Analyst Corner: Reiterate ‘sell’ on Blue Dart as headwinds will sustain

Due diligence suggests that rates have gone up in India by 7-15% — a hope-inducing factor for Blue Dart Express (BDE) given its operating leverage.

Two recent events have generated significant interest for air express players, global belly cargo capacity has remarkably reduced and, on some routes, air freight rates have increased by 30-60%. Due diligence suggests that rates have gone up in India by 7-15% — a hope-inducing factor for Blue Dart Express (BDE) given its operating leverage. Recent DHL commentary highlights the Covid-19 vaccine distribution scope that may open up for the air express industry. Researchers have also estimated that 15,000 flights would be needed to ensure global distribution of the vaccine in two years. This presents a scope for the Indian express and 3PL players. These two events have resulted in salience for Indian air express, particularly BDE. Reiterate ‘sell’ on BDE as structural headwinds of the model will sustain.

Globally, the rate hike has been driven by decline in belly cargo capacity, which is leading to an increase in freight load factor despite drop in freight ton-km. Under normal circumstances, about 60% of air cargo globally is flown in the belly-hold of passenger flights. With hundreds of those jets parked waiting out the pandemic, air freight costs have spiralled, rates to North America from Hong Kong are up almost 60% this year. Due diligence suggests, Indian belly cargo freight rates are up 7-15% (mostly YTD). This can be prospective for BDE since the business has meaningful operating leverage, margins can expand materially with price hikes of 7-15%. BDE has seen success in wresting more market share in domestic air freight traffic in FY20, presumably by closing the pricing gap with belly cargo of commercial carriers.

BDE did see a sharp market share gain (~3.5% YoY) in air freight cargo over FY20 (IBEF data) – presumably as the company tried to normalise/reduce pricing. This ensures average realisation of Rs41/kg, not far from the average costing of belly cargo of commercial carriers (Indigo and Spice). With increase in belly cargo freight rates of commercial carriers, BDE will also enjoy pricing/margin benefits. The key question remains whether such pricing power may sustain. Globally, we have tracked certain commentaries, e.g. Qatar Airways, one of the world’s heavyweights in freight, does not see cargo rates declining for at least 12months.

DHL commentary also raises hope for air express volumes till FY22. Insufficient last mile connectivity, cooling facilities in the final delivery stages and lack of storage at clinics would ‘pose biggest challenge’ to delivering vaccines on a high scale (this is particularly true for mRNA vaccines). Reseachers have also estimated that 15,000 flights would be needed to ensure global distribution over the next two years.