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Monday, Jun 24, 2024

Orbit’s Demise Raises Concern

Virgin Orbit Holdings Inc.’s bankruptcy this month has prompted some experts to wonder if the surprisingly big cluster of space launch companies in Los Angeles is overdeveloped.

The Long Beach-based company found itself in a crowded field of other launch companies, many of them based in Southern California.

Alex King, founder of Cestrian Capital Research Inc., an investment firm in the aerospace and tech industries in Newport Beach, said that between traditional companies like United Launch Alliance, the Colorado joint venture of Boeing Co. and Lockheed Martin Corp. with operations in El Segundo, Space Exploration Technologies Corp., or Space X, in Hawthorne, and newer entrants including Rocket Lab USA Inc., also in Long Beach, there are just too many launch providers.

“Virgin Orbit had such a niche position that if you think about the number of customers they could potentially serve, it’s tiny,” King said. “In the end, they didn’t have a viable business and it doesn’t surprise me what’s happened to them.”

Dan Hart, the chief executive of Virgin Orbit, said in a declaration filed as part of the Chapter 11 bankruptcy proceedings on April 4, that the company and its indirect parent entity, Virgin Investments Ltd., have invested significant capital with comparatively small corresponding revenue to date.

Virgin Orbit has successfully launched four vehicles and roughly 33 satellites.

A fifth launch, from England in January, seemed to have doomed the company.

The Start Me Up mission started out okay but then the rocket, after reaching space, developed an anomaly or glitch that caused it to shut down during firing of the second stage.

“This event ended the mission, with the rocket components and payload falling back to Earth within the approved safety corridor without ever achieving orbit,” according to a release from Virgin Orbit.

Hart said the mission failure as well as challenges raising necessary funds were among issues plaguing the company.

“First, the changing capital markets and higher interest rate environment made obtaining new capital difficult for the Debtors,” Hart wrote. “Second, the Debtors faced heavy pricing pressure from well-capitalized competitors in the commercial launch market.”

Other challenges included the amount of time to develop government contracts, operational inefficiencies that slowed launch rates and substantial fixed capital costs to maintain its launch, manufacturing and space services operations.

“Finally, the (company’s) unsuccessful launch in January 2023 negatively impacted investor discussions,” Hart wrote in the document.

Hart mentioned in his declaration that the cause of the breakdown had been determined and duplicated through ground testing and the appropriate changes had been made to LauncherOne to eliminate the issue on subsequent rockets.

Workers build rockets at Virgin Orbit’s Long Beach facility.

“The (company) expects to receive ‘Return to Flight’ status from the FAA during the month of April and the next rocket is in final integration and test phase in advance of a planned launch in the third quarter of 2023,” Hart wrote in the declaration.

Billionaire Sir Richard Branson, who has a minority stake in Virgin Orbit through Virgin Group Ltd., said in a statement that he had put about $1 billion of his own money into the company, including $60 million since November.

“This significant funding was not enough to counter the strong headwinds and liquidity challenges Virgin Orbit continues to face,” Virgin Group said.

No major benefits

King, of Cestrian Capital, said it is unlikely competitors will be able to take advantage of Virgin Orbit filing for bankruptcy.

Virgin Orbit has let go of 675 employees, or about 85% of its total workforce. King said that some will get picked up by other aerospace companies and while those employees may be talented, there isn’t one that could be a game changer to a new employer.

“It is not like we are talking about a major player that went under; they were a niche player who just started to get a little commercial traction,” King continued. “Aside from a little less competition, I don’t think there is any benefit to anyone else.”

And what about the competition? Are other local aerospace companies one failure away from bankruptcy?

That could be the question on the minds of the executives at Relativity Space. Like Virgin Orbit, the company is located in Long Beach, where it is using 3D printers to make its Terran rockets. The first launch of Terran 1 last month ended in failure although the rocket technically made it into space. It failed to make it into Earth orbit and splashed down into the Atlantic Ocean. The company has not yet released any information on what went wrong.

On April 12, Relativity put out a release about the Terran R, its newest rocket to be 3D printed and requiring 6 times more 3D printing by mass than Terran 1.

Startup culture

To better understand if other aerospace companies are close to bankruptcy, King said one needs to look at the basic economics of startups. The questions they must ask themselves are can you get a big enough market, do you have a clear path to profitability and do you have a quality base of equity investors, he added.

One also needs to look at the class of aerospace companies that went public via a special purpose acquisition company or SPAC, rather than through an IPO, he said.

“Of those, the best of them I think is Rocket Lab,” King said.

He called Rocket Lab relatively well funded with an established launch record with a majority of its launches being successful. The company also has a business plan that is designed to go beyond launchings to other sectors of aerospace which is unproven.

“It will succeed, or it won’t; nobody knows,” King said.

The other company that is in good shape is Spire Global Inc., a Virginia satellite company that has “a thin balance sheet” but is still doing okay, King said.

“But it is an example of how the market has really punished the share price,” he added. “It is very hard environment to run a company in right now.”

As of April 17, shares of Spire had lost about 62% of their value over a 52-week period, when it closed at 67 cents. That compares to the $1.75 closing share price in April of last year.

Astra Space Inc., an Alameda space launch company, had it even worse. Astra had lost about 88% of its share price over the 52-week period, closing at 41 cents on April 17.

While King doesn’t own shares in Virgin Orbit, he does own stock in Rocket Lab and Spire.

Even the strong companies, like Rocket Lab and Spire, are going to have a harder time now than they would have a few years ago, King said.

If any of these companies want to raise money, as Virgin Orbit tried to, it is tougher now than it was, he added.

“Virgin Orbit didn’t have a viable business; therefore, in a tough funding environment it doesn’t surprise me that they went under,” King said. “There were too few customers to keep the business going and it was too small an opportunity.”

It was a sentiment that Eric Berger, senior space editor at Ars Technica, agreed with in an interview with Yahoo Finance Live.

“We’re at a perilous time for space startups because for a long time, with low interest rates, they have been living with basically free money,” Berger said. “Now we’re seeing capital availability dry up, and it’s more expensive to borrow and raise funding.”

A lot of space startups still aren’t showing profits or even positive cash flow, Berger said, including Virgin Orbit.

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MARK R. MADLER Author