Podcast: Why Virgin Orbit Went Bankrupt
Richard Branson’s launch venture Virgin Orbit ran out of cash. Could a buyer pick up the valuable pieces? Aviation Week editors are joined by veteran space journalist Warren Ferster to discuss.
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Joe Anselmo: Welcome to this week's Check 6 podcast. I'm Joe Anselmo, Aviation Week's editorial director and editor-in-chief of Aviation Week & Space Technology magazine.
The space sector has attracted a lot of investment from the private sector, but there's no guarantee of success -- even if you're a world-famous billionaire.
Virgin Orbit, a space launch company founded six years ago by UK entrepreneur Richard Branson, has filed for Chapter 11 bankruptcy protection and is looking for a buyer. The California company's air-launched rocket had placed 33 satellites in orbit during the last two years, but a launch failure in January proved devastating to its already challenging business plan. So, what are the odds that a buyer will rescue the company and what does its bankruptcy mean for other space startups looking to attract capital?
Joining me to break it all down is Aviation Week editor Guy Norris, who has closely followed Virgin Orbit since its inception. We're also joined by a special guest, Warren Ferster, who has more than three decades of experience covering the space industry as a reporter, editor and consultant. So Guy, why don't you kick us off, tell our listeners a little bit about what Virgin Orbit was and what happened.
Guy Norris: Thanks, Joe. For those that perhaps are not so familiar with it, the nugget really that gave birth to the idea for Virgin Orbit was from Virgin Galactic, when they looked to do more uses with the launch capability they had with White Knight Two, which is the aircraft they used to take the SpaceShipOne to drop altitude for the human-carrying missions.
So, they just decided that there was a potential market there. They could spin off all the work they were doing with rocket propulsion and that airlift system, and then it became abundantly clear to them during their research in the mid-2015, 2014 period, that they didn't have enough capability with that system. So, they decided to develop a much more powerful LauncherOne rocket system, which would inevitably have to be carried by something larger to launch altitude, which was of course the 747, which was acquired from sister company Virgin Atlantic and on its retirement in 2015 was ferried over to Texas for initial modification.
So, this idea was essentially, let's build on a plan that Orbital Sciences first came up with, which was really to air launch a payload from underneath a large vehicle and Orbital, of course, used the :-1011 TriStar and Virgin Galactic which then spun off Virgin Orbit two years later in 2017, was wanting to take this idea much further.
So, that was the basic concept and that's where it all began. I know that we're going to hear from Warren perhaps more detail about what went wrong, but essentially right from the start, Virgin had these ambitious plans. As I say, it spun off a dedicated company in 2017, really the Virgin Orbit side of it, but they were forever always lagging behind their ambition. So, for example, in 2015 when I went down to see the aircraft in San Antonio, brand new, delivered from London, the plan then was to do the first drop in 2017.
As we know, that didn't happen until 2019. So, it set the seal really for how this program was going to be done. Everything they did was excellently executed, but it always took a lot longer than anybody seemed to have thought. It was always at least two or three years behind where they expected to go. So anyway, we can get into all of that later on, but that's just to give you a quick snapshot of where the company came from.
Joe Anselmo: Warren Ferster, you just heard Guy’s set up. Were you surprised that the company ran into financial difficulty?
Warren Ferster: Thanks, Joe. No, not really. There's a lot of stuff to unpack here. Guy made a point about their accomplishments lagging behind their ambitions and that that's true, but it's also true of just about every space venture. Nothing in space happens when people say it's going to happen. That's true of every company, every venture I've ever covered in my career in the space industry. So, there's nothing new.
What was unfortunate for Virgin Galactic was that they lagged at a time when the financial markets turned against them. If you look at when they started launching and what was that? That was 2021, that was a time of peak availability of capital. Capital was very cheap and perhaps, had they really gotten up and running by then they would've been okay.
