A (New) Mexican Standoff at the Old Spaceport

Richard Branson hangs off the side of the Virgin Galactic Gateway to Space in New Mexico. (Credit: Douglas Messier)

By Douglas Messier
Parabolic Arc Managing Editor

Starting on Tuesday, the taxpayers of New Mexico will begin to see the first returns on their $209 million investment in Spaceport America – the futuristic launch base they funded in the desert for Sir Richard Branson’s Virgin Galactic suborbital tourism company.

Virgin Galactic’s first monthly payments – $83,333 in facilities rent and $2,500 in ground rent – are dwarfed by the cost of the spaceport and the space plane that will fly from it. However, they constitute a major milestone in a bold and risky effort to jump start a suborbital space tourism industry that, to date anyway, has been all bucks and no Buck Rogers.

How soon Virgin Galactic will begin rocketing hundreds of of wealthy clients – who include Ashton Kutcher, Victoria Principal and Sir Richard himself – into space from New Mexico at $200,000 per seat remains unclear. Branson’s first SpaceShipTwo, named the VSS Enterprise, has yet to take its first powered flight from its development facility in Mojave, Calif. A rigorous test flight program, followed by licensing by the Federal Aviation Administration, will likely take at least a year – and possibly much longer.

Meanwhile, a dispute over just how much liability Virgin Galactic should have if the company injures or kills any its well-heeled clients during flights has the company hinting strongly that it will leave New Mexico for another state willing to give it more protections. Virgin Galactic wants as little liability as possible, something that has not gone over very well with trial lawyers. Both the company and New Mexico need other tenants at the spaceport to cover operating costs, something they say will be impossible without the extra protection.

The liability question will be considered by the Legislature, which begins its 2013 session – coincidentally enough – on Tuesday, the same day Virgin Galactic will begin to pay rent.

A Long and Dusty Road

Such a future would have been unfathomable to anyone who attended the ceremonial groundbreaking for the spaceport, which took place on June 19, 2009 in a barren stretch of desert 20 miles southeast of the town of Truth or Consequences.

In 18 months, state officials declared confidently, New Mexico would turn over the spaceport to Virgin Galactic, which would shortly thereafter begin the first regularly scheduled commercial trips into suborbital space. New jobs and tourists would flow into the poor counties surrounding the spaceport, bringing a much needed boost to the region.

Things didn’t quite work out as planned. Construction at the remote site has been plagued with delays. New Mexico Spaceport Authority Executive Director Steve Landeene left under an ethical cloud. When officials gathered at the construction site in October 2010 – a time when the facility should have been being readied for occupancy – the runway was the only major part of the project completed. The Terminal Hangar Facility (THF) — where SpaceShipTwo and its WhiteKnightTwo carrier aircraft were to be housed – was a partly finished shell.

There also was political bumps along the road. After taking over from spaceport champion Bill Richardson in January 2011, new Gov. Susana Martinez cut NMSA’s budget, fired its executive director despite a plea from Branson to retain him, and replaced its entire board of directors. When Martinez appeared at the spaceport in October 2011 for the renaming of the THF as the Virgin Galactic Gateway to Space, the facility was more than a year away from completion.

All these problems took their toll. According to a schedule in the original Development Agreement, the Date of Base Building Standard Completion – the point at which the terminal facility would be essentially completed – was originally set for July 30, 2010. Instead, it was reached on Nov. 15, 2012 – nearly two years and four months late.

The Base Building Standard Completion milestone means that “the Virgin Facilities and the THF Common Facilities are sufficiently complete, in accordance with the THF Construction Documents, so that Virgin can safely occupy and utilize the Virgin Facilities and the THF Common Facilities for the use for which they are intended, without material inconvenience.”

The milestone also means that New Mexico Construction Industries Division (CID) has made the required inspections of the facilities and has issued a final certificate of occupancy. A punch list of outstanding issues was prepared and is being worked through by contractors.

The Date of Base Building Standard Completion began a 60-day countdown to the Rent Commencement Date that takes place on Tuesday. This latter date triggers the first of millions of dollars worth of financial commitments by Virgin Galactic in the form of rents, passenger fees and a performance guarantee.

During the initial five years of the 20-year lease, Virgin Galactic will pay the following annual rents and fees:

Facilities Rent Payments: $1 million per year ($83,333.33 per month)
Ground Rent: $30,000 per year ($2,500 per month)
User Fees: $600,000 per year minimum ($50,000 per month)

Minimum Annual Total: $1.63 million per year
Minimum Monthly Total: $135,833.33

When you look at these numbers, you get an understanding of how much the construction delays have benefited Virgin Galactic, which has suffered its own delays in getting SpaceShipTwo ready to fly into space. If the spaceport had been completed on time two years ago, the company would have spent millions on a facility from which it wasn’t flying anything.

