Virgin Galactic 'on track' for Spaceflights by Year-end, Despite Financial Challenges

Feb. 26—Virgin Galactic is steadily laying the business and manufacturing foundation for commercial launch of space tourism operations later this year, but it's burning through a lot of cash along the way.

During the company's latest earnings call with investors on Feb. 22, CEO Michael Colglazier said "enhancement" work on the VSS Unity passenger rocket — and on the VMS mother ship that flies the Unity part way to space — is advancing on schedule, paving the way to restart test flights this summer, and then tourist rides to space for paying passengers by year-end.

"We're on track to launch commercial operations in the fourth quarter," Colglazier told investors. "Enhancement work on our current vehicles is progressing well and on track for completion in the third quarter."

Flights out of Spaceport America in southern New Mexico came to a halt last summer, after company founder Sir Richard Branson made history by successfully rocketing into suborbit with other Virgin Galactic crew members. Branson's July 11 achievement as the first billionaire entrepreneur to fly to space on his own commercial rocket ship represented a turning point in civilian spaceflight, marking the official launch of the world's long-awaited space tourism industry.

But following that historic flight, Virgin Galactic initiated a prolonged hiatus to improve the durability and rapid reuse of its current spaceships to prepare for sustained commercial service for paying passengers, who will pay $450,000 each for joyrides into suborbit where they can float for a few minutes in microgravity and enjoy spectacular views of Earth below.

Alongside those enhancements, the company is also preparing its second spaceship, VSS Imagine, to enter commercial service by early 2023. And, it's simultaneously laying the infrastructure and business framework for rapid manufacture of its next-generation "Delta" class rockets, which will allow the company to produce a fleet of spaceships that could begin weekly flights from Spaceport America by 2025, Colglazier told investors.

But while the company plows forward on its business plans, it's navigating through significant financial challenges that aren't likely to improve until commercial, revenue-generating operations begin. And even then, the company doesn't expect to become cash positive, much less profitable, until at least 2026, when its Delta class rockets are shuttling paying customers to space on a regular basis, Chief Financial Officer Doug Ahrens said during last week's earnings call.

In the meantime, it's pumping hundreds of millions into developing the manufacturing infrastructure for long-term sustainability and growth, with huge monetary losses mounting up each quarter. The company lost $81 million in fourth-quarter 2022, and $353 million for all of last year. That pushed total losses over the past two years to nearly $1 billion, after adding in the $645 million in net losses it logged in 2020.

And its stock price has plummeted from a peak of $62.80 per share in February 2021 to $8.22 as of Thursday.

Paving the runway

Still, 2021 represented a watershed year for Virgin Galactic, allowing it to move from nearly two decades of research and development of its foundational spaceship technology to manufacturing operations and a service-oriented business strategy.

"We achieved many important milestones in 2021 that laid an essential foundation towards becoming a scaled, commercial operation," Colglazier said.

The company conducted two successful launches into space, including the Branson flight, which generated worldwide media attention. It also received Federal Aviation Administration approval last summer for a full commercial launch license to fly its vehicles out of Spaceport America.

Now, the company is squarely focused on scaling its business by enhancing its current spacecraft for commercial launch this year, finishing the design and manufacturing base for its next-generation rockets, and rolling out a broad customer service model that can appeal to potential space tourists across the globe who have the monetary means to board Virgin Galactic's suborbital flights.

The vehicle enhancements and next-gen manufacturing preparation aim to grease the wings for regular passenger service, beginning with one rocket launch per month when the VSS Unity starts flying again in late fall, and then two more flights per month when the VSS Imagine is ready for commercial launch early next year, Colglazier said. When the Delta rockets become operational starting in 2025, the flight schedule will begin ramping up, eventually reaching 100 launches per year.

"We'll reach three flights per month with our current ships, and then ramp and scale operations with more (Delta class) ships," Colglazier said.

Current-ship enhancement includes modifications to improve durability, reliability and predictability, reducing time spent on maintenance, testing and verification of craft for a faster turnaround between flights, Colglazier said. The company, for example, is reinforcing the joints and components on its ships to reduce maintenance needs.

The Delta class, in contrast, will be fully designed for assembly-line manufacturing using national aerospace suppliers to build the sub assemblies, and Virgin Galactic doing final integration.

