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Space Future has been on something of a hiatus of late. With the concept of Space Tourism steadily increasing in acceptance, and the advances of commercial space, much of our purpose could be said to be achieved. But this industry is still nascent, and there's much to do. So...watch this space.
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F Eilingsfeld & D Schaetzler, October 2002, "Developing Viable Financing Models for Space Tourism", IAC-02-IAA.1.2.08. 53rd International Astronautical Congress, The World Space Congress, Houston, Texas, 1019 October 2002.
Also downloadable from http://www.spacefuture.com/archive/developing viable financing models for space tourism.shtml

References and Referring Papers    Printable Version 
 Bibliographic Index
Developing Viable Financing Models for Space Tourism
Fabian Eilingsfeld and Daniel Schaetzler
Abstract
In recent years, several research efforts have found out that the opportunity cost of capital of a commercial space tourism venture will be relatively high (~18%). The proposed infrastructure for orbital space tourism, at least a commercial, passenger- carrying launch vehicle to begin with, will probably cost up to several billion dollars. To raise such sums as part of a private venture and still make it profitable afterwards seems to be virtually impossible. One possible route out of this dilemma is to minimize the required up-front investment by beginning with a downsized project. This would just offer suborbital flights for space tourists. In 2001, rocketfinance.com was asked to develop the respective financing model for such a venture. This paper presents the results of that research effort. It has been concluded that a commercial `X-Prize'-type vehicle could be developed and brought to operating capability for under $100 million while still returning up to 35% (IRR), given that the vehicle's time-to-market is kept to a minimum.
The Capital Markets: No Place for Space Tourism

Today, it is very hard to get funding for rocket ventures. During the 1990s, many startup companies have been established in the field of space transportation vehicles. Some of them explicitly quoted space tourism as a major revenue stream for their intended businesses. While some of these companies have been able to raise significant amounts of private capital (particularly Kistler), most of their competitors are still cash-starved and seeking equity funding for their projects.

In the space field, things seem to go a little differently. For a certain period, the abysmal performance of the Iridium satellite project made investors shy away from giving ambitious space ventures another look. The collapse of the stock markets, competition from other high-return ventures (e.g. biotechnology), a spate of recent launch failures had combined with the now- notorious $5 billion Iridium fiasco to make it extremely difficult for unproven space systems to attract money.

Government's future role in space tourism is unclear

Although NASA isn't actively marketing it, 'space tourists' like Dennis Tito can today fly to the ISS and enjoy a `subsidized'[1] >$10 M space holiday in a space station that has already been paid for by the taxpayer. So, potential private investors in space tourism are afraid that NASA or other government space agencies might abuse their power and existing infrastructure to elbow future space tourism providers out of the market. It is not the first time that this has happened and it might happen again. For instance, Beal Aerospace, a privately funded launch vehicle manufacturer, went out of the launch business because they were afraid of competition from NASA-subsidized government contractors.[2] At the same, it seems to be virtually impossible that governments are going to support the financing of commercial space tourism ventures.

Only business cases that are based on real customers get significant funding

So far, space-related ventures like direct-to-home TV and Internet/broadband services have already proven that they can attract a huge number of customers. Hence, respective business cases can be built bottom-up upon reliable numbers of existing customers. In order to attract investors, it is very helpful to use this approach to convincingly show how money will be made. What works today will most probably work tomorrow as well! Seemingly, those ventures that present known and rational business cases appear solid enough to attract large non-aerospace companies (in 1999, America Online invested $1.5 billion in Hughes Electronics) to spend significant amounts on space ventures.

Space means Satellites: commercial launch vehicles are ignored by investors

The satellite market makes for a stark contrast to some launch vehicle ventures, where, at times, the old "build it and they will come" paradigm is still in place. There are cases where entrepreneurs rely on just showing how they intend to raise funding. But as the capital market shows, this is not enough for receiving a positive investor response. It is even very likely that many finance people still perceive the space sector as being stuck with the old "high cost, high performance paradigm" of the Apollo days. Back then, technological merit was all what counted; economic performance was secondary.

