Description

Blade offers an opportunity to short a low margin, limited runway service business that is trading and marketing itself as a growthy tech company. Based on initial analysis, the opportunity offers a ~50% return over the next 1-2 years. 

Company Overview

Blade is a technology-enabled air mobility platform, akin to being the ‘Uber’ for helicopters / air mobility. The Company offers a price-competitive and time-efficient alternative to ground-based transportation in congested routes primarily in the Northeast US with plans to expand to the West Coast and other locations over time. Catering mainly to business or affluent travelers currently, Blade operates exclusive passenger terminals in markets, and offers by-the-seat service between city centers and airports using helicopters and seaplanes provided by third-party operators. The firm’s technology platform includes a mobile application that enables Blade to aggregate customer demand and optimize passenger volumes in the firm’s network. It is important to note that Blade does not own their vehicles, and instead partners with pilots and private airports to charter out their helicopters on a per ride basis (i.e. they don’t pay for helicopters if they aren’t being used). Blade looks to incorporate EVAs (Electric Visionary Aircrafts, or eVTOLs) into the fleet in 2025, expanding the network into additional locations going to the low-noise, zero carbon characteristics of these vehicles. The Company went public via a SPAC merger in April 2021.  

The Company’s core services and rides offered currently are:

• Blade Airport: Commuter services between New York City and JFK from 7AM – 7PM on weekdays with plans to expand to Newark and LaGuardia. They charge $195 per seat

• Hamptons Commuter: Flights from NYC to Hamptons on a scheduled basis for $795 per seat

• Nantucket: Seaplane flights from Manhattan to Nantucket for $1095 per seat or direct turboprop flights from Westchester for $725 per seat

• Flight and Private Charters: Several flights from their varying hubs between $2500-$4000 per flight

• Medimobility: Partners with NYU Langone and Mount Sinai in NYC for organ transplant and medical patient travel

Industry Overview

Blade’s offering at its core is a fast, efficient option for travelling to and from major cities that competes with ground-based transportation options. Compared to Uber, Lyft, or other on-the-ground options, Blade cuts down on commute time and offers a ‘luxury’ experience to its customers. The screenshot below summarizes their core customer offering, traveling from Manhattan to JFK. The core customer profile for Blade services are high end business travelers. Although its services are tailored to both business needs, and luxury travel such as to the Hamptons, the primary use case is commuting to the airport for business travel.

Blade currently has hubs in NYC, Nantucket, Miami, Chicago, and LA with plans to expand to San Francisco, Washington DC, Boston, and Philadelphia.  They have slight international presence in India and plan to expand into Indonesia, Japan, and Canada. This is all to say that Blade currently has tapped into a few large markets, but has material growth capex needs in order to expand into the markets that drive any marginal growth.

Currently the market only has a few competitors, with Blade being the first mover and the only real established player in the market. A positive for Blade is that they are the largest player in the market and are the name brand for commuter private travel. However, Blade doesn’t have much market/wallet share to take given it has a strong foothold in its existing markets. The growth that management estimates and investors currently value them at needs to come from 1) product and customer adoption 2) expansion into new markets or 3) new product development. Management has outlined a plan for customer adotpion and new market expansion, with little new product development outside of the MediMobility product.

A final industry trend that is important to note is the belief in the adoption of electronic air vehicles. A large part of management’s thesis is that adoption of electronic air vehicles will drive customer adoption (pages 23-25 of their most recent IP are dedicated to this and are characterized as “The Catalyst for Blade’s Growth in Urban Air Mobility”). The thesis is that as electronic vehicles are adopted, the lower noise output, zero carbon output, and ease of use will allow Blade to reach a broader demographic. As the demographic expands, and flights become cheaper, then the $ per seat will decline and allow trips to be more accessible.

The Problems and Short Thesis

The general thesis is that Blade is not a fast growth tech platform that has high profitability at scale, as it is currently being valued; but instead is a very strong competitor in a low margin low growth business segment. I won’t disagree that Blade has a dominant position in its market, but the growth vectors simply aren’t there to substantiate the very rich ~10.0x TEV / Revenue multiple it trades at currently. Similarly, although Blade is being marketed as a tech platform, this is really a B2C service enabler that clips a 20% margin fee with little upside. There is no subscription revenue, little cross-salability of its products, and extremely high cost of revenue that is almost entirely variable. Let’s walk through a few key problems:

1. Financial Outlook and Profitability:

The above is a simplified view of a conservative case for Blade’s financial outlook. The key drivers have assumed flat 30% growth, which given the points below on TAM are generous, flat 81% cost of revenue  (in line with 2021), and $1.5m of sales and market and $1m of G&A spend to account for margin cost for scaling the business. However, I would expect there to be material spend necessary in both segments in excess of $2.5m as competitors arise driving need for sales and marketing expense and as costs to maintain the various expansions they outline.

The main point to highlight is that this is a ~20% gross margin business. The cost of revenue is the cost of flight under contractual terms with the 3rd party flyers and landing fees. I don’t see this declining as they scale as these are entirely variable costs and will be paid on a flight-by-flight basis. The two ways for them to drive additional margin are 1) increasing seats per flight and 2) increasing price. I don’t see them gaining more seats per flight given the key purchase criteria of convivence and ‘luxury’ service. Additional seats would require more scheduling, and less luxury service. There would need to be a rewriting of the business model from private on-demand flights to being scheduled flights similar to normal airlines, which is doesn’t seem to be the direction management will take this.  Increasing price is more feasible, however I think this will stagnate growth as their customer adoption will decline and Blade will become a true premium service. I think that there is a case where this can become a low growth and ~40% margin business at a high price per seats, but I don’t think this is where management wants to take the business. In Blade’s current form, I view there being potentially more downward pressure on margins due to inflation and cost of labor increases (discussed in the TAM section).  

