Pie in the Sky? The Economics of Space Travel

SpaceX hopes to take paying passengers into deep space next year. Is this a real business or an ego trip?

An awfully big adventure

Elon Musk announced on Monday (27 February) that his space company SpaceX has been contracted by two private citizens to circumnavigate the moon and return to Earth late in 2018. The mission will not land on the Moon but the two privileged individuals will get close. And they have already paid a substantial deposit.

The identity of the amateur astronauts is unknown – apparently, they know one another – but they can only be drawn from a tiny elite group. Firstly, they would have to be billionaires as they must be forking out something above US$100 million for the ride; and secondly they will have to pass the stringent health and fitness tests that SpaceX intends to impose on them. And then they have to pass the training exams.

So one might surmise that there is not exactly a mass market for this product. Or is it a service?

NASA still rules space

Moreover, as SpaceX admits, the project would not be feasible without the involvement of Uncle Sam in the form of NASA. NASA, let us recall, is still the pre-eminent national space agency in the world with an annual budget of around US$20 billion.

NASA’s Falcon Heavy Rocket, developed in collaboration with SpaceX, is due to be launched in a test flight this summer and will be the most powerful rocket in use since the Saturn V, which as every schoolboy used to know, was the vehicle for the Apollo moon programme in the late 1960s and early 1970s. The Falcon Heavy Rocket is already well behind schedule – it was supposed to come into service in 2013.


Also later this year, SpaceX, in collaboration with NASA will launch its Dragon 2 spacecraft which will dock, unmanned, with the International Space Station which orbits at about 200 miles above the Earth’s surface. A second manned mission will make the same trip in the second quarter of 2018. SpaceX already has a contract to make four missions to the International Space Station per year. The financial logic is that NASA and other government space agencies can reduce costs by outsourcing some space activities to the likes of SpaceX.

According to the New York Times[i] the Falcon Heavy Rocket costs US$90 million to build and launch – though presumably there are economies of scale here as in the more rockets they launch the cheaper the unit cost. (“Heavy” refers to the payload, rather than the rocket itself).

But SpaceX is not unique in NASA’s favours. Boeing (NYSE:BA) also has a contract to ferry passengers to the ISS.

No astronauts have ventured beyond low-Earth orbit since the last of NASA’s Apollo moon landings in 1972. NASA is working on its own heavy-lift rocket, the Space Launch System which will carry a spacecraft called Orion capable of taking astronauts to deep space once again. Supposedly this spacecraft will be launched, with astronauts, in 2019.

What is the business model?

I doubt if SpaceX’s business model is to become a space tourist company – a sort of Orient Express to the Moon. It seems to me that the two space tourists are most likely useful idiots who will sub the company’s real long-term goal – to be a favoured contractor for government-funded space programmes. In so doing they will generate unparalleled media attention for the company – although if they don’t make it back (perish the thought) that coverage could be negative.

In fact, space tourism is already with us. Seven space tourists have already paid tens of millions of dollars to fly on Russian Soyuz rockets to visit the ISS. The question is whether it could ever be a viable business.

It is worth noting that while SpaceX has launched satellites it has yet to launch crew into near-Earth orbit. And there have been glitches with unmanned flights.

On 19 February, a crewless Dragon capsule taking 2,500 kilos of supplies and equipment to the ISS aborted its rendezvous. It successfully arrived a day later.

I doubt if SpaceX’s business model is to become a space tourist company – a sort of Orient Express to the Moon.

And in September last year a SpaceX rocket exploded on lift-off at Cape Canaveral destroying a $200 million communications satellite owned by Israeli technology company Spacecom (TASE:SCC). Interestingly, this was the first pre-ignition rocket disaster since 1959. The satellite would have extended Facebook’s reach across much of Eastern and Sub-Saharan Africa. Hours after the event, Facebook CEO Mark Zuckerberg expressed disappointment on his Facebook page, saying that “SpaceX’s launch failure destroyed our satellite”. This suggests that relations between Mark and Elon are less than cordial. Facebook has since invested in high-altitude drones – just as Google has been investing in high-altitude balloons equipped with communications technology.