So far, the institutional finance community has only recognized the GEO satellite business as commercially viable. As a matter of fact, most finance people today mean `satellites' when they talk about `space' and `space' ventures. This results in a continuing lack of private capital that stifles the development of new commercial reusable launch vehicles (RLVs). Even NASA and Lockheed Martin failed to get their X-33 RLV off the ground after they jointly invested almost $1.3 billion. They cancelled the program after five years when government funding dried up. At the same time, more than ten launch vehicle ventures look for funding.[3]

Debt financing and venture capital play virtually no role in space ventures

While large companies buy equity in space (= satellite) ventures, the debt markets have virtually been closed to space projects for the foreseeable future. Debt markets in general tend to seek more conservative situations which promise less risk than space. In most cases, the share of overall funding that could be secured by collaterals (e.g. engines, equipment) is simply to small. At the same time, most venture capitalists have long shunned space, in part because of the huge costs of space projects. This is easy to understand, since a $2-million investment used to buy you a 25% stake in a dot.com startup, while the same amount represents only a tiny fraction of the money needed for a, say, billion dollar launcher project.

Space Tourism's Cost of Capital

The typical annual rate of return so often used before in the financial modeling of space tourism (around 6%) is not realistic, because such a rate can only be achieved with a government-backed loan. The latter is virtually unavailable for startups. So far, private space investments have been virtually dwarfed by the approximately $2,000 billion (!) of government budgets (= taxpayers' money) spent on the world's space programs during the last 40+ years. Private space investing is a relatively new concept and only gained importance with the global satellite communications market.

In the old days of government space programs, the idea of giving compensation to investors for the uncertainty and risk of space activities was non-existent. Only the last two decades brought up the issue that space ventures have to cope with three typical weaknesses:

  1. Long lead times for project development
  2. Long time to break-even
  3. High uncertainty or risk

According to Table 1, the cost of capital (CoC) that can be applied to a space venture varies widely, depending on the respective source of funding: while a government-backed loan requires a return of merely 6% a year, venture capital requires as much as 40%.


Government-backed loan6%
Private debt 810%
Junk bonds ~15%
Common stock 1518%
Venture capital ~40%

Table 1: Expected (risk adjusted) rate of return for different sources of funding

Generations of aerospace students have based their financial models on the assumption that low-interest loans (typical annual rate of return: 6%) will be available for future space projects. In reality, this source of funding is virtually non-existent. Other types of debt (810%) have the disadvantage that they need to be secured. The fact that most launcher startups (like Rotary Rocket) did not qualify for debt can be attributed to the missing collaterals.

So the typical cost of capital for space ventures comes closer to 1518%. The difference between 6% and, say, 15% has a significant impact on the economic performance of a venture. For instance, financial simulations have shown that an RLV designed to operate at $1,000/lb would actually cost well over $2,000/lb if financed 100% through equity instead of the government-backed loan which was once hoped for as preferred source of funding. So, compared to the latter, pure equity financing doubles the cost to orbit, which might lead to a loss of competitive advantage, hence rendering the respective venture useless.

This problem gets even worse with venture capital (VC). Owing to the competition from other high-return ventures, VC funds ask for annual returns of 40%. That is beyond the performance envelope of launch vehicle ventures and only leaves satellite projects as an attractive investment opportunity.

A "Small Is Beautiful" Approach: Suborbital Space Tourism

In recent years, a lot has been written on the prospects for orbital space tourism. This will only be commercially feasible if it can be funded by government-backed loans with their low CoC (6%). A fully private equity funding is virtually unfeasible.[4]

Instead, a different idea was developed: Why isn't it possible to fund development of a 34 seat X-Prize-type vehicle and market it for suborbital `joyrides'?

With an expected R&D investment of about $50 million, such a project is about the same size as a large dot.com venture while being potentially more promising.[5] In 2001 a respective study was undertaken for a large investment bank.

