2/28/2005

The Business of Space Travel

Finding a market niche is hard to do with so many people pushing different products. One niche that has yet to be fully exploited is now being developed by a Chinese American company. They plan on selling space flights and space station visits. Their cheapest product includes a short sub-orbital flight taking you to the edge of the atmosphere. The exact price of the sub-orbital flight was not stated in the article “Space maybe the final frontier for Chinese Tourists” but it did mention a lofty 120,000 dollar down payment!!! Most people will never have that kind of cash but as the market increases and the demand stays constant prices will fall and consumer's reality may include the stars.

3 comments:

Fred said...

With all the technological increases it is pretty fun to think of things like this but is it really a business that will be able to hold itself up. The price to do something like this probably won't get much cheaper with the market either, even with the market increasing. The amount of money that it cost to travel by space craft and maintain all the equipment is horrendous. Also, isn't there a lot of policies and strict rules on space travel; much of it is controlled by the government. It just seems a little far fetched to me.

June said...

If I had an extra $120,000 I would probably take a trip into space. I suppose the demend wouldn't haave to grow too large to maintain such a venture. Which is a good thing, because I don't think the world has too people willing to shell out $120,000 for a space ride.

Dr. Tufte said...

-1 on June's comment for spelling errors.

Space travel is an excellent example of an industry with huge economies of scale. Almost all of the costs of space travel are fixed costs of development and testing. The actual marginal costs of flight and refurbishment of the vehicle are expected to fall to the range of a first class plane ticket.

What we are seeing right now is the development of a market for early adopters. If these firms can get a few people to fork over $100-200K they can start rapidly paying off those fixed costs, and when they do the price will start dropping towards marginal cost. (Note that the fixed costs of developing SpaceShipOne - the X Prize winner and future vehicle of Virgin Galactic - were around $25M. That can be covered with 125 passengers at the prices that Virgin Galactic is charging, and after that it is all pure profit sending a strong signal to others to enter the industry and drive the price down.

As to Fred's comment, part of the problem with the "horrendous" cost of spaceflight is that it isn't run by the government as a profit maximizing enterprise. Governments tend to price things at average total cost rather than marginal cost. The effect of this is a problem called "lazy monopoly". The skinny on that is that average cost pricing does not lead to profit maximization, so when costs rise, prices are reflexively jacked up to cover them. What you end up with is a product that costs a lot more than if it were produced in the private sector.