After the first five years, the $1 million facilities rent will be adjusted to allow New Mexico to recover the cost of building the facilities with interest. The new payments will be

calculated as monthly amortization of the remaining Final Virgin Facilities Cost (after applying all the payments made by Virgin during the first five (5) years) based on a twenty (20) year amortization, calculated using the latest true interest cost of the most recent general obligation bond issued by the State of New Mexico as of the Effective Date so that, at the end of the Initial Term, the full Final Virgin Facilities Cost, amortized based on a twenty (20) year amortization, is paid.

The $30,000 annual ground rent also covers the first five years. Afterward, the amount will be adjusted every five years “based on the percentage increase in the CPI for the latest available five (5) year period.”

The company is also required to put up a $2 million performance guarantee that covers the possibilities of the company discontinuing operations in New Mexico and beginning them elsewhere. Under the terms of the lease, if Virgin were to leave, NMSA could:

• apply up to $500,000 to past due payments
• recover $1.5 million “if, and only if, any Virgin parent, member, affiliate or subsidiary (or any parent, member, affiliate or subsidiary thereof), or any entity with ownership or management substantially the same as Virgin’s, commences operations anywhere outside of the Spaceport (other than operations in Mojave, California, solely as part of Virgin’s development of technology for commercial spaceflight and not for paying people, experiments or cargo) within two (2) years of the date of discontinuance of operations, using a launch system substantially similar to that described in the Virgin Business Plan.

NMSA would not be able to recover the $1.5 million portion of the bond as long as “Virgin employs the minimum number of full-time employees and launches the minimum number of flights from the Spaceport with the minimum number of passengers required….and…at least seventy five percent (75%) of the total number of flights launched by Virgin carrying paying people, experiments or cargo are launched from the Spaceport.”

The tables below show the minimum number of flights, passengers and full-time employees required for Virgin Galactic to avoid losing the $1.5 million portion of the bond. Year Zero — the year before the start of commercial operations — was set for 2009, which was the expectation at the time the deal with finalized. The figures for the minimal number of annual flights and passengers are based on Virgin Galactic’s business plan.

Minimum Number of Yearly Flights and Passengers

Minimum Number of Full-Time Employees

++ Year 1 starts on the Date of Beneficial Occupancy and ends on December 31 of the same year; thereafter, the Lease Year is the twelve month period commencing on each annual anniversary of the Date of Beneficial Occupancy.

* Year 0 is the year prior to the start of commercial flight operations.

The Date of Beneficial Occupancy mentioned in the mentioned in the note cannot take place any earlier than 120 days after the Date of Base Building Standard Completion, which was Nov. 15. So, the earliest date of beneficial occupancy would be the middle of March.

User Fees

The user fees are based upon the number of passengers flown in a year. The lease agreement requires Virgin Galactic to pay a minimum of $50,000 per month in user fees totaling $600,000 annually.

The user fee structure is complicated. Virgin Galactic will pay more for flights that take place during pre-set exclusive airfield use periods during which the airfield is reserved only for its own use. It will pay far less for non-exclusive use flights, which would take place when other tenants are able to use the runway. To date, the spaceport has no other tenants, which raises concerns about the viability of the spaceport.

To complicate matters further, the user fees are calculated at different rates depending upon how many flights and passengers Virgin Galactic flies in a year. There are also separate user fee structures for when Virgin Galactic flies 100 or fewer exclusive use flights and for when it flies more than 100 flights annually.

Confused? That’s understandable. The following tables should help to clarify matters.

User Fee Structure for 100 or Less Exclusive Use Flights Annually

Proforma Model Based on 100 or Less Exclusive Use Flights

As you can see in the top table, the more Virgin Galactic flies, the lower the per-flight and per-passenger fees become. Just by doubling the number of passengers flown from 143 to 285, the exclusive airfield use fee drops from $75,000 to $35,000. Double that number again to 570 passengers, and the corresponding fee drops to $10,000 per flight. There are also steep drops in passenger and non-exclusive use fees.

The bottom table shows examples of the fees paid under different flight and passenger scenarios. You’ll note that the minimum base payment of $600,000 per year is about $5 million below the operation and maintenance expenses for the spaceport. Even if Virgin were to fly 570 passengers with 100 exclusive and 50 non-exclusive flights, the total fees would not cover operations and maintenance fees.

User Fee Structure for Greater Than 100 Flights Annually

Proforma Model Based on the Virgin Galactic Business Plan

Years 1 through 5

Years 6 through 10

The fees shown above are subject to increases or decreases each year depending upon the consumer price index (CPI), with an annual cap of 3 percent above or below the previous year’s fees.

As the facility’s anchor tenant, the lease gives Virgin Galactic exclusive use of two blocked out missions periods per day lasting two hours apiece seven days per week throughout the 20-year lease. The rest of the times can be booked by Virgin Galactic and any other tenants of Spaceport America on a first-come, first served basis.

The exclusive blocked times could be reduced depending upon Virgin Galactic’s flight rates. If the projected number of missions for a year is less than 100, the company will be limited to a pair of two-hour exclusive blocks on Monday, Wednesday and Friday. If the mission rate falls before 50, Virgin Galactic will have exclusive rights to fly during two two-hour blocks of time on Tuesday and Friday. The goal is to lower NMSA’s operating costs by limiting the days of operations.

