Virgin Galactic: A Race Against Time? Will Space Tourism Ever Be Viable?

Introduction

The spa Mania of 2020 and 2021 was truly a once-in-a-generation spectacle to behold. Hundreds of questionable companies were able to raise hundreds of billions of dollars based on dubious business plans and financial projections. Today, almost all that money has disappeared.

In today’s article, we’re going back to the very beginning of the SPAC craze. This takes us all the way back to October of 2019, when Sir Richard Branson’s space tourism company Virgin Galactic went public by merging with Chamath Palihapitiya’s first SPAC. Being the first space tourism company ever to be listed on the public markets, Virgin Galactic soon became one of the hottest stocks on Wall Street.

In 2021, its market cap peaked at over 10 billion dollars before it had flown a single paying customer into space. Four and a half years later, the company is reaching the end of its rope. In June of 2024, their share price fell to below $1, putting them out of compliance with the New York Stock Exchange’s listing requirements. To solve this, they were forced to do a 1-for-20 reverse stock split.

Had you invested $11,000 into Virgin Galactic stock at its all-time high, you would have $7 today. While the company has succeeded in taking a couple dozen paying customers into space, their revenue is minuscule, and they’re burning more than $1 million per day. They are truly on the brink of bankruptcy.

In this article, we’ll look at why Virgin Galactic failed so disastrously and whether or not Space tourism will ever be a viable industry?

The bull case

Space is cool. Who wouldn’t want to go on a spaceship, experience zero gravity, and see the Earth’s curved surface from 100 km above the ground? Going to space will never be cheap.

When Virgin Galactic first started taking reservations in the early 2010s, the cost of each ticket was $250,000. In 2022, they raised the price to $450,000. So, how many people can afford to pay this type of money for a 2-hour flight?

In a recent report, the investment bank Credit Suisse estimates that there are over 200,000 ultra-high-net-worth individuals in the world. These are people with net worths in excess of $50 million. If you have $50 million, $450,000 is less than 1% of your net worth. This once-in-a-lifetime experience might just be worth the cost.

Because there are so many super-rich people in the world, the thinking was that if Virgin Galactic could get regulatory approval, there would be an almost limitless stream of willing customers.

Operating history

Virgin Galactic was founded by the British billionaire Sir Richard Branson all the way back in 2004. At the time, Branson targeted to launch commercial operations by 2007. Their launch system consisted of two parts: the mother ship and the suborbital vehicle.

The suborbital vehicle is where the passengers sit. The mother ship takes off like a regular airplane and flies up to an altitude of 50,000 ft. The suborbital vehicle detaches and flies up to 100 km above the surface.

Building spaceships isn’t easy; it’s literally rocket science. The suborbital vehicle travels at speeds of up to 3,000 mph in very extreme conditions. In 2014, Virgin Galactic’s suborbital vehicle, the VSS Enterprise, crashed, tragically taking the life of one of its test pilots. The proximate cause of the crash was human error, but an investigation also found that Virgin Galactic had inadequate safety procedures.

Despite this disaster, Branson wasn’t prepared to give up. He was fully committed to making a space tourism dream a reality. By this point, the company had already accepted deposits from approximately 600 people, totaling $80 million. They had the passengers already lined up; they just needed to make the spacecraft safe enough to get FAA approval.

So, they created a new spacecraft called the VSS Unity. Over the next few years, they implemented various improvements to the design to make it safer than its ill-fated predecessor. In June of 2021, 17 years after the company was founded, 14 years after their initial target, and 7 years after the VSS Enterprise disaster, Virgin Galactic finally received approval to fly paying customers into space.

In 2022, they also raised the ticket price up to $450,000. Charging so much money for each ticket, it should be easy for Virgin Galactic to make profits, right? Unfortunately, it’s not that simple.

Low launch frequency

Flying a spaceship isn’t like driving a car or even like flying an airplane. The extreme speeds, acceleration, and changes in temperature cause immense stress on the spacecraft’s wings and other components. After each flight, all parts of the spacecraft must be meticulously inspected, and damaged parts must be either repaired or replaced.

According to a shareholder lawsuit, Virgin Galactic’s spacecraft were not designed for regular space travel. Allegedly, the VMS Eve, which is the name of the mother ship, had cracks on its wings after every flight. Eventually, so many cracks appeared that the wings looked like spiderwebs or cracked eggshells.

While we don’t know if these specific allegations are true, it’s indisputable that significant amounts of maintenance need to be done in between each flight. This necessitates a very infrequent launch schedule.

When they received FAA approval in 2021, they didn’t actually fly their first paying customers into space until 2 years later, in June of 2023. Between June of 2023 and June of 2024, they flew a grand total of seven commercial space flights, carrying 23 paying customers. That’s an average of about one flight every 2 months. The VSS Unity has a maximum capacity of four passengers.

The passengers who reserved their tickets before 2014 paid $250,000. Passengers who reserved after 2022 paid $450,000. Even using the $450,000 number, Virgin Galactic can make at most $1.8 million per flight. The company has operating expenses of more than $100 million per quarter.

Even if the contribution margin was 100% (which it’s not), Virgin Galactic would need to fly 55 flights per quarter just to cover its operating costs. That’s more than one flight every 2 days. The VSS Unity isn’t even capable of doing one flight per month.

Space flight is complicated. Maintaining the spacecraft, maintaining the facilities, etc., costs a huge amount of money. For all this to work, Virgin Galactic needs to send many hundreds, if not thousands, of paying customers into space every year.

