Virgin Galactic is rocketing to new heights, but major challenges lie ahead

Sep. 10—Virgin Galactic is racking up huge achievements in its effort to build the world's first commercial space tourism operation at Spaceport America in southern New Mexico.

The company flew three more paying passengers to space on Friday, marking the third time in less than three months it's successfully flown both researchers and space tourists into suborbit since June, and the fourth time overall that the company's VSS Unity spaceship has rocketed into the cosmos since the spring.

Those are unprecedented milestones in the world's rapidly-emerging commercial space industry, making Virgin Galactic the clear No. 1 global leader in building an entirely new space venue for wealthy adventure tourists to grasp a personal glimpse into the next frontier.

Jeff Bezos' Blue Origin — Virgin Galactic's closest competition in the space tourism industry — flew a half-dozen missions with private astronauts in 2021 and 2022. But it stopped flying paying passengers a year ago after its rocket blew up during an uncrewed flight in Texas, and it's unclear when that company's "New Shepard" launch vehicle will take off again.

"Virgin Galactic has clearly surpassed Blue Origin," long-time space technology writer Eric Berger told the Journal. "Virgin Galactic is the true space tourism leader now."

Berger was among some 60 reporters who attended Virgin Galactic's second commercial flight at the spaceport in early August, which marked the first time paying passengers, rather than research scientists, boarded the Unity's six-passenger cabin for a ride to space.

Berger, a certified meteorologist, is senior space editor at the technology-focused publication Ars Technica, and author of the book "Liftoff," about the rise of Elon Musk's company SpaceX. In a blog-style article published in Ars Tecnica after the Aug. 10 flight, Berger said he attended the event not just to observe the company's inaugural launch for paying passengers, but to dig deep into both the company's achievements and its challenges going forward to better assess Virgin Galactic's chances for success.

"It was a moment," Berger wrote after the August flight. "But will it be a fleeting moment? ... Does Virgin Galactic have a successful future?"

That's a hard question to answer, and one that Berger, other industry experts, and financial analysts took a stab at in recent interviews with the Journal.

The challenges — both technical and financial — are immense, and the jury is still out on whether Virgin Galactic can reach its goal of weekly, and later daily, space flights from the spaceport in the next few years, said Rich Smith, a financial analyst with the investor service The Motley Fool who follows the company.

Virgin Galactic is bleeding hundreds of millions of dollars a year to build its next-generation fleet of Delta Class spaceships, with many more financial hurdles still on the horizon as it strives to ramp up its manufacturing capacity and build out the infrastructure and services it needs to sustain business operations in the long term.

The company has proven its foundational technology and launched initial commercial operations. It now has what the investment industry calls a "minimal viable product." But it's entered the infamous "Valley of Death" — a gaping ravine that early-stage companies must traverse once they have a proven product but still face the uphill climb to build sustainable business operations, achieve at least the break-even point financially, and then, eventually, reach profitability.

"If I had to put a percentage on it, I'd say that their chances of success are, at best, 50/50," Smith told the Journal. "Possibly under 50/50, but by how much, I don't know."

Technology achievements, challenges

The company's progress to date is impressive.

"I'm a lot less skeptical now than a year ago," Berger told the Journal just two days before Friday's flight. "They've actually executed on three flights, and now they're launching a fourth. They've almost reached a monthly flight cadence, and that's really hard to do."

To date, only one other company, SpaceX, has demonstrated the capability to fly 12 times a year.

"I'm impressed," Berger said. "It opens the door to the possibility of scaling up to get closer to cash-flow positive."

It took nearly 20 years to get to this point, reflecting many technology ups and downs, including a fatal accident nearly a decade ago.

But the company now has scores of successful flights under its belt for both the VSS Unity and the VMS Mothership Eve, which carries the Unity part way to space before the rocket breaks away from Eve and ignites its engine to shoot into space.