Mr Musk posted a brief explanation on Twitter: “Loss of Falcon vehicle today during propellant fill operation. Originated around upper stage oxygen tank. Cause still unknown. More soon.”

That was not the first of SpaceX’s misadventures. In June 2015, a rocket carrying NASA cargo to the ISS fell apart in-flight when a strut holding a helium bottle snapped, setting off a chain reaction that destroyed the rocket moments later. SpaceX planned for 18 rocket launches in 2016 but the final tally was barely half that.

The lure of Mars

SpaceX already envisages that, going forward, the Dragon spacecraft will be used for further missions in “deep space” – by which they mean Mars. You certainly can’t accuse Elon Musk of lacking ambition.

In an address to the 67th International Astronautical Congress in Guadalajara, Mexico in September last year, Mr Musk, who has been described as one of the greatest engineers of all time, provided the engineering blueprint for how a manned mission to Mars might work. Check out the very slick video of the concept on YouTube if you enjoy that kind of thing (as I do).

The key design feature of the Mars rocket – as for the Dragon 2 spacecraft – is its capacity for propulsive landing – a kind of reverse thrust mechanism whereby the spacecraft can land safely even without a parachute. This technology permits re-use of the same rockets and spacecraft again and again which changes the economics completely. As Mr Musk says in one of his promotional videos, if aircraft had to be thrown away after each flight, air travel would be prohibitively expensive! The fact that aircraft have long working lives and can undertake hundreds of thousands of flights before they are scrapped means that air travel is the cheapest form of transport on a passenger per kilometre basis.


Each of the SpaceX Mars vehicles would take 100 passengers on the journey to Mars, with trips planned every 26 months, when Earth and Mars are closest to each other. The spacecraft would have the same internal capacity to a Boeing 767 airliner. Mr. Musk said the first flights would be fairly expensive but he foresaw that ticket prices might eventually fall to between US$100,000 and US$200,000 per person. This opens up the possibility that “colonies” of human beings could be established on Mars more quickly than we had supposed – perhaps even before 2050. Mr Musk admits that it will then take between 40 and 100 years for the Mars colony to become self-sustaining.

Mr Musk estimated it would cost US$10 billion to develop the Mars rocket, and he said the first passengers to Mars could take off in principle as early as 2024. (An uplifting prospect, though surely over-optimistic – NASA’s target date is the mid-2030s). For now, SpaceX is financing development costs to the tune of tens of millions of dollars a year. That will not be enough.

Beyond Mars

SpaceX’s Mars Colonial Transporter (MCT) has been renamed the Interplanetary Colonial Transporter (ICT) suggesting that Mr Musk’s vision extends beyond Mars. He wants humanity to become a “multi-planetary species” in order to ensure our survival in case of some calamity like an asteroid strike against the Earth (which statistically is likely to happen sometime in the next million years…). A proposed booster system which deploys 42 of SpaceX’s new more powerful Raptor rocket engines could be used for even more distant trips to places like Europa, Jupiter’s icy moon which may contain life in its oceans.

Where’s the return?

Apart from the adventure of going to Mars, investors are entitled to ask: Where is the pay-back? One very tangible source or return will be in mining minerals in space. I wrote about this back in the August 2016 edition of the MI magazine. We have insufficient platinum group metals and rare Earth elements on this planet. They might be abundant on Mars.

And the finances?

The technology is one thing. What is less clear is how SpaceX will raise the money needed to bring its Mars dreams to fruition. To be fair, during his presentation Mr. Musk did put up a slide headed funding.

The first bullet point was Steal underpants – a humorous reference to an episode in the popular US TV cartoon South Park in which the boys uncover a bizarre conspiracy involving gnomes stealing underpants. When confronted about the reasoning behind the plan, a gnome replies: “Phase one: collect underpants. Phase two: [pauses, points to question mark]. Phase three: profit”. It is not recorded what the serious-faced men from Goldman Sachs made of that slide.