The idea was to attract wealthy individuals to privately fund a small spaceplane project instead of investing their expendable income in office buildings, cargo ship shares or film funds.

Based on existing design concepts like the British Ascender[6] or the Russian-German ARS[7], several business and financial models had been developed.

Fig. 1: Artist's impression of the 4-Seater Ascender Spaceplane

The results were due to be presented in October 2001 at the 52nd IAF congress at Toulouse. Unfortunately, this plan was called off prematurely after September 11, 2001. Since then, all research work has been suspended.

Designing a Financing Model for a Space Tourism Startup

Above all, a viable financing model has to be robust. That means it has to give a certain safety margin against slips in schedule and cost overruns. There are several examples for aerospace startups which went out of business because they ran out of cash before the anticipated revenue streams could begin (e.g. Rotary Rocket, CargoLifter).

So, some typical questions that are usually raised in this context are:

  1. Can the space tourism company raise what it needs under the projected market conditions?

  2. Can the company carry the cost of capital even if there is a slip in schedule?

  3. How high are the safety margins in the cash flow plan?

At any given time, it is critical for a space entrepreneur to take into account the different view of the finance community. If the respective business case is presented to investors, the following model parameters will have to be researched in detail:


Parameters Drivers

1. Cost of Capital Debt/Equity Ratio

2. R&D Cost Technology Maturity Level

3. Time to Market Project Management
Regulatory Environment

4. Revenue ExpectationsOverall Demand
Competition

Table 2: Key parameters of the financing model
Cost of Capital

The opportunity cost of capital for space tourism has been researched in detail through recent years.[8] A new aspect which has been analyzed in this study is the potential use of (private) debt financing in order to reduce the weighted average cost of capital (WACC).

The formula for the WACC is as follows:

WACC = rd(1-Tc)D/V + rEE/V

rD = cost of debt (8% or higher)
rE = cost of equity (17.6% or higher)
Tc = marginal corporate tax rate (~35%)
V = total market value of firm (= D+E)
D = debt
E = equity

With some streamlining of the debt-to- equity ratio the WACC could be reduced to under 15%. But: streamlined financials alone give no guarantee that debt financing will be available at all.[9]

R&D Cost

The costs for Research and Development (R&D) are strongly dependent from the Technology Maturity Level. The latter sets the complexity level for implementation of the business model. Is the technology ready? Does it comprise commercial off-the-shelf (COTS) components or is there still a significant development effort involved? Is it readily available or is it controlled by the military or government? As can be seen in Lockheed Martin's development work for the NASA X-33/ RLV, the project was put into jeopardy because it involved too many new, unproven technologies (engines, tanks) instead of relying on proven, off-the-shelf components.

Time to Market

The Time to Market (TTM) is the criterion for the viability of a business model since it gives the time for the beginning of revenue streams and substantive cash flows.

Any stretch in the TTM has a strong impact on the overall profitability of a project. It was one nail in Iridium's coffin that the initially planned date for its going online could not be met.

This puts high requirements on the venture's Project Management, since any time lags can have bitter consequences.

The Regulatory Environment gives a lot of room for government interference. Which licenses are needed? Is there a vehicle that must be registered, certified or approved by some federal authority? Is there an existing procedure for certification of commercial, passenger-carrying launch vehicles? The time it takes to certify such a system might be so long that the impact on time-to-market and the respective cash flows make it unattractive to private investors.

Revenue Expectations

The Overall Demand for suborbital space tourism has not been surveyed as intensely as for orbital tourism. Most of the available demand figures are rather derived from `educated guesses' than from thorough market research. In order to get some `robust', reliable revenue expectations, an analysis of high-income people (HIP) was conducted instead. Based on the World Wealth Report[10] and some own research, an overall market potential of over 40,000 people was calculated, very conservatively assuming that only 0.56%[11] of HIPs actually buy a ticket. The maximum ticket price was assumed as $100,000 (see Table 3).

That demand figure is comfortably high and gives a high enough safety margin. There is even room for competitors. Hence, the data make a strong business case.