Eve was originally built in 2008 and has flown many times, both alone and with Unity. Unity, which first flew in 2016, has now flown nearly 30 times, although only eight of those trips were to suborbit.

Originally, however, those ships were only intended as prototypes to test and perfect Virgin Galactic's spaceflight system, not to perform regular commercial operations. The company took nearly a two-year hiatus that ended this spring for structural enhancements to improve the durability and reliability of those two ships, turning them into operational vehicles for Virgin Galactic to initiate passenger flights for the first time this summer.

But the company won't go beyond monthly flights until its next-generation Delta Class ships — which will be built to handle weekly flights — begin to enter commercial service, and that won't happen until at least 2026, or possibly beyond. And, to get to daily flights, the company needs between four and eight Delta ships in service, plus a second mothership, said President of Spaceline Missions and Safety Mike Moses in a lengthy interview with Berger that Ars Technica published in late August.

The company is only now preparing to build the Deltas. It's constructing an assembly factory in Arizona, and it's working with subcontractors to build and send components to Arizona later this year, followed by major sub-assemblies in 2024. Once assembled, Virgin Galactic would then test the Deltas for most of 2025 before putting them into commercial service in 2026.

But that timeline may be overly optimistic, Berger said.

That's because the Deltas are still in the design phase. They'll be based on a very different type of assembly to allow for faster, cheaper and easier manufacturing, plus simpler, expedited inspections between flights to permit speedy, weekly turnaround, Moses said.

VSS Unity was manufactured and assembled with mold tools to lay down carbon fiber "layer by layer" in a lego-like fashion, Moses told Berger. In contrast, the Deltas will be be built in modules that will be fastened together, speeding production and making inspections easier.

"You make those things in their own jigs, and they'll come together as one unit," Moses said. "It's much more like how airlines assemble their planes — modular build-to-print, plug-and-play fittings."

To inspect many things today on Unity — which is basically glued together — the company uses X-ray scanners to determine the health of glue joints, Moses said. In contrast, with fasteners, the company can easily check the joints at regular intervals.

"It's much faster, and that's what gives us the confidence in the weekly turn rates for Delta," Moses told Berger.

But with basically a newly-designed spaceship coming off the assembly line, the 2025 to 2026 timeline for testing and commercial service may be unrealistic.

"For the Delta ships, that's very hard to do," Berger told the Journal. "They're going to make spaceships with a different design, and their timeline is probably optimistic. They say 2026, but that really means 2028 or later."

That means Virgin Galactic will be forced to rely on just Eve and Unity to continue commercial service on just a monthly basis until at least 2026, and probably longer, which creates significant financial challenges going forward.

Valley of Death

The problem is, today's monthly flights bring in very little revenue, which means the company must continue raising money from investors to sustain operations for at least the next three years, and likely more, because the revenue stream won't significantly increase until the Deltas start coming online.

The company, which went public on the New York Stock Exchange in 2019, reported about $1.5 billion in accumulated operating losses from 2018-2022 as it pumped money into fully building out its technology and business operations. And, in the first half of 2023, it reported another $289 million in losses.

It projects between $240 million and $260 million in additional losses for the rest of this year, compared with just $2 million in total revenue from its monthly flights during the second half of 2023.

"The company's big, immediate problem is it's spending about $125 million in operating costs every quarter, and it's revenue is nowhere near that," said Smith of The Motley Fool. "And, as they go forward, their operating expenses will continue to grow significantly."

Apart from expenses to construct the Arizona factory and build between four and eight Delta ships — each one costing between $50 million and $60 million — Virgin Galactic must still build a second mothership to be able to achieve daily flights, according to Moses.

It will also need to build out its rocket-motor manufacturing capacity. Those engines, which cost about $250,000 each, are the only non-reusable space system component that the company must change out each time Unity, or the future Deltas, fly.

The company can make up to 20 motors per month currently with the test stands it now has in place in California. But when the future Delta fleet rolls out, it will need to build a bigger facility, Moses told Berger.

