2023 was a milestone year for Virgin Galactic (SPCE 3.34%). Beginning with its first commercial, revenue-generating spaceflight in June, Virgin went on to fly a total of five "Galactic" missions to the edge of space and back, and generated about $6.8 million in total revenue.
Granted, this wasn't quite enough to cover the company's $527.1 million in operating costs last year. On the bottom line, the company reported a loss of $502.3 million. Still, it was an accomplishment that, after years of work, Virgin Galactic finally managed to get its space tourism business up and running.
And now, it's time to shut it down.
NYSE: SPCE
Key Data Points
Five steps forward, one giant leap back
When it reported its fourth-quarter 2023 results last month, Virgin Galactic was able to boast of completing one more commercial spaceflight in 2024's Q1 -- "Galactic 06," which took off in January -- and said it will fly one more time in the second quarter of 2024. "Galactic 07," however, will probably be VSS Unity's last rodeo, a fact Virgin's VP of spaceline operations Mike Moses confirmed to industry news website Ars Technica last month.
CEO Michael Colglazier confided in November (according to a transcript from S&P Global Market Intelligence) that Virgin plans to stop flying in mid-2024 as it shifts its focus to building and testing the first of its new Delta-class spaceplanes.
The problem is, Delta test flights aren't scheduled to begin before mid-2025. Even assuming everything goes perfectly with the tests, Virgin Galactic won't be able to resume commercial flights, with Delta taking over Unity's role, until sometime in 2026. And that means that from roughly June 2024 through at least January 2026 -- an 18-month stretch -- Virgin Galactic will generate essentially zero revenue while incurring hundreds of millions of dollars of research and development and other operating costs every quarter.
And remember: This is the best-case scenario.
What could go wrong -- and what if things go right?
Eighteen months is the minimum time Virgin Galactic's commercial spaceplanes will be grounded. Granted, once Delta is operational, Virgin hopes the new spaceplane's ease of maintenance, greater passenger capacity, and higher flight cadence will help the company make up for lost time (and lost revenue). But even so, 18 months could easily stretch to 24 months or more if anything delays Delta's development and certification as safe to fly.
Given this prospect, investors may wonder how long Virgin Galactic can reasonably be expected to survive without any revenues coming in.
Well, let's consider. 2023 was an odd year, with Virgin Galactic generating significant revenue in its final three quarters, but very little in Q1. 2022, in contrast, when Virgin Galactic flew no commercial flights even as it incurred sizable operating costs, probably gives investors a better picture of how its finances will look during its upcoming flight hiatus.
In 2022, Virgin Galactic recorded de minimis revenue while earning interest on its cash that basically canceled out the interest owed on its debt. (Virgin Galactic has about $492 million in debt, by the way.) Operating costs for the year were $500 million, with selling, general, and administrative expenses making up about $175 million of that total, and research and development consuming just under $315 million. (Depreciation and amortization accounted for the rest.)
I'd expect operating costs for the second half of 2024 and all of 2025 to roughly approximate this -- $500 million per year. Virgin Galactic's operating costs should hold pretty steady, while R&D spending will continue at the high level needed to get Delta ready to fly. Thus, if Virgin can deliver Delta on time at the start of 2026, the company should consume "only" $750 million of the $874 million in cash and equivalents it has on its books.
The upshot for investors
Thus, if Delta begins commercial flights on schedule in Q1 2026, Virgin Galactic will probably be fine. And once Delta begins flying, the $1 billion in revenue that Virgin Galactic says it will generate annually (from a fleet of four or five Deltas, each flying once or twice a week) should more than offset operating costs -- even if these rise somewhat to support the steady operation of five spaceplanes. Engine replacement costs alone, for example, could add roughly $90 million to annual expenses if Virgin is flying daily.
Granted, there's still the question of whether Virgin will be able to find enough paying passengers to fill out a daily flight schedule -- but first things first. First, let's see if the Delta arrives on time or is delayed. Then Virgin can figure out how to make a profit in this business.
