Space travel is more than just tourism

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Christen Chen's picture

 

“If it quacks like a duck and swims like a duck, then that something must be a duck” is an idiom many people have recited since they were children. Therefore, just because it also flies, then does it mean that space travel can likewise be compared to flying Delta or United Air?

In the decade between 2000 and 2010, it seemed like the U.S. airlines (Delta, Northwest, U.S. Air, and American) were playing musical chairs in bankruptcy court. In terms of customer perception, airlines frequently appear on the bottom 5 on the annual American Consumer Satisfaction Index[1]. The Oracle of Omaha has deemed airlines as a sector that consistently destroys value.

Yet despite all that, there are airlines that have bucked the trend. Germany based Lufthansa and Southwest Airlines for example, have remained profitable in 9 of the last 10 and 10 of the last 10 years respectively. Both have also received numerous customer satisfaction accolades. Its peer Delta, on the other hand, has lost money in 4 of the last 10 years. It may or may not be fair to compare space travel to airlines but comparing it to the worst of the airline bunch is certainly unfair.

Space travel as an industry is still very much in its early innings: an unproven business model with a spotty safety record and a price tag that is out of reach of the layman (and woman). The path to commercial viability is far from fully codified. In deciding on potential business models, it is useful to consider its purpose in the first place, which can likely be three-fold: 1) conventional travel (point A to point B), 2) tourism, 3) scientific advancement.

The most promising use of space travel, albeit still far off, is the opportunity for space travel to give conventional air travel a run for its money and dramatically reduce the time to get from point A to point B. This value proposition may be limited for a flight from New York City to Atlanta but becomes very compelling for customers flying longer distances like New York to Hong Kong, where the flight time can be reduced from 16 hours (non-stop) to just a few hours. Initially, the price and capacity constraints will likely restrict this option to those with the highest opportunity cost on time: for example, a top executive of a U.S. based multi-national who needs to get to Asia for a business meeting or government officials who frequently take overseas trips.

Tourism is likely to be the first use of space travel, but only for those with a high risk appetite and a streak for early adoption. The world has no shortage of adventurous travelers, including the 700 people who have already signed up for the opportunity to visit outer space. However, the hefty $250,000 price tag and its high placement on the adventure meter will likely limit this to a niche travel product, much like a cruise to Antarctica or a hike up an active volcano in Nicaragua will never attract as many customers as a cruise in the Caribbean or a hike up a local mountain trail. For those initial customers, space travel is a way to satisfy their craving for novelty and offers bragging rights as part of an “exclusive early adopter” club.

Finally, as evidenced by the dramatic budget cuts NASA has experienced in the decades following the Apollo launch, scientific advancement is unlikely to be a viable business model without alternate sources of revenue generation.

In order to become a commercial reality, space travel must clear two main hurdles. By far, the largest impediment is its spotty safety record. Recent data suggests that the survival rate for space travel is 97%[2]. Currently, accident rates on U.S. general aviation flights are 7.2 per 100,000 hours flown and fatality rates are 1.3 per 100,000 hours flown[3]. If the space travel companies cannot close the safety gulf between them and conventional air travel, the general public can never fully trust or embrace the technology. Consequently, safety should be the first and foremost measure of performance for the industry and followed secondly by reliability. It is not sufficient for a spacecraft to deliver passengers from New York to Hong Kong in 4 hours one time but it must do so consistently for 100 or 200 times. Along the way, malfunctions and mishaps will undoubtedly occur (as witnessed by the Boeing Dreamliner’s many mishaps), but so long as a sufficient value proposition exists, the path to adoption will likely continue. For the frequent global traveler, the time savings is a value proposition too large to ignore.

Conventional wisdom touts the benefits of first mover advantage with adages such as “early bird gets the worm,” but the case isn’t as black and white in the case of commercial space travel. Harvard Professors Fernando Suarez and Gianvito Lanzolla[4] identified two characteristics as key determinants for assessing whether a first or second mover advantage makes sense in a marketplace: the pace of technological change and the pace of growth of the market.  In a market of slow technological change (eg toothpaste), latter entrants find it hard to differentiate their products from early movers; however the opposite is true when technological change occurs rapidly as early advantages can easily be eroded.  Similarly, when the market overall is growing gradually, early firms have time to “cultivate” and “satisfy new market segments.

 

Space travel technology requires hefty upfront investment to quickly scale the learning curve, and front-runners bear the cost of working out the problem spots, suggesting that latter entrants may stand to benefit once large R&D costs are already sunk. As a result, strong IP protection needs to exist to protect early movers and incentivize them to make the investment. On the other hand, market demand will likely grow gradually at first, due to consumer wariness and a high price tag, which bodes well for early entrants. However, once space travel has reached a critical mass or a “tipping point,” adoption will take off dramatically from there. On balance, the dynamics of the industry favors first movers if the early technological gains can stay with them.

 

Though tourism has garnered the many of the headlines concerning space travel, the real impact lies in its ability to revolutionize conventional travel.  Its poor safety record is a main area of concern, but early commercial aviation (1950s) also bore more than ten times the accident rate of today’s aviation, providing some comfort that the safety of space travel can climb dramatically from here. Whether it takes 60 years for space travel to reach commercial viability is the real million dollar question.

 

 

References: 

[1]Ausick, Paul. America’s Best and Worst Airlines. USA Today. Web. April 26, 2014. http://www.usatoday.com/story/money/business/2014/04/26/best-worst-airlines/8144891/ 

[2] Gapper, John. Showmanship and Business Collide in Virgin’s Space Venture. Web. Financial Times. November 2, 2014. http://www.ft.com/intl/cms/s/0/2efcfa04-6279-11e4-9838-00144feabdc0.html#axzz3JzeR37Hc

 

[4] Lanzolla, Gianvito and Suarez, Fernando. The Half-Truth of First Mover Advantage. Harvard Business Review. April 2005. https://hbr.org/2005/04/the-half-truth-of-first-mover-advantage