Virgin Galactic endgame: Air travel 50% faster than Concorde – and profitable?
Galactic Virgo (SPCE -6.77% ) the stock took off like — what else? – a rocket this week, rising almost 30% in the first three trading days alone.
Experts attribute the stock’s sudden popularity to a widely circulated report from the investment bank Morgan Stanley, which approved bright and early Monday morning stock. In its report, MS predicted that while Virgin Galactic may look like a gamble on space tourism today, in the longer term, Virgin has “a chance to disrupt the multi-trillion dollar airline market” by developing a fleet of point-to-point aircraft capable of ferrying air travelers through the Earth’s atmosphere at hypersonic speeds.
Now all that could have given Morgan Stanley this idea?
Virgin Galactic speaks
It turns out that Morgan Stanley’s vision for Virgin Galactic’s long-term plans appears to come from Virgin Galactic itself. Specifically, from Virgin Galactic’s Chairman of the Board, Chamath Palihapitiya, who, in an interview at the 2019 Phocuswright conference in Miami last month, laid out his vision for the “space” business in the 20 to 30 coming years.
You see, ferrying tourists to the edge of space in a “SpaceShipTwo” (SS2) space plane, six at a time and at a cost of $250,000 per ticket, is just the beginning of this story. Virgin Galactic plans to begin these flights sometime next year, the culmination of 17 years of development work and approximately $1 billion of investment to validate the “very difficult technical concepts” involved in the flight. aircraft at hypersonic speeds and at altitudes of 100 kilometers above the Earth’s surface. where things get really interesting, however, is after Virgin Galactic proves it can safely conduct tourist operations at this speed and height (SS2 will technically fly through Earth’s thermosphere at twice the height of the stratosphere).
You see, there isn’t much of a technological difference between getting passengers up to that height and then getting them back down to where they started and getting them up to that height and getting them down…somewhere else. Theoretically, at least, Virgin Galactic space sightseeing flights could one day evolve to hypersonic commercial trips using the same or similar vehicles, perhaps as little as five to ten years from now.
Point-to-point travel at speeds faster than a Concorde
To put this scenario into context, when Air France flew its Concorde supersonic airliner commercially, this aircraft flew at altitudes approximately twice as high (18 km) as most other commercial aircraft, and reached speeds maximum of Mach 2 (twice the speed of sound). But Palihapitiya notes that Concorde generally only achieves such fast speeds when flying over water, with concerns about sonic booms hampering its ability to drastically reduce flight times.
In contrast, when flying at much higher altitudes (in Earth’s thermosphere, where there is little air to “boom”), and at speeds nearly twice the Concorde’s top speed, Virgin Galactic believes within a decade or less, it could offer trips between Los Angeles and Hong Kong in as little as two hours (compared to the 13 hours it takes to get there today). A hypersonic flight from San Francisco to London could be completed in as little as 90 minutes.
Theoretically, says Palihapitiya, “it’s a product that could…carry passengers across two points in the world roughly…one-fifth the time of a traditional aircraft”, which would be “completely transformational in the world of travel and tourism.
The Virgin Galactic Business Case
How will this transformation take place?? As Palihapitiya describes it, Virgin’s plan is to “start small,” fly small hypersonic spaceplanes on space sightseeing flights, “and prove quality and value ‘first,’ then slowly and methodically. .to expand the market” to offer commercial point-to-point travel services, selling more and more flights at ever lower prices.
Yes, initially this service will be very expensive – see the $250,000 ticket price mentioned above. But that’s not necessarily a bad thing, at least not for Virgin Galactic stock investors. Palihapitiya is keen to emphasize his view that “companies that win” in the long run are “companies that focus on free cash flow and profitability and simply run their business prudently.” If $250,000 per ticket is what it takes to keep Virgin Galactic solvent, then that’s what the company should charge first.
As for longer-term profitability, it’s worth pointing out that while Concorde ended up losing money for its operator Air France, especially after suffering an accident in 2000 that killed 113 people, there was ” few years” where it was profitable. This suggests there is potential for a commercial carrier service from Virgin Galactic to also be profitable, especially if it can cut costs and grow its customer base.
And over 10 to 15 years, Palihapitiya believes in it should It may also be possible to lower the cost of hypersonic flights from “hundreds of thousands” of dollars to “tens of thousands” – in a cost-effective way – which logically would attract more customers.
Admittedly, even a ticket price of $10,000 and above still doesn’t seem particularly cheap. But maybe it’s cheap enough to expand the billionaire-class market and make such flights accessible to well-heeled corporate executives, for example. Then, over time — Palihapitiya doesn’t say precisely how long — he sees hypersonic ticket prices fall back toward the cost of an economy-class ticket today.
At this point, traveling around the world in a few hours could become an available – and affordable – service for everyone. (And profitable for Virgin Galactic investors to boot.)
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.