SpaceShipOne test pilot Mike Melvill (right) said he would be willing to pay a million dollars to fly that vehicle. What kinds of unusual economic tradeoffs will future suborbital and orbital spacecraft create? (credit: Scaled Composites)

The price of privation

by Sam Dinkin
Monday, May 24, 2004

Would you take a job where you have all your time free, you just have to sit in a tiny chair? What if it paid $750,000 a year? Well, I just priced a flight from Austin to London in coach and it cost about $3,000 less each way than Austin to London in business class ($2,000 vs. $8,000 round trip). If you work 250 days at $3,000 a day and all you have to do is sit in a small seat instead of a large seat, that would come out to $750,000 a year. For some reason, travelers are unable to arbitrage the price of privation. If my boss is willing to pay $3,000 per flight to someone else in order for me to be comfortable, why won’t he pay me $1,500 directly and I will just be uncomfortable.

D.E. Shaw’s travel policy paid its employees half the difference between coach and business class when they traveled in coach. They risk their employees traveling to Europe more often. But they would need to have their employees take about twice as many flights for their policy to cost more than paying for business class.

Pilot Mike Melvill told CNN after his test flight of SpaceShipOne to 65 kilometers up on Thursday, May 13, that “I feel great, it was fabulous. I would pay a million dollars to do that again.” If he wants to do that again in a few years as a passenger, he will probably only have to pay $102,000 and he can get all the way to 100 kilometers and get trip cancellation insurance to boot.

A few years later, he might be able to do the trip for much less. If there is sufficient demand, a $10 million space plane could go up three times a day for ten years with two passengers for a capital cost of a couple thousand per flight. Add in crew, maintenance, spare parts (and plane) and fuel and Mike will have to be paying at least in the roundtrip-in-business-class range. Much of the $102,000 for the early flights will be rental time for the plane in the hangar.

But Mike Melvill says he is willing to pay to fly. What should he be charged to sit in the pilot’s seat? He probably does not have $1 million to pay once a day and will likely find a rocket company willing to pay him instead. However, a competitive market might result in a low salary. Once rocket piloting comes out of the realm of the test pilot into the realm of the commercial pilot, it may be possible to attract pilots for the “airless” lines who are willing to work for less than their counterparts in the airlines. Having the origination point be the same as the destination point is a great perquisite to go with the daily thrill rides.

Economy vs. luxury

There are some new innovations in the price of privation once there is point-to-point service. Consider what people might be willing to pay for this service. There certainly seem to be a lot of people for whom an extra day or two on the ground is worth a fair bit of money. There are about eight million millionaire households in the US, about seven percent of all households. When the economy doubles in fifteen years or so, there are likely to be more than thirty million millionaire households as we move inward on the income bell curve. A subgroup of them (maybe 5%) will have an earner making $1 million/year. That works out to $500/hour. If we can get them two extra working days, that’s a premium of $8,000 per roundtrip. Suborbital rocket point-to-point is probably not economical at $16,000 per roundtrip today, but people are getting richer and technology is improving. If the utilization is high enough, $16,000 is feasible just as for tourist hops. If business travelers can make $100,000 a year and fly business class at 7.5 times their rate of pay for a big seat, maybe million-dollar-a-year executives can pay $60,000 per round trip. Airless planes may not have enough subsonic cross range to fly into and out of major air hubs where sonic booms are likely to be a problem. If not, they will not enter the mainstream as quickly. Another set of critical questions that will need to be answered will be about the desire for economy versus luxury on the first airless lines that start using rocket ships for point to point service.

Concorde had its critics and its fans. At as much as £8,000 ($14,000) per seat, it certainly showed the market for fast exclusive service over its life. Concorde had narrow seats, but excellent food and wine. At $150/pound, expect new heights of luxury and engineering achievement for civilian transportation. Only the best oranges will be eaten aboard the airless line—the cost of almost every food is so much less than the fuel cost to carry it that the expense of amenities will be inconsequential in comparison.

The price of privation will be interesting to explore in orbit. What prices will spacers charge each other for personal amenities that they have to bring in their personal weight allowance? Airless lines should track the price. If it is low, they should try to buy some of that space back to use for mail or propellant. They should not buy all of it because crew may have trouble to adapting to new price levels and will likely overeconomize. (Have you watched folks go gaga over frequent flier miles and coupons?)

