Michael Belfiore reviews the EADS idea of building a suborbital business jet. At the $1.3 billion price tag and unit cost presumably in the high tens of millions, the business case is iffy. In particular, it would probably be a lot cheaper to spin out the Rocketplane XP project out of Rocketplane Kistler and end up with a product that could fly a few years sooner and more seats for the same money.

The Futron study Jeff implicitly cited saying 15,000 customers for suborbital space travel in 2015. If we get 4 providers, it's hard to see how prices stay much above the marginal cost of the fourth provider. RpK and XCOR might have revised their cost estimates since they were estimated as south of $50,000 back when Space Adventures were selling suborbital seats for $100k each. But let's be generous and say that EADS rivals are going to push the price down to $100k by 2015. This is lower than the implicit Futron estimate of $140k if flight starts in 2009, spends 3 years at $200k then works it's way down to $50k in 2021.

At $100k, they could get perhaps $50k in debt payments per seat. They would need 6,500 customers per year to pay 25% interest and 9,400 customers per year to pay back the loan in 9 years. But they are unlikely to get 2/3 of the market if they are fourth to market with a higher price structure. If EADS is indeed the high cost provider, the estimate of how much each flight will contribute to debt repayment is $0. The capacity required to fly 9,400 customers per year at two flights per week per craft with four seats is 23 craft which would add another billion in debt if they are $45 million each.

EADS won't pay 25% interest.

even if they get outside sponsors, they will still be able to
borrow at preferred rates due to the state connection.
I doubt if EADS pays about 5% real interest on any
of their programs, otherwise they'd have gone bust
a long time ago.

At 5% interest, they need about 8,000 customers and 19 space craft to make interest payments and pay down the $2 billion in development and manufacturing. Again, that's assuming $100,000 a head in 2015. They'll need fewer craft at first, but the seat count will be lower too. Still, that's suggests they'd need half the market. So a bet on EADS would presumably be a bet that all the other suborbital companies either fail or have such high costs that prices stay in the $250,000 range until 2015. Even in that scenario, the high prices would likely make the seat count much lower. I think it would be a much better bet to buy two of the existing players and run both suborbital programs. That would take far less than $1 billion for seat capacity that's far higher, far sooner with greater operating margin and manageable technical risk.

This is the killer.
> If the financing comes through, EADS plans to start construction next year

The money part doesn't make sense. This is a business where no one knows the operating costs, or the risks. An investor would have to see potential for really big ROIC to get involved.

It won’t happen.

Sam and all --

The money in suborbital isn't in space tourism, it's in point-to-point on-demand hypersonic travel -- which is most readily done by going exoatmospheric for part of the flight.

The situation with the current suborbital 'Space Tourism' entrepreneurs is that they're hoping to skim the early-adopters and experience hounds -- the sort of people that pay $75k to be led up Everest on a leash -- and then have enough economies of scale that they can start price skimming before they saturate market segment that wants to do this badly enough that their price elasticity is zero.

There is, as sober analysts warn, a high hope to rationality ratio in that model. People are doing it anyway, though; people like Branson who think it's worth doing regardless, and if you can make money on it all the better.

At the X-Prize flights in Mojave I realized that what they really had was a first generation of a really, really, fast point-to-point travel machine.

Right now, business jets are at the pinnacle of their practicality, given today's technology. Several groups are looking (again) at supersonic flight, but the numbers I see say the expense is going to be fiendishly hard to justify. Nonetheless, the fastest bizjet made, the Citation X (mach .93 or so) still sells well despite its high costs (acquisition and operating) and low despatch rate, because people will pay for speed.

Thing is, the delta between the Citation X and the Aerion or Dassault SSBJ proposals, in terms of door-to-door speed, is a matter of a "step" rather than a "leap." The only two ways I can think of to make a quantum leap in performance door to door are:

1. take-off and land closer to actual departure and destination points. This is what has created the thriving market for luxury helicopters, and why Bell is sitting on sixty-some orders for the long-delayed BA609 business tiltrotor. Indeed, the biggest aggro and biggest delays in travel, the reason commercial airline is not Frank Sinatra "Come Fly with Me" and is more like the Greyhound from Hell, is all related to airport infrastructure limits (and airline misuse of the infrastructure, a Tragedy of the Commons, but that's another story).