The lease provides NMSA with an out if Virgin Galactic is not able to perform a designated number of flights per year.

That provision could well come into play sooner rather than later, depending upon how quickly Virgin Galactic can begin commercial flights. The company had hoped to begin powered test flights in Mojave by the end of 2012, with the first commercial flights in New Mexico about a year later. That schedule appears to have slipped, but it’s not clear precisely how much.

All this assumes that Virgin Galactic will actually fly out of New Mexico. That is up in the air at the moment.

The Liability Issue

New Mexico has already passed an informed consent law that prevents passengers and their heirs from suing except in the event of gross negligence or intentional harm. However, that law only covers the spaceflight operations part of Virgin Galactic’s business.

Virgin Galactic is also a spacecraft builder, having bought out Scaled Composites’ interest in the Spaceship Company that constructs the WhiteKnightTwo and SpaceShipTwo vehicles. So, Virgin wants the law extended to cover its manufacturing operations as well as its suppliers. Such an extension has gone down to defeat repeatedly in the New Mexico Legislature due to opposition from trial lawyers who feel it gives away too many of the rights of passengers.

Virgin Galactic officials have been saying they will evaluate the situation if the measure fails again in 2013. They say they are not only concerned about their own liability but the viability of the spaceport because other companies are refusing to locate there unless the informed consent law is extended.

NMSA officials have made the same point about the need for other tenants. The tables above show that even if Virgin Galactic hits very high flight and passenger rates, the revenue generated would be insufficient to cover Spaceport America’s operating expenses. A lack of additional tenants would make operations expensive for both NMSA and Virgin Galactic.

If legislators defeat the proposal and Virgin Galactic does walk, New Mexico will be able to recover some portion of the $2 million performance bond. Just how much would depend upon the circumstances of the departure. It could be as little as $500,000.

Virgin Galactic is probably going to get its way, if only because that the prospect of Spaceport America sitting empty in the desert, unused save for a handful of sounding rocket launches annually, is far worse than the alternative of taking away the rights of people brave enough to spend $200,000 apiece and risk their lives on a first-generation suborbital space plane.

The Unknown

Assuming that Virgin Galactic gets what it wants and stay in New Mexico, there’s one other issue that is perhaps even more important: When will the company actually get to use the spaceport for commercial flights. And that is where things get really interesting.

SpaceShipTwo is set to begin its first powered test flights later this year using a “starter motor” that will be smaller than the full-scale hybrid engine that will be used for flights into space. The motor will allow pilots to test the space plane in the transonic flight region, which would be a major step forward.

Whether the full-scale RocketMotorTwo engine, powered by nitrous oxide and rubber, will be ready to fly this year is an interesting question. There have been stories for years – persistent, consistent and never really denied – that the motor just doesn’t work very well. Hybrid motors can function effectively for smaller vehicles, such as the smaller SpaceShipOne vehicle that flew in 2004, but are difficult to scale up. SpaceShipTwo is three times larger than its predecessor.

Virgin appears to be hedging its bets. There is on-going development and testing of two backup hybrid motor designs in Mojave. Virgin Galactic is also working on a long-term solution, a liquid motor for the LauncherOne rocket that would be air launch satellites from WhiteKnightTwo. That motor could eventually replace the hybrid one on SpaceShipTwo in about three or four years.

Why this Matters

In recent months, a popular meme has began to appear on social media that goes something like this: “I was promised flying cars/trips to Mars/hotels in the stars, and all I got was Facebook.”

The meme is a reflection on the supposedly broken promises of the Space Age, where men walked on the moon during its first 12 years but haven’t ventured any further than low Earth orbit since Apollo 17 splashed down in the Pacific 40 years ago last month. The future just ain’t what it used to be. And, if you ask some people, it’s getting worse all the time.

A same pattern risks repeating itself in a desert in southern New Mexico. Gov. Richardson and Sir Richard made extravagant claims to the taxpayers of New Mexico to gain support for an enormous public investment in an industry that didn’t even exist yet. Both sides have been struggling to keep those promises ever since. And now the entire venture hangs in the balance, dependent upon how much value the legislators in Sante Fe put on the lives of Branson’s millionaire clientele.

The stakes are high, and the repercussions would go far beyond whether New Mexico ends up with an empty spaceport and Virgin Galactic flies from somewhere else. This partnership has been the standard bearer for the nascent commercial suborbital industry. Branson and his Virgin Group, by dint of their reputations, wealth and public relations brilliance, have given the industry credibility and stature that it would not otherwise possess. New Mexico’s willingness to invest has inspired other entities to make investments in the industry.

If this partnership collapses, or proves nonviable in the future, then a lot of that good will goes away. Governments could be very reluctant to invest in space companies and the types of infrastructure projects that the industry needs to enable its operations. And that could have some serious consequences.