The problem was that they were behind schedule and when they needed another tranche of financing the capital markets soured on them. I think you'll recall they did their SPAC merger in 2021 and already there were some warning signs there because they intended to raise ... I've seen two different figures.
One was $480-something million dollars and I saw another figure of $300 and something, but they didn't come anywhere near that. They raised $228, I think. So, that was a blinking yellow light right there. Interest rates have, in the meantime, skyrocketed and if you look at their stock value, their share value, it's just plummeted throughout 2023. They had, I guess, a kind of rescue financing plan in place, but that unraveled and there's some reports about this gentleman that are less than favorable.
So yeah they lagged behind and then they had that launch failure, it just came ... Everybody falls behind, but they unfortunately, could not get going before the financial conditions turned against them. So, that's what happened here.
Joe Anselmo: Warren, you point out this is partially a sign of the times, of the easy money and low interest rates going away. What does it mean for the rest of the space sector? There's still plenty of money pouring into space ventures isn't there?
Warren Ferster: I think you have to consider Virgin Orbit separately from a lot of the other ventures, well actually not Virgin Orbit, but launch. The experts I've spoken to over the past couple of years have been warning for some time that launch is ... A, it's saturated. There are too many providers and not enough business. The small launch vehicle companies especially, they cannot compete against the operators of medium- to heavy-lift rockets who do these ride-share deals. They cannot compete on a cost per kilogram basis with these companies, SpaceX, the Indian rockets. It's just a really, really tough business to be in.
A lot of the other companies are going to start running into the same challenges of getting capital, that Virgin Orbit ran into. I mean, these are market conditions that don't just affect one industry sector or another. Interest rates are high no matter what. The SPAC craze seems to have lost some of its luster, and so I think money's just going to be a little bit harder to come by. Having said that, there's still a lot of money coming into this sector. It surprises me.
Guy Norris: Following up from what Warren was saying there, I think it's worth reminding everybody that one of the unique selling points really, as Virgin Orbit liked to say about itself, was that it had this responsive space capability that other launch ... even small launch systems, couldn't necessarily provide. That was the ideal plan that really Orbital Sciences had as well of getting out there. Anywhere you could find a runway big enough to park a 747 was basically ... or use a 747 from, was essentially a new launch site.
And to that point, that was a new element of the market that was really underserved and remains underserved in many ways. So, Virgin did have that unique idea, this plan, to really go there. What of course happened, was one of the great users of that market is the military and not necessarily just the U.S. Space Force for example, but the U.S. Space Force is where the immediate market is.
And very strangely, a lot of people thought, there was a tactically responsive space program launch contract that was awarded not to Virgin Orbit last year in October, but to Firefly Aerospace, another competing company, to fly Space Force satellites. So, even there, where there was a potential niche that Virgin should have really honed in on, they didn't necessarily make the most of it. So, that was I think, another warning sign maybe that there was this bubble in the small launch vehicles that was about to burst.
And just one last thing, I love this quote, David Thompson, who was founder of Orbital, always famously said to Antonio Elias, who came up with this idea of air launching with the Pegasus. He said, "Antonio, the battlefield of small launches is littered with corpses." So, he wasn't necessarily talking about vertical launch there, but horizontal launch. So anyway, back to you.
Warren Ferster: That's a good point, Guy. A couple of things about the whole responsive launch capability. It looks better on paper than it actually plays out in reality. We've been talking about responsive launch and responsive space for 20 years. The U.S. government started to get serious about it, or it sounded like it was getting serious about it when it created the Operationally Responsive Space Office and program. That really struggled to get funding and it never really got off the ground.
I think one of the problems with responsive space is that it assumes that you have satellites laying around in a warehouse somewhere, ready to be launched on a moment's notice, but that's not the reality. Satellites, in spite of the fact that we can crank these things out at a pretty good clip these days, they're still pretty much built to order. They're not something that can just pluck off a shelf and have it ready to launch in a week's time. That was the vision for this and maybe it will become a reality, but it's not a reality yet.
