Virgin Galactic (SPCE -0.52%) stock took off like -- what else? -- a rocket this week, rising nearly 30% in the first three trading days alone.
Pundits are attributing the stock's sudden popularity to a widely publicized report out of investment bank Morgan Stanley, which endorsed the stock bright and early Monday morning. In its report, MS predicted that while Virgin Galactic may look like a risky play 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 airplanes capable of carrying air travelers through Earth's atmosphere at hypersonic speeds.
Now whatever could have given Morgan Stanley that idea?
Virgin Galactic speaks
It turns out Morgan Stanley's insight into Virgin Galactic's long-term plans appears to have come from Virgin Galactic itself. More precisely, from Virgin Galactic board chairman Chamath Palihapitiya, who in an interview at the Phocuswright Conference 2019 in Miami last month laid out his vision for the "space" business over the next 20 to 30 years.
You see, carrying tourists to the edge of space in a "SpaceShipTwo" spaceplane (SS2), six at a time and at a cost of $250,000 per ticket, is only the start of this story. Virgin Galactic plans to begin these flights sometime next year, the culmination of 17 years of development work and some $1 billion in investment to validate the "very difficult technical concepts" involved in flying aircraft at hypersonic speeds and altitudes of 100 kilometers above Earth's surface. Where things get really interesting, though, is after Virgin Galactic proves it can safely conduct tourist operations at that speed and height (SS2 will technically be flying through Earth's thermosphere at twice the height of the stratosphere).
You see, there's not a whole lot of technological difference between flying passengers up to that height then bringing them back down to land where they started and flying them up to that height and bringing them down ... somewhere else. Theoretically, at least, space tourism flights at Virgin Galactic could one day evolve into hypersonic commercial travel using the same, or similar, vehicles -- perhaps as soon as just five to 10 years from now.
Point-to-point travel at speeds faster than a Concorde
To put this scenario into context, back when Air France was flying its Concorde supersonic jetliner commercially, that aircraft flew at altitudes about twice as high (18 km) as most other commercial aircraft, and maxed out at a speed of Mach 2 (twice the speed of sound). But Palihapitiya notes that Concorde generally only hit speeds that fast when flying over water, with concern regarding sonic booms hindering its ability to dramatically cut flight times.
In contrast, by flying at much higher altitudes (up in Earth's thermosphere, where there's little air to "boom"), and at speeds nearly twice Concorde's maximum speed, Virgin Galactic thinks that within just a decade or less it could be offering trips between Los Angeles and Hong Kong in as little as two hours (versus the 13 hours it takes to fly there today). A hypersonic flight from San Francisco to London could be completed in as little as 90 minutes.
Theoretically, says Palihapitiya, "this is a product that could ... ferry passengers across any two points in the world at roughly ... one fifth of the time of a traditional airplane," which would be "completely transformational to the world of travel and tourism."
The business case for Virgin Galactic
How will this transformation happen? As Palihapitiya describes it, Virgin's plan is to "start small," flying small hypersonic spaceplanes on space tourism flights, "and prove quality and prove value" first, "then slowly and methodically ... broaden the market" to offer commercial point-to-point travel services, selling more and more flights at lower and lower prices.
Yes, initially this service will be very expensive -- see the above-mentioned $250,000 ticket price. But that's not necessarily a bad thing, at least not for investors in Virgin Galactic stock. Palihapitiya makes a point of emphasizing his view that "the companies that win" over the long run are "companies that focus on free cash flow and profitability and just run their business prudently." If $250,000 a ticket is what it takes to keep Virgin Galactic solvent, then that's what the company must charge at first.
As for profitability farther down the line, it's worth pointing out that, while Concorde ended up losing money for its operator Air France, especially after suffering a crash in 2000 that killed 113 people, there were "some years" in which it was profitable. This suggests there's potential for a commercial transport service by Virgin Galactic to be profitable as well, especially if it can cut costs and grow its customer base.
And over 10 to 15 years, Palihapitiya believes it should also be possible to drive down the cost of hypersonic flights from the "hundreds of thousands" of dollars into the "tens of thousands" range -- profitably -- which would logically attract more customers.
Granted, even a ticket price of $10,000 and up still doesn't sound particularly cheap. But it might be cheap enough to broaden the market from the billionaire-class and make these flights accessible to well-heeled business executives, for example. Then, over time -- Palihapitiya doesn't say precisely how long -- he sees hypersonic ticket prices falling back toward the cost of an economy class ticket today.
At that point, around-the-globe travel in a handful of hours could become a service available --and affordable -- to the everyman. (And profitable for Virgin Galactic investors to boot.)