The Competitive Landscape does not only take into account competitors from the same market ($100k suborbital `joyrides'), but also competing technologies (e.g. $10 million flights to ISS).

It also important to look at changes in the pricing of competitive service offerings.


Liquid Net WorthNumber of People WorldwideEstimated Annual Gross IncomeShare of Annual Income = $100k TicketSeats Sold at $100k (rate of 0.56%)

>$1,000,000 7,000,000 $150,00066.67%39,200
>$5,000,000 1,300,000 $350,00028.57% 7,280
>$30,000,000 55,000 $800,00012.50% 308
>$500,000,000 1,000 $10,000,000 1.00% 6
>$1,000,000,000514 $20,000,000 0.50% 3

Potential Demand for Tickets, Total:46,797

Table 3: Ticket demand estimates, based on World Wealth Report (WWR 2000)

For instance, it will be interesting to ask how the market sees $7000 a minute for suborbital tourism as compared to $1400 a minute for orbital trips to the ISS.

And: it is hard to believe that a provider of suborbital space flights could still charge $1 million for his first ticket, since the respective trip will no longer lead to the label "first civil astronaut". That title has been taken by Dennis Tito now.

Testing Financial Performance with Different Project Scenarios

Any well-designed financing model will have to address all these aforementioned sources of risk and show their impact on the respective space venture's overall viability.

Reference Scenario

The so-called Reference Scenario was based on a relatively well-documented cost and operations model for an X-Prize vehicle that was developed in 2000.

In that model, the following key parameters were set:

TTM: 2.5 years
R&D cost: $59.34 million
Investment needed:$63.27 million
Ticket price: $100,000
Passengers/year: < 250
Tickets sold: 1,578

The time horizon for the evaluation of the venture's financial performance was set to 10 years, but only after a long internal discussion (raised from formerly 7 years).

Alternative Scenarios

In order to do some `destructive testing' of the financing model, additional scenarios had to be derived. By simply asking the question "How much being `over time/over budget' can my business bear?" the increases in time-to-market (Delta TTM) and R&D cost (Delta RDC) have been varied. That way, the financial performance of the venture was deliberately impaired and its limits of profitability could be tested.

Based on experience from past projects that were over time and over budget, it has been assumed that some combinations of Delta TTM and Delta RDC are more likely than others. For instance, it is very unlikely that a project is 100% over time, but still on budget. It is more likely that the additional consumption of project resources will be a combination of both, time and money.

Therefore, 12 additional scenarios with distinct combinations of Delta RDC/TTM have been developed:

  1. Scenario A1: RDC +10%
  2. Scenario A2: RDC +20%
  3. Scenario A3: RDC +30%
  4. Scenario B1: TTM +1yr, RDC +10%
  5. Scenario B2: TTM +1yr, RDC +25%
  6. Scenario B3: TTM +1yr, RDC +40%
  7. Scenario C1: TTM +2yrs, RDC +20%
  8. Scenario C2: TTM +2yrs, RDC +40%
  9. Scenario C3: TTM +2yrs, RDC +60%
  10. Scenario D1: TTM +3yrs, RDC +30%
  11. Scenario D2: TTM +3yrs, RDC +55%
  12. Scenario D3: TTM +3yrs, RDC +80%

In the beginning the WACC was varied, but later on it was found that this led to far too many degrees of freedom for the financial modeling. In addition, it was assumed that in view of scarce collaterals, the maximum debt level that could be achieved (D/V) was only 10%. This leads to a reduction in the WACC of roughly 1% (16.7% vs. 17.6%). This seemed not to be worth the additional complexity of the financing model, at least not at this stage. In the end, it was found to be easier (and more conservative) to keep the higher cost of capital numbers (17.6% p.a. for 100% equity) for discounting the cash flows.

Results

The results are shown below as bubble charts, whereas each bubble's area (not diameter) represents the value of the respective parameter. Negative values have black bubbles. For full results, see the Appendix, please.

The results for the Net Present Value (NPV10; after 10 years) are shown in Fig. 2.