Depending on whether ticket prices are by the pound or by the person, there will be very different incentives for the airless lines. If by the person and there is standby cargo such as mail or leftover propellant, expect free shaves, haircuts, manicures and pedicures before takeoff. Point-to-point service might have to cost much more than $60,000/seat and mail service $150/pound in order to see airless lines to invest in clothing made to order at the destination, and duplicate electronics customized to order. If a flier can email ahead their whole disk drive over fiber, there is not much point to carry a laptop on the rocket plane. Of course, if people and their luggage are priced by the pound, do not expect these innovations to come from the airless line no matter how high the price gets—under that pricing rule they would profit from more pounds flying.

Shedding pounds from the cockpit can also be done by having lighter pilots. It’s possible that airless lines should be concerned about pilots and the Atkins diet. This could be taken to an extreme and we might need pilots who are paid by how well they diet take a blood glucose test along with an alcohol breathalyzer test in order to prove that they are fit to fly. In general though, buying the inconvenience of a hungry pilot is probably a worse idea than redesigning the cockpit for very short pilots and training short people to fly them.

If there is significant manned traffic to orbit at $150/pound, having a half-size pilot might save a couple hundred pounds per flight in lower takeoff weight and a smaller pilot seat and cabin. The short pilots probably would enjoy additional market power beyond the typical pilot’s union, but at 150 roundtrips a year, saving $60,000 per round trip, they could be paid an extra $1 million a year and there would be another $8 million for the airless line. The giggle factor might sink this one, but it worked for the Wizard of Oz.

Futures and the future

The non-engineering requirements for the business plan are often much more difficult to meet. A recent policy fiasco that sank Admiral John Poindexter (where Iran-Contra could not) was the policy futures exchange. Designed to predict terrorism in the Middle East, it spectacularly failed the laugh test and Robin Hansen and Poindexter were pilloried for an excellent technical idea. The basic idea is to have a market for shares that would pay depending on some prediction coming true such as suborbital tourist traffic hitting 10,000 people in 2010, the shares would pay $1 if the referee judges it is true and $0 if not. The shares would trade at roughly the consensus percentage chance that would happen. Based on the phenomenally successful Iowa Political Stock Market, the academic economics foundation is excellent. If anyone wants better answers to predictions than a survey can give, and can stand a little heat, dust off the exchange, but be prepared to weather a storm of criticism. Financing a space business plan requires credibility.

But if an entrepreneur can withstand the heat of giggling, then what about championing something really far out! Such an entrepreneur might help future entrepreneurs by redefining the fringe. To wit, if a short pilot is good for Mars, why not a short colonist? A one-way mission could carry a lot more consumables for a long stay than a round-trip mission. If a short colonist is better, why not a pregnant one with a genetic bank so a colony can be grown on site after one trip? Hopefully would-be Mars developers will be less “tone deaf” than Poindexter.

The Moon and Mars will be different when it comes to inconvenience. To the Moon, like to the ISS, there will be regular supply runs. Needs can translate easily to new deliveries when there are many small supply runs. Again, the price of privation should be tracked to see if luxuries and so-called necessities can be cut out to save weight. But on Mars, the economy starts to resemble an Edgeworth Box (an idealized economy where there is no production and no imports or exports). It might pay mission planners to put people in the actual situation of a Mars trip to see what they do; by measuring the strength of their preferences and aggressively changing the starting conditions, weight lowering discoveries might be made. That is, terrestrial planners should test the economics of privation in their environmental isolation experiments. Various items should be provided in short supply and see what prices develop for trade amongst the crew. This can start to give a rough tradeoff matrix between weight and morale during the timescales between resupply. Sailors accomplished great feats of exploration on little more than limes and weevily biscuits if Master and Commander: The Far Side of the World is to be believed.

The actual astronauts can buy and sell weight, space and amenities before and during the trip. Such a privation market would be a people version of the successful market used in the construction of Galileo. Different experiments on Galileo were able to trade weight, power, space and money amongst themselves to optimize the function of the craft given the constraints.

Economics is all about the study of scarcity. It is a mistake to include anything in abundance on the manifest for a space mission except credibility.

Dr. Sam Dinkin is Chief Economist for Optimal Auctions, Inc. The advice contained in this column is for education and entertainment only, not investment advice.

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