2. Fly orders of magnitude faster. The only way to do that is to go exoatmospheric, and make a "ballistic business jet," to coin a phrase. You can go New York to Osaka in forty minutes, but you can't do it by staying in Earth's atmosphere. Not with any materials I can build a plane from, anyway.

Virtual meetings are beloved of futurists and software guys, but they will not likely replace face-to-face meetings, in high-stakes business, in our lifetime. Humans are social creatures and we rely on nonverbal cues to an extent our machine interfaces can't reproduce (in part, because our bioscientists can't even agree on what they are). So businessmen and -women will still have to travel in a world where hardly anybody does business only in one neighbourhood.

A lot of people thought Charles Lindbergh was nuts when he proposed buying a 10,000 dollar plane to seek a 25,000 dollar prize. But Ryan, the company, wasn't nuts to build the plane. It put them on the map and they had a good run as a result (later they would pioneer drones).

Will companies pay 100 mil in 2007 dollars for suborbital transports, or "Ballistic Business Jets?" Well, those position holders for the BA609 know it's going to be way over the early $60 million quote and they're hanging in there. All those Gulfstream Vs you see cost somebody $40-50 mil. Aerion's numbers look like $100 mil for a "mere" supersonic business transport with a Mach 2 supercruise.

Space tourism is the bait. Ultra-fast, on-demand travel is the fish.

(for the record, if you don't know me -- I'm an aerospace journalist, pilot, military vet, entrepreneur, and currently working on an aerospace-oriented MBA. DESPITE what Guy K. advises!)

Kevin, you sound like you need to pick up a copy of Harry Stine's Halfway to Anywhere. He discusses transcontinental rockets in depth.

"At $100k, they could get perhaps $50k in debt payments per seat. They would need 6,500 customers per year to pay 25% interest and 9,400 customers per year to pay back the loan in 9 years."

Hi Sam. Could you explain this one a bit more? By debt payments are you saying that the passenger borrows the money to pay for the seat from the launch provider?

And where did 25% interest come from? That's equity-level return, not bank debt. Unless you're operating your financing arm out of the Dakotas like Citi and can in fact get that level of interest. As I'm sure you know, here in Texas usury laws cap the rate of interest at 18%. I'm not sure about New Mexico.

Or are you saying that the launch provider would need 50% of the capital cost of the seat-launch to be financed?

Sorry for the confusion.

Ken, yes it would be the equity investors that need 25% returns. There's no proven market tourist or point-to-point for suborbital except for nuclear bomb delivery and that's already covered by existing fleets of ICBMs.

By debt payments I mean that once you have a craft built, you need to pay off the loan to build it. That means you need operating profit. If you have operating profit of 50% of the seat price, that could go to pay off your construction investment.

If you want to invest $1 billion in a risky proposition you need high returns. That would involve debt tranches that pay debt returns, but if it's only 15%, then the equity would need to return 40% unless you have a subsidized source of capital.

I am suggesting that the payment for research and development and the manufacturing of a fleet of suborbital EADS craft would not be recovered based on the demand indicated by the Futron model (or my estimate of how that would change if there were four suborbital providers in 2012).

It's a bit of a criticism of Michael. He cites Jeff and implicitly the Futron traffic number, but not the Futron expected price in 2012 and 2015. It's not in most journalists interest (with the exception of movie reviewers) to call a business plan or an announcement a dog. For the EADS plan to work with the Futron demand curve, they would almost have to be a monopolist and maybe not then.

I don't know if point to point sub-orbital flight can be made profotable in the near term with forseable technology or not, or whether high end cargo might not be better than passenger service but I do know that for years I have thought what a wondeful slogan Fed-X could have for service across the International Date Line, east to west, "When it absolutely, positively, HAS to be there yesterday!"