Fig. 2: The Net Present Value (NPV10) as function of RDC and TTM

It can be seen that the NPV is much more sensitive against delays in the TTM than against overruns in the R&D cost.

In the reference scenario, the NPV after 10 years is $41.7 million. Depending on the respective cost overruns, NPV10 becomes negative if the TTM (reference: 2.5 years) is stretched by 2 years or more.

The Internal Rate of Return (IRR) shows a similar trend (Fig. 3). The IRR is defined as the rate of discount which makes NPV = 0. Obviously, and according to the NPV trends, the IRR10 will drop below the (opportunity) cost of capital if the TTM is at least 2 years (80%) longer than planned.

Fig. 3: The Internal Rate of Return (IRR10) as function of RDC and TTM

The Investment Needed can seen in Fig. 4. Originally, the preferred project size for a suborbital space tourism vehicle was set as $50100 million. With a reference investment of roughly $63 million, it is relatively safe to assume that such a project can be realized for under $100 million.

Fig. 4: The Investment Needed as function of RDC and TTM

At that cost, it still returns a positive NPV, as long as the time-to-market can be kept to a minimum.

In terms of overall performance, it is better to invest, say, $80 million in a project that is on time, but 30% over budget (Scenario A3) than $75.6 million in a project that is two years late but only 20% over budget (C1). The latter's NPV is over $25 million less than the first!

Conclusion

A privately funded space tourism venture, built around a suborbital X-prize-type vehicle seems to be viable.

The following lessons were learned during the study:

  1. A suborbital space tourism business can be set up for under $100 million (reference: $63.27 million)

  2. In most tested scenarios, the venture is able to return at least its cost of capital (17.6% @ 100% equity financing)

  3. Debt financing isn't really helpful, as long as it needs collaterals

  4. Time-to-market is critical: the profitability of such a space tourism project is very sensitive against its time-to-market (5 years is already too long!)

Bottom line: Flying paying passengers on suborbital `joyrides' can be a viable and profitable venture.

  1. NASA denies that the price paid by Tito covered the cost, see: http://www.space.com/businesstechnology/goldin_interview_010320-4.html
  2. See: http://www.spacefuture.com/journal/journal.cgi?art=2000.10.27.bealfolds
  3. For instance: http://www.space-frontier.org/COMMSPACE/
  4. For details see: Eilingsfeld, Fabian and Schaetzler, Daniel: The Cost of Capital for Space Tourism Ventures. Technical Paper IAA-00-IAA.1.4.02. 51st Congress of the International Astronautical Federation, Rio de Janeiro, 26 October 2000.
  5. Indeed: The dot.com bubble burst
  6. For Ascender see http://www.bristolspaceplanes.com/
  7. See Inden, Werner: "Tourist Space Flights: A Vision for 2020 and its Challenges for Today". Proceedings of the International Symposium on Impact of Space Technology Innovation on Economic Development. Shanghai, China. April 1720, 2001. 222233.
  8. See: Eilingsfeld, Fabian and Schaetzler, Daniel: The Cost of Capital for Space Tourism Ventures. Technical Paper IAA-00- IAA.1.4.02. 51st Congress of the International Astronautical Federation, Rio de Janeiro, 26 October 2000.
  9. For instance: the case of German airship firm Cargolifter that wasn't able to raise 50 million Euro of debt after having burnt 300 million Euro of equity financed cash
  10. See: Merrill Lynch/Gemini Consulting: World Wealth Report 2000
  11. Assumption made: Of those rich enough, 75% are physically fit, 75% thereof are men, 10% thereof are interested, 10% thereof actually buy; .75 x .75 x .10 x .10 = .0056 = 0.56%
  12. For instance:http://www.space-frontier.org/COMMSPACE/ as of September 20, 2002
  13. See Anselmo, Joseph C.: " RLV Ventures Strained by Funding Problems". Aviation Week and Space Technology 151.1 (July 5, 1999): 24.
  14. See http://www.xprize.org/
  15. For instance: Ascender