"We did the design and manufacture of our current ships in-house," Colglazier said. "That was critical during the flight-test phase of development, but it's a slow and expensive process. Now, we'll use tier 1 suppliers for the Delta, and for future mother ships, taking advantage of the nationwide aerospace system while focusing in-house work on further design and engineering."

The company is in advanced negotiations with suppliers, and it's developing the engineering models for subcontracted manufacturers to seamlessly build parts and components, said Ahrens.

"Subsequent (Delta) ships will be produced in a replicable, scalable fashion to drive down costs," Ahrens said. "We expect to build up to six (Delta) ships per year. ... We're using advanced modeling for more predictable parts manufacturing."

The company is planning a new engineering and design headquarters to be located in San Diego. And it will open a separate assembly facility in 2023 for final ship integration.

Once the company has produced a fleet of ships for operations at the New Mexico Spaceport, it will start making more fleets for use at forthcoming spaceports in other parts of the world.

The goal is to maximize flight rates to generate a large, regular flow of revenue, potentially allowing it to become cash positive by 2026.

"At that point, we expect to reach economies of scale as we add multiple ships and spaceports," Ahrens said.

Customer base

The company reopened ticket sales this month for a limited number of seats. It currently has 750 passenger reservations on the books, with a goal of 1,000 reservations by the time it launches commercial service later this year.

Tickets now cost $450,000 — up from a $250,000 price tag in years past — with an upfront $50,000 deposit required to reserve a seat.

"When we reach 1,000 astronauts (paying passengers), we'll build a priority line for future customers with a $10,000 deposit to join," Colglazier said.

At nearly a half million dollars per seat, the company's customer base will be limited to people with money to burn. But thousands of wealthy individuals have expressed interest around the world.

"The majority of seats to date have been sold to individual fliers," Colglazier said. "But we've also had sales for couples, and for families that have reserved full-ship purchases. It's a good mix."

And as space flights increase and the company begins expanding its fleet to more spaceports in other places, Virgin Galactic believes reservations will grow significantly, including repeat customers.

"We believe demand will outstrip supply for quite a while," Ahrens said. "We expect repeat customers who fly at one spaceport will then fly at another one to see the world from space from different locations."

Independent industry analysts agree that, at least for now, the company does have a significant customer base that can fill up the six passenger seats available on each rocket. And it will generate substantial income as well from public agencies and private companies that buy space on its ships for experiments in microgravity.

But it's unlikely to become affordable for the general public, certainly not in the short term, if ever, said Henry Hertzfeld, a research professor with George Washington University's Space Policy Institute.

"I don't see any mass market out there, and I wonder what the long-term viability is for taking people to space," Hertzfeld told the Journal. "At a half million dollars per flight, these are people who can afford it and who want to spend their money on it. But even with those customers, the company probably can go for several years without exhausting its potential market."

Profitable economics?

In fact, demand may be less a concern for investors than Virgin Galactic's capacity to serve paying passengers, said Rich Smith, a writer for the investor advisory service The Motley Fool who follows Virgin Galactic on the New York Stock Exchange.

With only three flights per month projected once the VSS Unity and VSS Imagine are both flying next year, the company will continue bleeding capital as it works to create its Delta fleet and ramp up services. If Virgin Galactic continues to lose $81 million per quarter as it did in the last three months of 2023 — and considering the per-seat ticket price of $450,000 — the company would need to triple its number of monthly flights just to break even, Smith said.

"They need 30 flights every quarter, or one flight every three days, to break even," Smith told the Journal. "And even if they could achieve that, it doesn't account for all the higher costs that come with operating more flights."

Indeed, apart from regular maintenance between launches, the company must install a new rocket engine — the only nonreusable part of the spaceship — every time it flies at a cost of $250,000 per motor.

"Basically, the economics are not looking very good," Smith said.

For now, however, Virgin Galactic still has a lot of capital to finance investments and operations going forward, with $931 million in cash, cash equivalents and marketable securities on hand as of Dec. 31. And in January, it raised another $425 million in gross proceeds from a convertible debt offering.

That's a lot of cash to keep going.

"I believe companies can lose money for a lot longer than anyone believes without going bankrupt," Smith said. "I do believe Virgin Galactic will get its business off the ground. But from my perspective, for right now, its business model doesn't really work."

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