Virgin Galactic: Space Shuttle 2.0 (NYSE: SPCE)

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David Lienemann

Two years ago, I dove deep into Virgin Galactic Holdings, Inc. (NYSE: SPCE) and showed that Virgin Galactic – contrary to popular belief – lagged behind its competitors and was far too expensive for its prospects. Since writing, the stock has dropped significantly, but this may not improve the risk-reward ratio…

Current state

Blue Origin (BORGN) has conducted several successful manned flights using the New Shepard with tourists, making headlines around the world and creating value for its shareholders. In my previous article from two years ago, I predicted that Blue Origin was going to be a very big competitor for Virgin Galactic. On the other hand, Virgin Galactic has again postponed the launch of its commercial service to Q2 2023. Number of delays unknown.

As Jeff Bezos ferries passengers into space, Virgin Galactic continues to struggle to start operating. Why is that?

Spaceship

A historical comparison with NASA’s famous space shuttle project is in order. NASA attempted to launch the space shuttle project to reduce the cost of flight to space. The idea was that the reusability element of the Space Shuttle would reduce the cost of the flight. But in reality, this failed, because vertical take-off aircraft with capsules turned out to be significantly cheaper. A big problem was the reliability of the space shuttle which had catastrophic crashes 1 out of 9 times, a terrible score. Now SpaceX (SPACE) and Blue Origin have been able to build reusable vertical take-off aircraft; which consequently greatly reduced the cost of capsule flight. It makes you wonder why do we need Virgin Galactic’s inferior method to fly in space?

My previous article had a good summary of Virgin Galactic’s plans to enter space with its aircraft:

‘Virgin Galactic has a spacecraft called SpaceShipTwo to commercialize space travel, its design is based on the award-winning 2004 spacecraft developed by Mojave Aerospace Ventures. However, Virgin Galactic with Scale composites massively expanded the design to meet their needs. They also built a brand new aircraft called WhiteKnightTwo, specifically for space tourism, which carries the SpaceShipTwo up to 45,000 feet, after which SpaceShipTwo is released. Then the SpaceShipTwo flies through space using its powerful thruster, after reaching an altitude of 50 miles it stops and as a result the passengers experience microgravity. ~Robert Vink

(Source: Virgin GalacticIR)

(Source: Virgin GalacticIR) ((Source: Virgin Galactic IR))

As can be seen, the approach is similar to the Space Shuttle program. The space shuttle was also mounted on a booster or a Boeing 747.

Virgin Galactic was founded in 2004, and the first version of the aircraft comes from the XPRIZE competition that started in 1996. But ever since Virgin Galactic decided to take the original design one step further, the company has been plagued with problems.

Disorder

Virgin Galactic has a history full of dramatic events. In 2007, 3 employees died during an engine test. In 2014, cracks were discovered in the wings of the WhiteKnightTwo. Virgin Galactic only has one WhiteKnightTwo so far – if that plane is malfunctioning, it can no longer get the SpaceShipTwo into space. It’s cool to have three SpaceShipTwo planes, but without the WhiteKnightTwo they can’t fly – a flaw in that business. And exactly this plane had cracks in its wings in 2014. In 2015, the SpaceShipTwo crashed because the re-entry system was initiated too soon – resulting in the death of one person. Then in 2019, after one flight, a joint along the stabilizer of SpaceShipTwo came undone. A test driver said: “The structural integrity of the stabilizer assembly was compromised, I don’t know how we didn’t lose the vehicle and kill three people.”

Plus, you have a history of broken promises. In 2007, Richard Branson predicted that the SpaceShipTwo would be ready in a year. In fact, the first flight took place in 2014. In 2007, the SpaceShipTwo was estimated at 100 km, but now the goal is only 80 km. And the list of broken promises goes on and on. What’s going on?

I believe Virgin Galactic’s approach to space tourism is fundamentally flawed. The whole flight has a large number of steps with too high a risk of failure. Let’s not forget that Virgin Galactic is betting on sending massive numbers of passengers into space. All of these risks at every step contribute to making the whole flight too risky for space tourism.

Blue Origin flights are controlled from headquarters. During the flight, the booster and the capsule are separated, which makes the flight much safer. On the other hand, SpaceShipTwo has two pilots on the plane, and the WhiteKnightTwo also has two pilots inside. This increases the risk of human error. Virgin Galactic is a stunning example of the sunk cost fallacy. A person had a bad idea, but instead of stopping, it seems more interesting to invest a little more so that it finally succeeds. But will it ever happen?

Blue Origin IR

Blue Origin IR (blue original IR)

(Source: Blue Origin IR)

The reality is that Blue Origin and SpaceX’s approach is much better. Yes, sometimes the crash of reusable rockets is a big loss for the company, but the passengers are incredibly safe in the capsule. This is not only demonstrated by Blue Origin’s flawless record, but also by a decades-long history of space travel. Capsule-based approaches are significantly safer for humans. A good example of this is the Soyuz, with a 1% fatality rate and the Space Shuttle with a 1.7% fatality rate. But Soyuz hasn’t had a fatality since 1974. The space shuttle has had fatalities much later in its life. Soyuz is multitudes safer than the space shuttle.

Carry

Virgin Galactic is a company behind its competitors due to a bet on the wrong approach. Even NASA, an organization with far more capital and know-how, shut down the spacecraft program – which bears similarities to the Virgin Galactic flight. One has to wonder if Virgin Galactic will succeed and begin to create shareholder value.

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