No two ways about it: Last week was a weird week to own Virgin Galactic (SPCE 3.15%) stock.
Coming out of the holiday weekend, shares of the first-ever space tourism company rocketed 27% on Tuesday in response to the company's confirmation that it will launch its first-ever revenue-generating commercial space tourism flight later this week.
Investors' applause died out quickly, however, as Virgin Galactic stock began to collapse: down 5% on Wednesday, then another 7% on Thursday, and then an avalanche of losses -- falling a further 18% on Friday after the company announced plans to sell $400 million in new stock. All of a sudden it became apparent that the amount of money Virgin Galactic is raising from selling stock simply dwarfs the amount of money it hopes to make from selling tickets.
And investors weren't happy to hear that.
Virgin Galactic's math problem
Whether investors like to hear it or not, the fact can't be denied: Virgin Galactic has a big math problem.
Start with the company's costs. According to data from S&P Global Market Intelligence, Virgin Galactic stock incurred $500 million in net losses last year, almost entirely from its operating costs. That works out to roughly $125 million that the company is losing every quarter -- money that the company must make up by bringing in revenue from its commercial space tourism business.
Now, let's look at Virgin Galactic's revenue.
Since the company began selling tickets, Virgin Galactic has sold somewhere between 700 and 800 reservations for seats on its spaceplanes. Although details are fuzzy, the first 600 tickets were widely reported to have been sold for prices ranging from $200,000 to $250,000 apiece. Subsequent sales, which reopened in August 2021, and now number between 100 and 200 more tickets, were made at much higher prices -- $450,000 and up -- and thus will help more to close the gap between the company's costs and its revenue. But before Virgin Galactic can begin flying those $450,000-a-ticket passengers, it must first fly its $200,000-to-$250,000 passengers -- 600 of them.
Here's how the math on that works, and bear in mind that -- given the conclusion I anticipate -- I'm giving Virgin Galactic the benefit of the doubt at every possible turn:
First, assume that every flight Virgin Galactic makes will carry the full potential complement of six passengers per spaceplane. (This week's flight is only carrying three passengers). Furthermore, to make the math as easy as possible, assume each of these tickets costs $250,000 -- thus, $1.5 million in revenue per flight. (This week's tickets are reported to have cost only $200,000). Then, subtract the cost of replacing the engine on the spaceplane after each flight -- a revenue hit of at least $250,000. (Virgin Galactic actually puts the cost at $250,000 to $275,000).
Even were we to assume there are no other costs to flying the spaceplane -- no pilot salaries, no other overhead -- this would reduce gross profit on each flight to a maximum of $1.25 million.
Thus, to cover Virgin Galactic's $125 million in quarterly operating costs with flights generating $1.25 million each, the company must fly its spaceplane at least 100 times per quarter.
Coincidentally, 100 flights would also be enough flights to run Virgin Galactic through its entire first batch of 600 tickets, so that it could begin flying passengers to space for $450,000 a seat. But there's just one hitch: Virgin Galactic's single spaceplane is only expected to be able to fly about once per month -- or three times per quarter -- rather than 100 times. Thus, Virgin Galactic can only generate gross profit of about $3.75 million per quarter, leaving it $121.25 million in the hole. And at a flight rate of once per month, Virgin Galactic will have to spend the next 100 months... or eight years, four months... or basically through the end of 2031, working its way through those first 600 tickets.
How to solve the math problem
That's a long time for Virgin Galactic to be losing money, and implies the company might lose as much as another $4 billion before it is able to cut its losses by charging more for tickets.
Now, the good news is that Virgin Galactic is working to build a bigger fleet of spaceplanes, capable of flying once per week per spaceplane, such that it will be able to fly more frequently, work through its first 600 tickets faster, and reach operating profitability sooner. (The bad news is that each of these new "Delta class" spaceplanes is going to cost Virgin Galactic between $50 million and $60 million to build, and the first one won't enter service before 2026.)
As a thought experiment, though, it might still be helpful to figure out how many spaceplanes Virgin Galactic needs, and how often these spaceplanes must fly in order to offset its $125 million in quarterly operating costs.
Assuming 100 flights per quarter is the magic number needed to offset $125 million in operating costs, that each Delta spaceplane can fly (and contribute $1.25 million in revenue) once per week, and that there are 13 weeks in a quarter, then a fleet of eight Delta spaceplanes should suffice to generate $130 million in revenue per quarter.
This, then, it appears, is the answer. Virgin Galactic needs eight Delta class spaceplanes, flying a total of 104 missions per quarter, to generate enough revenue to offset Virgin Galactic's costs and turn the company profitable -- finally rewarding investors for their patience and their faith in the company.
There are of course caveats to this calculation. More spaceplanes means more pilot salaries, more ground crew salaries, and more overhead cost in general, presumably increasing Virgin Galactic's quarterly operating costs beyond the current $125 million. There's also the $50 million-plus cost of building each Delta class spaceplane to consider. At the same time, once Virgin Galactic has flown 100 missions, its revenue per flight will roughly double as ticket prices skyrocket -- helping to offset those higher operating costs.
But even so, this is a decent ballpark estimate to keep in mind when figuring out how close Virgin Galactic is getting toward profitability: The closer Virgin Galactic gets to eight spaceplanes in service, the closer the company will be to profitability.
But seeing as Virgin Galactic so far only has one usable spaceplane to work with, the company is currently very far away from profitability indeed.