I think another thing to point out, and this gets back to the David Thompson quote, the field may well have been littered with corpses, the small launch vehicle business and the launch vehicle business in general, littered with corpses. That's as true today as it was back when David Thompson said it. But I think you have to look at these horizontal launch capabilities with the carrier aircraft.
One the issues that Orbital Sciences ran into with Pegasus was it cost a lot of money to maintain that L-1011 carrier aircraft. It was a huge expense. And so, when you looked at Pegasus, when you looked at the whole setup, it looked really good. You've got this aircraft that acts as the first stage of the rocket. It's reusable, you land it, so it looks like an economically viable proposition, but it turns out that it costs so much money to maintain that capability, that aircraft capability that flies once every few months or so, that that just undermines the economic case.
I remember in back in the heyday of Pegasus, that was launching for ... I think they publicized one launch price, it was $35 million. That's for a capability to put what? About a thousand pounds into lower Earth orbit. At the same time, you had the McDonnell Douglass/Boeing Delta II rocket, which was capable of putting many, many times that into lower Earth orbit and its cost was about $40-$50 million. So, the costs are really disproportionate there, and I think it could be that Virgin Orbit ran into some of the same troubles.
Guy Norris: And just to follow up Warren, I think I was lucky enough to fly with Northrop Grumman, who now own the Orbital system and the Pegasus team, well the Stargazer last year, and it's interesting that they now, having really gone away from Pegasus, are focusing the aircraft use on hypersonic tests, using it as a test vehicle or a dropping platform for hypersonic tests.
What's happening now though, it's interesting to me, is what could happen in the future with the assets of Virgin Orbit. Because yes, everything took longer. They had their two failures, the last one, ironically, for a $100 piece of kit, a fuel filter. So, I mean, this whole thing could have collapsed because of a $100 piece of component, which is such a tragedy.
But anyway, the point is that they were at the point where everything was working. They knew what the problems were with the two launch failures, they'd got over them, they'd done four successful missions, the aircraft is working fine. They were even halfway through developments of a launcher, 1.1, an upgraded version, and they've got six or seven rockets under assembly at Long Beach.
So, all the hard yards are done here. They're just primed to go and they just faulted at this because of the finances, obviously. So, what's going to happen with those assets? You've got this ready-made ... your state-of-the-art factory in Long Beach. I think the big problem really is that everybody's going, they've got to find work. So, the human element here is probably a very fragile part of the equation.
Naturally, people will need to find work and they'll disappear. So the talent is a huge part of this. But the infrastructure is there and it's a very valuable asset, in my view, that somebody could bring this together as a system, get back in the launch business, or they could strip it and separate it. That aircraft, for example, could be a very useful asset for somebody like Northrop or maybe Stratolaunch could acquire it as a backup to the Roc. I mean, there's all sorts of interesting elements here.
Joe Anselmo: So, it sounds like you're saying Guy, that there could be more to unfold in this story.
Guy Norris: Yeah, absolutely Joe, yeah. I think because of the fact that they had got to that ... They were on the verge, as it were, of really doing what they'd always promised to do, and they did have a backlog of customers and they did have this international aspect, with all of these plans for bases in ... operations in Brazil, in the Middle East and the UK. So, it wasn't as if there weren't customers out there. There was a lot of interest and a lot of momentum about to start rolling for this program.
Warren Ferster: So, if you look at the history of bankruptcies in the space industry, the biggest one that comes to mind is Iridium. In the case of Iridium, they did the hard work, the same as you pointed out in the case of Virgin Orbit, they've done all the hard work here and now they're in bankruptcy protection, right?
Well, in the case of Iridium, they did all the hard work. They got their initial constellation up and they were forced into bankruptcy and a group came in there and purchased all of those assets for pennies on the dollar, and they wound up with a full operational satellite constellation, pretty much debt-free and an anchor contract with the U.S. Army. And Iridium has now since launched a second generation constellation, and they're considered to be a very successful company. I'm not saying that that is going to happen in the case of Virgin Orbit, but it is certainly a possibility to consider.