Critics question whether Mr Musk’s dreams of colonising Mars are not distracting the company from its more mundane core business of launching satellites…

The second bullet point was revenue from SpaceX’s businesses — launching satellites and sending NASA cargo and astronauts to the International Space Station. The third bullet point was Kickstarter – presumably a fresh injection of equity from Mr Musk’s own resources and other investors. But he admitted that SpaceX would probably not be able to do it alone. “Ultimately, this is going to be a huge public-private partnership,” he said. That means that the project will require government funding from NASA and other national space agencies.

SpaceX has received much of the financing for its rocket development directly from NASA, generating revenue from contracts to take cargo to and from the International Space Station. The United States Air Force has also provided US$33.6 million for the development of the Raptor rocket engine[ii] – no doubt useful, but a drop in the ocean.

Critics question whether Mr Musk’s dreams of colonising Mars are not distracting the company from its more mundane core business of launching satellites – especially given that SpaceX’s Falcon 9 rocket was grounded at the time of this address, further to the failed launch.

Billionaire rivals: Bezos and Branson

Mr. Musk faces competition from other billionaires with vaulting ambitions in space. Jeff Bezos, the founder of Amazon (NASDAQ:AMZN), has his own rocket company, Blue Origin, which last September announced the development of a new rocket, New Glenn. This approaches the Saturn 5 in stature, but is much smaller than SpaceX’s Falcon rocket.

At the International Astronautical Congress, Robert Meyerson, Blue Origin’s president, said that New Glenn was designed to take people into space, although it will also be able to launch satellites. The images the company released showed the satellite-carrying version but Mr. Meyerson disclosed that “there are other versions that will have a space vehicle on top.” Mr. Meyerson said Blue Origin had an even larger rocket, to be called New Armstrong, on the drawing board.


Then there is Sir Richard Branson who is the largest shareholder in Virgin Galactic based at Spaceport America in New Mexico. Virgin Galactic has been investing in three main areas: human spaceflight operations, small satellite launch and advanced aerospace design, manufacturing, and testing.

Yesterday (02 March 2017) Virgin announced that it is breaking the company into three separate entities. Virgin Galactic will be the commercial human spaceflight service provider and The Spaceship Company will continue to offer design, manufacturing and testing services to build vehicles for Virgin Galactic. The group’s small satellite LauncherOne team will become a new company to be christened Virgin Orbit. Virgin Orbit will be led by Dan Hart, who joins after 34 years at Boeing where he was responsible for all the company’s satellite programmes for the US government and numerous allied countries.

Virgin Galactic has had its own reverses since being founded in 2004, most notably the October 2014 loss of the spaceship VSS Enterprise with one fatality. The crash was attributed to an as yet unidentified in-flight anomaly.

Public companies to watch

For those who can’t wait for SpaceX and others to become investible, there are numerous public companies which are already making money out of space. Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT) are key contractors to NASA and other state space agencies such as the European Space Agency (ESA). So are Orbital ATK (NYSE:OA), Northrop Grumman (NYE:NOC), Raytheon (NYSE:RTN) and Hewlett Packard (NYSE:HPE)[iii].

And don’t forget the robot developers – we shall need robots on Mars. I recently came across an impressive video from Boston Dynamics of androids suitable for service on Mars. Having googled them, I discovered that Boston is a wholly owned subsidiary of…Google (NASDAQ:GOOGL). So Google too will be player in the new space age.

SpaceX has a mountain to climb: but there is lucrative pie up there in the sky. And it won’t get eaten without big egos.

[i] See: https://www.nytimes.com/2017/02/27/science/spacex-moon-tourists.html?_r=1

[ii] See: https://www.nytimes.com/2016/09/28/science/elon-musk-spacex-mars-exploration.html?action=click&contentCollection=Science&module=RelatedCoverage&region=EndOfArticle&pgtype=article

[iii] See list of top contractors at: http://www.fi-aeroweb.com/Top-100-NASA-Contractors-2015.html