Delta class pipe dream

Currently, Virgin Galactic’s only working suborbital vehicle is the VSS Unity. Given the high maintenance burden and inability to launch frequently, this spacecraft is not commercially viable. So, in June of 2023, the company retired it. It will no longer be flying. Instead, they are going to develop a new spacecraft called the Delta Class. The Delta Class will have seats for six passengers and, importantly, it will be able to fly eight times per month.

Finally, once the Delta Class ships are ready, they plan to increase the ticket price again to $600,000. If you multiply six passengers, eight times a month, at $600,000 each, that’s $29 million in revenue per month. This is more than 10 times greater than the VSS Unity. This certainly looks good on a PowerPoint presentation, but how realistic is it?

Their target is for the Delta Class spacecraft to commence commercial operations in 2026. To date, the Delta Class spaceship does not yet exist. As of February of this year, they were still building the facility that will assemble the Delta Class. We don’t even know what the Delta Class is going to look like. Currently, all we have are vague CGI renderings.

On June 5th of 2024, Virgin Galactic CEO Michael Colglazier participated in an investor conference where he gave some details about the Delta Class. He said it will look and fly very similar to their old VSS Unity but will be able to fly eight times more frequently. He didn’t explain how they’re going to achieve this. The assembly facility will be complete by the end of the summer. Final assembly of the first two Delta Class spaceships will be completed in 2025. They will begin commercial operations one year later, in 2026.

For comparison, the VSS Unity began flight testing in 2016. Its first revenue-generating flight was 9 years later, in 2023. We are supposed to believe that the testing phase of the Delta Class spacecraft only needs to be one-ninth the duration as the VSS Unity. For the Delta Class to fly eight times more frequently than its predecessor, it almost by definition needs to have new types of advanced technologies or a new and innovative design philosophy. You would think that any spacecraft with a novel design would require significant testing before it starts carrying passengers.

The real reason behind the aggressive timeline may have to do more with the company’s financial position. As of March 31st, 2024, they had $800 million in cash, restricted cash, and short-term investments. Their free cash flow is negative $125 million per quarter. At the current rate of burn, they would run out of cash before the end of 2025. They plan to cut costs and reduce their cash burn, so they claim that their $800 million of cash will be enough to get them through to 2026 when their Delta Class spacecraft will supposedly start generating revenue.

The company also has $425 million in debt coming due in February of 2027. Investors have completely lost faith in Virgin Galactic; their market cap has shrunk to just $160 million. Given how tiny their market cap is, it’s hard to imagine how they could raise $425 million to pay off their debt. Conveniently, the game-changing Delta Class spaceship is supposed to start generating revenue in 2026, right before the debt comes due.

If Virgin Galactic can prove that the Delta Class is legit, maybe their stock price will go up and they’ll be able to raise more capital. Virgin Galactic is in a desperate race against time. They need to start generating revenue with the Delta Class before February of 2027. Desperate people are more likely to cut corners, and if you cut corners in space flight, the results can be catastrophic.

Demand

Even if Virgin Galactic meets their target of Delta Class commercial launches in 2026, it’s unclear if there will be enough willing customers. For the Delta Class spacecraft to operate at maximum capacity, they’ll need to fly 1,150 passengers per year.

The original bull case was that there are so many multi-millionaires in the world that Virgin Galactic would be supply-constrained for the foreseeable future. Here’s a short clip of the SPAC promoter Chamath Palihapitiya explaining the massive pent-up demand for space tourism in 2019:

“There are already 600-plus customers that have paid, um, you know, 80 million, about 120 million of future business. There are 3 or 4,000 more. After today, I suspect there’ll be many more thousands after that who want to give us money.”

Prior to 2014, Virgin Galactic received deposits from 600 future customers. In 2014, they closed reservations. Because reservations were closed for so long, there was supposedly a massive pent-up demand. According to Chamath, as of 2019, there were 3 or 4 thousand more people who wanted to reserve. As a result of the publicity from the SPAC, he expected many more thousands of people would want to reserve their seats.

In 2022, they finally reopened ticket sales. If you’d listened to Chamath, you might have expected the floodgates to open and thousands of people to reserve their tickets immediately. Unfortunately, this pent-up demand never materialized. As of March 31st, 2024, they had about 700 reservations. Up to that point, they had flown a grand total of 19 paying customers into space. The number of new reservations since 2022 was probably about 120 people.

So why are so few people signing up? Even if you were a billionaire and $450,000 was nothing to you, that doesn’t necessarily mean that you would want to ride on Virgin Galactic. Aside from money, safety is a huge concern. It’s important to remember that their first 600 reservations happened before the fatal accident in 2014, and I’m sure the 2023 shareholder lawsuit didn’t help either.

Secondly, potential customers can see Virgin Galactic’s collapsing share price and desperate financial position. If you buy a ticket, there’s a significant chance the company won’t even exist by the time your flight is supposed to happen. It’s theoretically possible that a company can meet its targets and narrowly avoid bankruptcy, but to be honest, at this point, it looks like a slim chance.

Virgin Galactic was a bold and innovative idea, but with current technologies, space flight is still far too difficult and expensive to be viable for tourism. Maybe at some point in our lifetimes, a new space tourism company will find success, but Virgin Galactic is probably multiple decades ahead of its time.

Alright, guys, that wraps it up. What do you think about Virgin Galactic? Let us know in the comments section below.