Now, the international aspect is interesting. I don't see an international, a non-U.S., company coming in and buying the assets because that would never pass muster with the U.S. government. The CIFIUS process would never let that happen. But still, it's a nice way to market the system. You've got countries that want to do a launch from their territory, but they don't have their own capability. Here, you can fly this system. In fact, Pegasus – Orbital Sciences used to do this with Pegasus -- you fly this to another country, they launch a satellite from ... I think they did it in the case with Spain. You launch a satellite from the territory of another country. That country waves the flag, "We launched the satellite from our own territory," lots of fanfare and it's a nice little asset to be able to have.
So, I do think that there is value here. And also to your point about hypersonics, excellent point. Stratolaunch, as you you'll recall, was intent on doing an orbital capability with their massive aircraft. And they have since pivoted to the hypersonic test market. I could potentially see that happening as well. Once you wipe all the debt out, that changes the whole game.
Guy Norris: And we shouldn't forget the technical achievements of what the team did because they've ... The NewtonThree and the NewtonFour rocket systems. I mean, this was all done from the ground up. Another reason, obviously why things took so long in the end. But the capability that they developed, it's combining with this ... And also it's a different launch system, the L-1011 that Northrop Grumman has, it just simply drops the launch vehicle and off it goes.
With the Virgin system, they go into a 33 or 30 degree climb. The trajectory is much more energetic and that's part of the higher payload capability that they've got with that. But anyway, to develop that entire launch capability and have an aircraft and a rocket system in parallel, and then meet up somewhere in the middle, that's a hell of an achievement. So, I think when you look at what they did, very worthy and it's got to be worth something to somebody.
Warren Ferster: Just to follow up on that really quick, it doesn't change the dynamics of the small launch market, which again, is incredibly tough. And if you look at almost every company that's gotten into the small launch vehicle, they've either diversified into other markets, or they've moved up to a bigger vehicle. I can't think of a better example than SpaceX, which started off with a small launch vehicle, moved up to the Falcon 9 vehicle and basically abandoned a small launch vehicle program because it's just a really, really tough market.
Joe Anselmo: Well guys, we're just about out of time, but Guy, I wanted to circle back to underscore a point you made at the very beginning. Virgin Orbit is separate from Virgin Galactic, which is Richard Branson's space tourism venture, to take people to the edge of space on rides. You and I were at Space Symposium in Colorado Springs about a year ago, and he was there, he was a rockstar. So, Richard Branson is not going away, right? In terms of space. He's still going strong?
Guy Norris: Well yeah, I mean obviously Virgin Galactic, which yeah, you're quite right, was the originator of this entire thing, has had its own struggles, of course. It's well behind schedule. The big difference is that Virgin Galactic built up its cash reserves to over a billion dollars through stock and debt sales after it went public in 2019. But Virgin Orbit never did that. It didn't build its cash coffers, and I think that was really a danger signal right there. They should have known at that point that they needed to lean and do the right things to streamline and survive. But Virgin Galactic, it's pressing on. They just recently transferred the White Knight Two. And refurbished Spaceship Two is back in New Mexico at Spaceport America. And I think imminently, all things being equal, we should be seeing the first signs of that getting back into the air in the next few weeks and months.
Joe Anselmo: Guy Norris, Warren Ferster, thanks to both of you for an informative conversation and for taking the time to show your insights with our listeners today. That is a wrap for this week's Check 6 podcast. Special thanks to our podcast editor in London, Guy Ferneyhough. Don't miss the next episode by subscribing to Check 6 in your podcast app of choice. And one final request of our listeners, if you're listening to us in Apple Podcasts and want to support this podcast, please leave us a star rating or a review. Thank you for your time and have a great week.