Throwing Money into Space

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Florian Hansmann's picture

When asked about his attitude towards the emerging space travel industry, Warren Buffet emphasised that he acknowledges the effort of mankind, but prefers to skip the ride (Time, 2014). Mr. Buffet may be reminiscent of the time in the early 1990s, when Berkshire Hathaway incurred significant losses on investments in a related field, namely the US airline industry (Berkshire Hathaway, 2007). But is it justified for Mr. Buffet’s scepticism to carry over into the space travel industry?

As investors look for matchable industries for comparative analysis, the airline industry comes to mind due to its apparent similarities. However, before arriving at hasty conclusions from cross-industry comparisions, it is necessary to develop an understanding of competitive forces driving the profitability in the seemingly related airline industry.

The global airline industry is characterised by strong competition, partly attributable to more than 2,300 airlines operating globally (MarketLine, 2014).  The strong competition, coupled with a high price sensitivity of consumers due to a low product differentiation, diminishes the ability of carriers to earn supernormal profits (Ben-Yosef, 2005). Moreover, the airline industry performance is closely tied to global GDP growth, with airlines being especially vulnerable to recurring fluctuations in consumer demand and the price of oil (MarketLine, 2014).

Given these factors, which tend to erode the industry’s long run profit potential (Ben-Yosef, 2005), Mr. Buffet seems to make a valid claim when signalling that he has no interest in investing in the airline industry. In fact, at least in the United States, the airline industry is one of the most unprofitable industries, with an average ROIC of just 5.9%, as seen in Figure 1 (Porter, 2008).

How does this compare to the industry dynamics in the space travel industry?

At present, there are about ten privately owned companies engaged in the immensely capital intensive space travel industry. One of them is SpaceX, founded by PayPal co-founder Elon Musk and another one is Virgin Galactic, the brainchild of Sir Richard Branson (FT, 2014a).

With Virgin Galactic charging $250,000 each for a two-hour journey that will blast passengers into suborbital space, this pleasure certainly does not come cheap (CNN, 2013).  Beyond the hype to create an unforgetable one-time experience in space, companies like SpaceX are advancing the idea that suborbital intercontinental travel has the potential to reshape the way people travel, at least the super rich (FT, 2014a). As both the wealth and population of high-net-worth individuals is expected to continue to grow on a global scale (CapGemini, 2014), space travel firms are likely to see their pool of potential customers increase in the future.

The growing, but limited number of target customers financially able to undertake space travel is not the only factor contributing to an industry environment differing from that of airlines. Firms engaged in space travel create high barriers of entry for potential new competitors, due to significant costs of technology investment. This in turn tends to reduce competitive industry pressures. As a result, from a strategic point of view, the space travel industry may be able to perform profitably and outperform the commericial airline industry by a significant margin.

If so, why does Mr. Buffet remain doubtful of the space travel industry's potential?

The reasons for this may be more fundamental. As commonly known among investors, Mr. Buffet prefers to invest in value rather than growth. More specifically, Mr. Buffett objects to the idea of investing in upcoming industries, in which profit growth is mainly driven by significant amounts of capital expenditures (Birkshire Heathaway, 2007). Many new space travel technologies are not just highly capital intensive, but also tend to have long periods of development and serve markets that are nascent (The Economist, 2012). While Mr. Buffet’s investing strategy seems irreconcilable with the prevailing dynamics of the space travel industry at this point, this may not be the only reason why Mr. Buffet is unlikely to invest in the industry anytime soon.

For example, the track record of space travel is not good, estimating that 3% of 540 astronauts on space missions have died flying, leaving aside the number of astronauts died in training and due to suborbital mishaps (FT, 2014b). While most of these deaths occurred under state auspices, there is no pressing evidence of private space enterprise being safer (FT, 2014b). Even if people who sign up for a space trip are less risk averse than average, are they really prepared to risk their lives? Also, who is going to be responsible in the case of a catastrophe? Finding satisfying answers to these questions at present appears difficult, not to mention questions arising on the topic of industry regulation. This leaves room for speculation, a term which a value investor like Mr. Buffet has never become fond of.

However, inspirational entrepreneurs like Sir Richard Branson and Jeff Bezos will not be warded off by speculation, nor by the inherent risks attached to this adventure. The entrepreneurial space travel community in general remains confident that their industry has the potential to become the next major ‘innovation economy’; joining the ranks of the internet, biotechnology and the automotive industry (MarketWatch, 2014). Currently, more companies and tech entrepreneurs than ever before are dedicating resources to developing innovative products and services for space travel. With recent endeavours made to better bridge the gap between technological talent and potential financiers, arguably there has never been a better time to invest in the future of space travel (CNBC, 2014).

Is mankind gazing at the stars too much?

Among the investors and entrepreneurs engaged in space travel, it is noticeable that many of them have earned their recognition in the technology sector. For them, commercial space travel, like tech in the early days, is a step into the unknown. This is something which they find inherently thrilling (FT, 2014a). However, the ambition to explore the solar system did not spring from a newly emerged entrpreneurial elite. Rather, it has been a collective societal desire (Soucek, 2011), rooted in human nature and reaffirmed by institutions such as NASA in recent history, which declared in the 1960s that moving beyong the earth is the ‘manifest destiny of mankind’ (FT, 2014c). Hence, commericial space travel might not only be an end in its own right, but a means to an end, with the end being the recognition that mankind has an unlimited capacity to discover and achieve. In other words, much of what motivates and defines the human race, including the basic instinct to discover, is captured by this industry in an aggregate form. Therefore, capitalising on humanity's long-standing fascination with outer space might be a lucrative affair.                        

With opportunties to participate in space travel likely to remain in limited supply, some wealthy individuals will be prepared to give up a significant proportion of their wealth to be able to attend. Recent private space missions have shown just this, e.g., space tourist Sarah Brightman who paid $52million for her adventure into space (Time, 2015).

In any case, you do not need to be a rocket scientist to forecast that further technological improvements will continue to fuel the craving for a commercially accessible outer space. One day, reasonably affluent individuals will be able to experience first hand the beauty and scope of space in private spaceships. Yet, many investors remain understandably reluctant to provide financing at present, for ventures where a failure of technology costs millions of dollars, or even human lives.

One might think of Thales, the philosopher, who tumbled into a well while gazing at the stars under the observation of his witty maid-servant. She said that he was so eager to observe the stars, that he could not see what was before his feet. Similarly, Mr. Buffet might do well in keeping his mind on the earth to not make a fool of himself. Although, Thales went on to supposedly become the first man to correctly predict a solar eclipse. Thus, if the likes of Sir Richard Bransen succeed in making commerial space travel a reality, then they may have the last laugh. 


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