Is Richard Branson’s Virgin Galactic “space tourism” or just a glorified plane ride? Blue Origin, owned by rival billionaire Jeff Bezos, argues it’s the latter because the bearded tycoon last weekend did not cross the Kármán line, the internationally recognised boundary of proper space. There’s another similarity. Without a big jump in ticket prices, the $8 billion company’s financial trajectory may resemble the loss-making Virgin Atlantic airline.
Last Sunday’s successful test-flight was a publicity coup for Branson, who beat the Amazon.com founder’s maiden flight by just over a week. It should also pave the way for Virgin Galactic to carry its first paying passengers next year. But the undoubted technological achievement does not necessarily mark the dawn of commercial success.
Financial consequences
In its 2019 investor blurb, Galactic reckoned that within four years it would be flogging 1,545 seats a year at around $360,000 each, netting some $560 million of revenue. After deducting expenses like rocket motors and pilot wages, it would earn $274 million of EBITDA, easily enough to finance the $55 million a year it needs for new craft and to reward shareholders.
Launch delays have pushed those estimates back by two years, which means Virgin Galactic’s enterprise value is currently 27 times expected EBITDA for 2025. Some reckon this undersells the opportunities in commercial space travel. Cowen analysts argue that the company will capture a slice of an ultra-high-speed global travel market which will be worth $1 trillion by 2050. They arrive at a $12 billion valuation by applying a multiple of 22 times expected EBITDA at the end of the decade.
Options galore
The shorter-term risk, however, is that Branson is unable to charge significantly more than the $250,000 at which he flogged early-bird tickets. At that level, his sums leave little margin for error. Projected 2025 revenue drops to $386 million, leaving EBITDA of just $69 million assuming costs stay the same.
Admittedly, early tickets were probably discounted. But raising prices just as competitors like Blue Origin or Elon Musk’s SpaceX leave the launchpad may be tough, especially when the latter two have eventual scope to offer full orbital flight. Those for whom money is no object will gravitate towards the most out-of-this-world experience, potentially leaving Virgin Galactic to offer a lower-thrills alternative. Investors should be prepared for a bumpy re-entry.