renamed Spaceport America, is where Virgin Galactic is now anchor tenant. The business plan identified accidents as a key risk to the spaceport:
Perhaps the most troublesome and, therefore, most important technological force New Mexico faces in developing and managing the Southwest Regional Spaceport is safety. A fatal accident in commercial aviation barely attracts attention beyond the evening news and causes only a minor hiccup in air travel, if having any effect at all.
A fatal accident in a NASA mission, for example the Shuttle, grounded the fleet for nearly two years and caused a national debate about the merits of manned spaceflight. An accident, which is certainly possible in the emerging commercial space market, could be fatal to the industry if not to particular individuals.
It’s one thing for a test pilot and engineers to die during development. But, what if a half dozen celebrities perish on a single, high-profile flight because their stylish blue “spacesuits” failed to protect them from a sudden high-altitude decompression?
What would happen to reservations as the gory details rapidly spread around the world? How long might the vehicles be grounded? And what might the resulting accident investigation reveal about safety standards? Might pressure to produce profits have played a role in the accident, as occurred with Boeing’s 737 Max’s fatal crashes?
Unlike with commercial airliners, passengers are dependent on the due diligence of their launch provider. Before flying, passengers will be required to sign waivers releasing Virgin Galactic and its suppliers from liability in the event of injuries or deaths. The only exceptions are for gross negligence or intentional harm.
The Federal Aviation Administration (FAA) will not certify SpaceShipTwo as it does airliners. The agency is prohibited from formulating safety regulations for passengers and pilots until after there is a close call or fatal accident.
The FAA’s main concern at present is that people and property not involved in the flight are not injured, killed or damaged if there is a space tourism accident.
All that could change after an accident or close call. Virgin Galactic might find its fleet grounded even longer than it might otherwise be in order to comply with new safety regulations.
A Growing Total Addressable Market (TAM)
Let’s assume for the sake of argument that Virgin Galactic can safety reach the flight rates it has promised to investors. Is there an actual market to support it? Unsurprisingly, Branson’s company believes there is one.
Virgin has $80 million from about 600 reservation holders who have put down deposits on tickets costing $200,000 or $250,000 apiece. (Ticket prices were raised by $50,000 in 2013.) Current reservations amount to 18 percent of the 3,242 passengers Virgin projects it will fly during the first four years.
Virgin Galactic said it had more than 700 reservations prior to the fatal crash of SpaceShipTwo Enterprise on Oct. 31, 2014. Commercial sales were suspended after the accident.
Despite the loss of about 100 reservations over the past five years, Virgin points to the loyalty of ticket holders who have remained as evidence there is a large market for suborbital space trips. Some have been waiting for more than a decade to fly.
The company estimates there are approximately 1.9 million people with net worth of more than $10 million. That number is expected to grow to nearly 2.4 million by 2023 due to economic growth and growing income inequality.
The number of high net worth individuals worth between $1 million and $5 million totals 37 million. That is a potential market if Virgin Galactic can reduce its current ticket price of $250,000.
The trend to date has been largely in the opposite direction since Branson announced Virgin Galactic in September 2004. Ticket prices started at $208,000, fell slightly to $200,000, and increased to its current level following SpaceShipTwo’s first powered flight in April 2013.
Branson has since announced that the price would increase again once Virgin Galactic restarts ticket sales. That is expected to occur after commercial service begins next year.
The investor presentation projects that each SpaceShipTwo flight will bring in $1.25 million based on five passengers paying an average of $250,000 per seat. After expense, there would be a 66 percent contribution margin totaling $820,000.
The presentation estimates it will cost $121,000 for nitrous oxide and a rubber fuel motor that must be replaced after each flight . The figure assumes that the “price per rocket motor decreases over via additional investments and manufacturing capabilities, as well as learning curve efficiencies and benefits of economies of scale, modestly offset by inflation; fuel costs increase gradually over time, driven by inflation.”
Three days of passenger training, the flight on day four and insurance will total $193,000 per flight. It’s not clear what portion of this amount is insurance. The amount could rise significantly if there is a serious accident.
Operations costs account for another $118,000 per flight. This category includes fleet management, consumables and other flight-related expenses.
The above slide has summary of flights, passengers flown and revenues. Virgin Galactic is expecting revenues to rise from $31 million in 2020 to $590 million in 2023. The four year total would amount to $.1.23 billion.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) would be a negative $104 million in 2020 based on flying 66 passengers on 16 flights.
EBITDA would total $12 million in 2021 rising by $274 million in 2023 based on a launch cadence of every 32.4 hours that year. EBITDA would total $327 million over the four-year period.
This figures do not include what Virgin Galactic will need to spend in capital expenditures to expand its fleet of vehicles and perform other tasks.
The above charts project $225 million in capital expenditures from 2020 through 2023. The expenditures include the cost of completing and testing four additional SpaceShipTwo vehicles and an additional WhiteKnightTwo carrier aircraft.
EBITDA and capital expenditures would total a negative $156 million in 2020 and minus $48 million the following year. The projections improve to $86 million in 2022 and $219 million in 2023. The four-year total would be $101 million.
Virgin Galactic also has another revenue stream from flying microgravity experiments aboard SpaceShipTwo. The company’s ultimate ambition is rapid passenger service between distant cities on Earth.
Earlier this month, Boeing announced it would be investing $20 million in Virgin Galactic to “work together to broaden commercial space access and transform global travel technologies.”
“Boeing’s strategic investment facilitates our effort to drive the commercialization of space and broaden consumer access to safe, efficient, and environmentally responsible new forms of transportation,” said Brian Schettler, senior managing director of Boeing HorizonX Ventures. “Our work with Virgin Galactic and others will help unlock the future of space travel and high-speed mobility.”
The X-15 is the only piloted rocket-powered aircraft known to have flown to hypsonic speed. On Oct. 3, 1967, William J. “Pete” Knight flew X-15A-2 to Mach 6.70 (4,520 miles per hour/7,274 km/h; 2,021 m/s), a record that remains unbroken today. The vehicle was retired after the flight.
Much progress has occurred in hypersonic flight and composite materials over the past 52 years. However, developing a vehicle capable of safely carrying passengers at speeds exceeding Mach 5 that can obtain FAA certification remains a challenging task.
Virgin Galactic will also face competition from SpaceX’s Starship, which Elon Musk is designing to rapidly fly passengers between distant cities.
Since the investor and analyst presentations are essentially sales documents, they leave a number of unanswered questions. One of them is how accurate Virgin Galactic’s projections will be once rival Blue Origin begins flying passengers in its New Shepard suborbital vehicle.
After 11 successful suborbital flight tests, Jeff Bezos’ company is planning two more launches with no one aboard. The first flight tests with people aboard are likely to occur sometime next year.
Blue Origin has not started selling tickets yet, although an official recently said the price would be in the hundreds of millions of dollars. Whether Bezos’ company will undercut Virgin Galactic remains to be seen.
Due to the lack of solid information about Blue Origin’s plans, Virgin Galactic’s presentations don’t have a lot of competitive analysis.
Suborbital space tourism doesn’t exist at the moment. Virgin Galactic and Blue Origin are inventing a new industry with many risks and unknowns. Nobody knows how reliable the vehicles will be over the long term. Or how tolerant people will be if there are accidents.
Virgin Galactic is going public promising unprecedented things to shareholders. The number of flights and passengers are very ambitious. On these the promised revenues all depend.
The only thing to say right now is, we’ll see. And good luck.