Billionaire entrepreneur Richard Branson wears his astronaut's wings at a news conference, after flying with a crew in Virgin Galactic's passenger rocket plane VSS Unity to the edge of space at Spaceport America near Truth or Consequences, New Mexico, U.S., July 11, 2021. LONDON, July 16 (Reuters Breakingviews) - Is Richard Branson’s Virgin Galactic (SPCE.N) “space tourism” or just a glorified plane ride? Blue Origin, owned by rival billionaire Jeff Bezos, argues it’s the latter because the bearded tycoon last weekend did not cross the Kármán line, the internationally recognised boundary of proper space. There’s another similarity. Without a big jump in ticket prices, the $8 billion company’s financial trajectory may resemble the loss-making Virgin Atlantic airline. Last Sunday’s successful test-flight was a publicity coup for Branson, who beat the Amazon.com (AMZN.O) founder’s maiden flight by just over a week. It should also pave the way for Virgin Galactic to carry its first paying passengers next year. But the undoubted technological achievement does not necessarily mark the dawn of commercial success. In its 2019 investor blurb, Galactic reckoned that within four years it would be flogging 1,545 seats a year at around $360,000 each, netting some $560 million of revenue. After deducting expenses like rocket motors and pilot wages, it would earn $274 million of EBITDA, easily enough to finance the $55 million a year it needs for new craft and to reward shareholders. Launch delays have pushed those estimates back by two years, which means Virgin Galactic’s enterprise value is currently 27 times expected EBITDA for 2025. Some reckon this undersells the opportunities in commercial space travel. Cowen analysts argue that the company will capture a slice of an ultra-high-speed global travel market which will be worth $1 trillion by 2050. They arrive at a $12 billion valuation by applying a multiple of 22 times expected EBITDA at the end of the decade. The shorter-term risk, however, is that Branson is unable to charge significantly more than the $250,000 at which he flogged early-bird tickets. At that level, his sums leave little margin for error. Projected 2025 revenue drops to $386 million, leaving EBITDA of just $69 million assuming costs stay the same. Admittedly, early tickets were probably discounted. But raising prices just as competitors like Blue Origin or Elon Musk’s SpaceX leave the launchpad may be tough, especially when the latter two have eventual scope to offer full orbital flight. Those for whom money is no object will gravitate towards the most out-of-this-world experience, potentially leaving Virgin Galactic to offer a lower-thrills alternative. Investors should be prepared for a bumpy re-entry. Follow @edwardcropley on Twitter CONTEXT NEWS - British billionaire Richard Branson on July 11 soared above the New Mexico desert in his Virgin Galactic rocket plane, the craft’s first fully crewed test flight to the edge of space. - The hour-long flight, which was launched from the belly of a specially designed plane, topped out at 53 miles (86 kilometres) above the earth’s surface and included several minutes of microgravity. - Virgin Galactic says 600 customers have already booked tickets, priced at around $250,000 each. Branson has said those prices could fall to as low as $40,000 per seat as services ramp up. - The company said on July 12 it would sell up to $500 million of new shares to finance the development and building of new planes, among other things. - Since the July 12 announcement about a capital raise, Virgin Galactic shares have fallen 33% to $33.07 each. Editing by Peter Thal Larsen and Karen Kwok Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time. Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.
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