Two years ago, I made a deep dive into Virgin Galactic Holdings, Inc.'s (NYSE:SPCE ) business and showed that Virgin Galactic - contrary to popular belief - was lagging its competitors and was far too expensive for its prospects. Since writing, the stock has declined significantly, but this may not make the risk-reward any better...

Blue Origin (BORGN) has had multiple successful manned flights using the New Shepard with tourists, making headlines around the world and creating value for its shareholders. In my previous article from two years ago, I predicted that Blue Origin was going to be a very big competitor for Virgin Galactic. On the other hand, Virgin Galactic has again delayed the launch of its commercial service to Q2 2023. Delay number unknown.

While Jeff Bezos is flying passengers into space, Virgin Galactic continues to struggle to start operating. Why is that?

A historic comparison with NASA's famous project the space shuttle is in order. NASA tried to launch the space shuttle project to lower the cost of flight to space. The idea was that the reusability element of the space shuttle would lower the cost of flight. But in reality, this failed as vertical-takeoff aircrafts with capsules turned out to be significantly cheaper. A big problem was the reliability of the space shuttle which had catastrophic crashes 1 out of 9 times, a terrible score. Now, SpaceX (SPACE) and Blue Origin have been able to build reusable vertical-takeoff aircrafts; which consequently has significantly lowered the cost of capsule flight. It makes you wonder why do we need Virgin Galactic's subpar method of flying into space?

My previous article had a good summary of Virgin Galactic's plans to enter space with its aircraft:

'Virgin Galactic owns a space ship called the SpaceShipTwo to commercialize space travel, its design is based upon the award-winning 2004 spaceship developed by Mojave Aerospace Ventures. However, Virgin Galactic together with Scaled Composites has expanded the design massively to suit their needs. They also built an entirely new aircraft called the WhiteKnightTwo, specifically for space tourism, that carries the SpaceShipTwo until 45,000 feet after which SpaceShipTwo is released. Then the SpaceShipTwo flies into space using its powerful booster, after arriving at the 50 miles height it stops and as a consequence passengers experience microgravity.' ~Robert Vink

(Source: Virgin Galactic IR) ((Source: Virgin Galactic IR))

(Source: Virgin Galactic IR) ((Source: Virgin Galactic IR))

As one can see, the approach is similar to the space shuttle program. The space shuttle was also mounted to a booster or a Boeing 747.

Virgin Galactic was founded in 2004, and the aircraft's first version originates from the XPRIZE competition that started in 1996. But since Virgin Galactic decided to take the original design further, the company has been struggling with problems.

Virgin Galactic has a history full of dramatic events. In 2007, 3 employees died during a test of the motor. In 2014, cracks were found in the WhiteKnightTwo's wings. Virgin Galactic as of date only has 1 WhiteKnightTwo - if this plane is dysfunctional, it can no longer bring the SpaceShipTwo to space. It's cool to have three SpaceShipTwo aircraft, but without the WhiteKnightTwo they can not fly - a flaw in this business. And exactly this plane had cracks in its wings in 2014. In 2015 the SpaceShipTwo crashed due to the re-entry system being initiated too early - which led to the death of one person. Then in 2019, after a flight, a seal running along the stabilizer of the SpaceShipTwo became undone. A test pilot said: "The structural integrity of the entire stabilizer was compromised, I don’t know how we didn’t lose the vehicle and kill three people."

In addition, you have a history of unfulfilled promises. In 2007, Richard Branson predicted that the SpaceShipTwo would be ready in a year's time. In reality, the first flight occurred in 2014. In 2007, the SpaceShipTwo was estimated to reach 100km, but now the goal is only 80km. And the list of unfulfilled promises goes on and on. So what is going on here?

I believe the way Virgin Galactic approaches space tourism is fundamentally flawed. The entire flight has a significant amount of steps with a too-high chance of failure. Let's not forget that Virgin Galactic is banking on taking passengers to space en masse. All these risks in each step compound towards making the entire flight too risky for space tourism.

Blue Origin's flights are controlled from the headquarters. During the flight, the booster and capsule are separated, which makes the flight significantly safer. On the other hand, SpaceShipTwo has two pilots in the aircraft, and the WhiteKnightTwo also has two pilots inside. This increases the risk of human error. Virgin Galactic is an amazing example of the sunk-cost fallacy. A person had a bad idea, but instead of stopping, it seems more attractive to invest a bit more to make it finally succeed. But will that ever happen?

Blue Origin IR (Blue Origin IR)

Blue Origin IR (Blue Origin IR)

The reality is that the approach of Blue Origin and SpaceX is much better. Yes, sometimes the reusable rockets crash is a significant loss for the company, but the passengers are incredibly safe in the capsule. This is not only shown by Blue Origin's flawless record but also a decades-long history of space travel. Capsule-based approaches are significantly safer for human beings. A great example of this is the Soyuz, with a 1% fatality rate and the Space Shuttle with a 1.7% fatality rate. But Soyuz has never had a death since 1974. The Space Shuttle had deaths far later in its lifetime. Soyuz is multitudes safer than the Space Shuttle.

Virgin Galactic is a company lagging behind its competitors due to a bet on the wrong approach. Even NASA, an organization with significantly more capital and know-how, stopped the spacecraft program - which has similarities to Virgin Galactic's flight. One has to wonder whether Virgin Galactic will succeed and start creating value for shareholders.

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.