It must also invest in a larger hanger and related facilities at the spaceport to accommodate the Delta fleet and a second mothership. And, it will have to ramp up its workforce significantly to manage the move from monthly to weekly flights, and then to daily ones.

It already employs about 1,100 people in New Mexico and California, accounting for a large chunk of its operating expenses, apart from capital investment in infrastructure and manufacturing.

Then there's the question of upkeep for Eve and Unity as they continue providing monthly flights. Those ships were designed for a 10-year life span, or between 500 and 1,000 flights, according to Moses. But even with the enhancements made during the company's two-year hiatus, wear and tear will require more maintenance and parts during the interim period before the Deltas arrive.

"The biggest challenge is Virgin Galactic only has one spacecraft and one mothership and they need to keep them both operational and flying for at least three to four years until the Delta class and the next Eve come along, and that's a long time," Berger told the Journal. "Moses said they can manage hundreds of flights, but that's a lot, and there are always safety issues. They can't afford another two-year downtime, so they need to carefully maintain them."

Cash on hand

For now, Virgin Galactic is financially stable, thanks to its ability to continue raising money. As of June 30, the company had $980 million in cash and securities on hand, or potentially enough to continue financing operations for close to two years.

In fact, that total reflects another $241 million that the company managed to raise from sales of common stock just during the April-June quarter.

In good part, that fund-raising ability reflects substantial investor interest in the general emergence of a commercial space industry following decades of government-funded space exploration and operations, allowing many space-related companies to attract significant investment for new, cutting-edge technology, said Chris Erickson, New Mexico State University economics professor and former interim department head.

"There's been a tremendous amount of progress in commercial space operations," Erickson told the Journal. "We're on the cusp of a major renaissance in the space industry, and Virgin Galactic is in a good position to take advantage of it."

That's particularly true given Virgin Galactic's leadership role in building the space tourism industry, Erickson added.

"There's strong support for it, and I expect that to expand going forward," Erickson said. "I believe Virgin Galactic will continue to raise money because of it."

Much of today's investment, however, is very "speculative" as investors pump money into an entirely new, high-risk industry with promises of returns years down the line, Smith said. And that leads to a fickle investor mentality, which is showing up in Virgin Galactic's stock price.

Company shares on the NYSE hit an all-time low of $2.25 a share on Friday morning, even as the company was preparing to launch its third commercial flight at the Spaceport.

Smith called that — "Buy the rumor, sell the news" — whereby people first buy stock based on speculative enthusiasm, or rumor, but then take a harder, more realistic look at the challenges once the company launches initial operations.

"As Virgin Galactic begins its first flights, people start paying more attention to the actual news, and they start thinking about it more realistically," Smith said. "The company is in business now, so the 'news' is out, and people are asking tough questions about profits and chances of long-term success. It's getting real now, and people are taking a hard look at it and valuing the stock."

To continue attracting investors, Virgin Galactic will need to maintain its promised monthly flight cadence while it works to bring the Delta ships into service, Berger said.

"And it needs to do so safely," he said. "An accident would probably be fatal for Virgin Galactic."

The challenges are significant, because Virgin Galactic is pioneering a new industry, said Spaceport America Executive Director Scott McLaughlin.

"Space is a very difficult market, and Virgin Galactic is doing something that's never been done before," McLaughlin told the Journal. "The goal is to move from early, risky operations to successful, long-term operations, and that takes patience."

Still, with more than 800 customers already on the company's waiting list fly — many of whom reserved their seats 15 years ago — market demand remains steady and is likely to grow if Virgin Galactic can execute on its short, medium and long-term goals, Berger said.

"The jury is still out on whether the company can achieve everything and bring six to eight spaceships and a new mothership into service in the next few years," Berger said. "But if it can continue to fly safely and increase its operational cadence going forward, it can own the space tourism market. Virgin Galactic is now ahead of all others, but we'll have to see where it all goes."