Reference Scenario
@ 17.6% Cost of Capital per year

Year 1 2 3 4 5 6 7 8 9 10
Cash Flow (NOPAT $million) (17,44)(22,93)(13,18)18,84 31,97 37,72 38,65 27,79 38,65 38,65
Discount factor 1/((1+r)^t) 1,00 0,85 0,72 0,61 0,52 0,44 0,38 0,32 0,27 0,23
Discounted Cash Flow (PV $million) (17,44)(19,50)(9,53) 11,58 16,72 16,77 14,61 8,93 10,57 8,99
Net Present Value (NPV $million) (17,44)(36,93)(46,46)(34,88)(18,16)(1,39) 13,23 22,16 32,73 41,71
NPV over 10 years ($million) 41,71
Internal Rate of Return (IRR) over 10 Years35,0%
Investment needed ($ million) 63,27
 

Scenario B1: TTM +1yr, RDC +10%
@ 17.6% Cost of Capital per year

Year 1 2 3 4 5 6 7 8 9 10
Cash Flow (NOPAT $million) (17,44)(22,93)(17,35)(2,03) 18,84 47,43 36,75 38,65 27,79 38,65
Discount factor 1/((1+r)^t) 1,00 0,85 0,72 0,61 0,52 0,44 0,38 0,32 0,27 0,23
Discounted Cash Flow (PV $million) (17,44)(19,50)(12,55)(1,25) 9,85 21,08 13,89 12,43 7,60 8,99
Net Present Value (NPV $million) (17,44)(36,93)(49,48)(50,73)(40,88)(19,79)(5,90) 6,53 14,13 23,11
NPV over 10 years ($million) 23,11
Internal Rate of Return (IRR) over 10 Years26,5%
Investment needed ($ million) 69,477
 

Scenario C2: TTM +2yrs, RDC +40%
@ 17.6% Cost of Capital per year

Year 1 2 3 4 5 6 7 8 9 10
Cash Flow (NOPAT $million) (17,44)(22,93)(17,35)(11,78)(7,60) 29,63 50,12 36,75 38,65 27,79
Discount factor 1/((1+r)^t) 1,00 0,85 0,72 0,61 0,52 0,44 0,38 0,32 0,27 0,23
Discounted Cash Flow (PV $million) (17,44)(19,50)(12,55)(7,24) (3,98) 13,17 18,95 11,81 10,57 6,46
Net Present Value (NPV $million) (17,44)(36,93)(49,48)(56,72)(60,70)(47,52)(28,58)(16,76)(6,19) 0,27
NPV over 10 years ($million) 0,27
Internal Rate of Return (IRR) over 10 Years17,7%
Investment needed ($ million) 86,83
 

Scenario D3: TTM +3yrs, RDC +80%
@ 17.6% Cost of Capital per year

Year 1 2 3 4 5 6 7 8 9 10
Cash Flow (NOPAT $million) (17,44)(22,93)(17,35)(17,35)(17,35)(2,26) 29,69 51,88 42,00 38,65
Discount factor 1/((1+r)^t) 1,00 0,85 0,72 0,61 0,52 0,44 0,38 0,32 0,27 0,23
Discounted Cash Flow (PV $million) (17,44)(19,50)(12,55)(10,67)(9,07) (1,00) 11,22 16,68 11,48 8,99
Net Present Value (NPV $million) (17,44)(36,93)(49,48)(60,15)(69,22)(70,22)(59,00)(42,32)(30,84)(21,86)
NPV over 10 years ($million) (21,86)
Internal Rate of Return (IRR) over 10 Years10,1%
Investment needed ($ million) 109,81

 
All $ in FY 2000 values
F Eilingsfeld & D Schaetzler, October 2002, "Developing Viable Financing Models for Space Tourism", IAC-02-IAA.1.2.08. 53rd International Astronautical Congress, The World Space Congress, Houston, Texas, 1019 October 2002.
Also downloadable from http://www.spacefuture.com/archive/developing viable financing models for space tourism.shtml

 Bibliographic Index
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