The last point I would highlight in this model is that the business only becomes EBITDA positive by 2028E. Even if you don’t believe the projected case, it is worth noting that if you believe that the margins will not expand, and this is a ~20% GM business, they need to achieve ~$170m to become EBITDA positive, assuming their 2021 post SPAC Operating Expense Base. This would imply the Company needs to 4x the current revenue base without increasing the Opex base…a tough feat.

The above outlines a downside case which I view potentially more realistic. This case contemplates Blade’s core business travel customer base saturated by 2022E as they return to work travel with little growth thereafter and then increased penetration from 2024E onwards as they potentially expand their network and tap into the EV market. In conjunction with this, the case assumes margins back at 2020 levels as fuel and maintenance expense increases along with service / pilot fees. This case takes into account two tailwinds 1) inflation (both service and fuel) and 2) business travel declines as the world orients to a 'hybrid' in person model.

2. TAM: I won’t go into too much detail around how management views their TAM, but they view it on the total number of interested riders (this is outlined in their latest IP). I have a few issues with how they calculate the TAM by riders, but that’s besides the point. For the sake of the argument, I’ll assume their TAM is correct. The main issue is that Serviceable Addressable Market should be capped by the number of servicers not users in this case. Helicopter pilots are a bespoke service class that has a high barrier to entering the market. There is a tremendous amount of education and expense that goes into becoming a pilot. Given Blade currently outsources their pilots and does not have forms of inhouse training, employed / W2 pilots, etc. we should assume that Blade’s serviceability is capped at the total private market pilots. If it is assumed that Blade would move to an inhouse model, that would materially add to the expense base and accelerate the cash burn identified above. Outlined below is a brief overview of the implied number of pilots needed to reach the $170m breakeven revenue number.

The preliminary research has identified that there are 2,624 helicopter pilots currently in the US serving the private market. Note this is for the entire US not just the geographies Blade seeks to cover (I would think that number is closer to 2,000 or less pilots). Blade achieving 16% of the total servicers in the US seems relatively unlikely given the private pilots includes substantially more than 3rd party service pilots and includes categories such as family pilots, corporate pilots, and helicopter pilots who do not operate a 3rd party vehicle (i.e. a non-hirable pilot). Additionally, our research shows that ~60% of pilots are 40+ years of age, with ~20% of total pilots retiring after 11 years, meaning that a substantial portion of the employable pilots will be declining as Blade accelerates. At 2,000 pilots, the flights imply ~20% of total private pilots.

Even if we assume that Blade can fill its pilot requirements. I think there is a strong case that the service rate will go up dramatically and compress margins. Similar to what is happening with the Uber and Lyft models, there be should be substantially more demand along with declining employment base which drives up labor costs.

3. Capex and Growth Needs: The Company notes that they run a capex light model given they don’t own their vehicles, which I grant. However, in order to achieve their growth requirements and locations, they will require material growth capex needs. They outline in their model below ~$312 of growth capex needs, which takes up almost all their current cash and current investments excluding the cash burn from operations.

With these growth requirements, they should have to raise additional capital either through a secondary offering or debt given the business will be cash burning through this stage. I view each of these iniatives outside of the M&A expense of $75m to be necessary to achieve their growth projections. Management doesn't outline a strong case as to why these would add incremental growth on-top of their existing platform, so to assume the 30% growth case I would assume there is a total of ~$400m of cash burn over the next 5 years including operations.

4. Business Commuters: I would recommend reading the sell-side research on Delta and American Airlines to get a sense of the current outlook on business commuters, but I would note that overall it isn’t optimistic. There should be a switch to a hybrid model where airline travel for these purposes declines by ~10-20%. This should have a direct effect on the overall growth of Blade given their core customers are business commuters. In other words, Blade should grow relatively in line with American and Delta airlines, with mild upside from customer adoption, which should be materially lower than the projections.  

5. Rerating: There should be a rerating in the next year or two driven by two core catalysts 1) There is a realization that customer adoption isn’t accelerating and business travel commuting is declining. I expect this to be realized in 2022, which will have the first set of ‘normalized’ growth outside of the COVID recovery. 2) Margins do not expand. The business is currently rated / valued like fast growing SaaS business with high growth. There seems to be a belief that the business can deliver 30%+ margins at scale, but that is nearly impossible given this is a 20% gross margin business. As discussed, there should be little Gross Margin expansion, given these are per-flight variable expenses. Being framed as the ‘Uber for Helicopters’ is only so great insofar that the service cost per ride is low and margins can show a profitable future. I don’t see that happening here…

Valuation

With these in mind, I have a price target of 5x 2023E Revenue in our base case ($73m) implying $365m TEV or $5.3 per share. This represents a ~50% return to current trading value of $10.25 and expect this to be realized over the next 2 years. Understanding there is ~$300m of cash and cash equivalents on the balance sheet currently, however I assume that a large portion of this is used over the next year ($160 for East and West Coast strategic expansion efforts and ~$60m of operating cash burn), limiting cash to be ~$100m implying ~$265m value to the company. There aren’t great public comps to Blade, but I think the closest comps are: Wheels Up Experience (UP) and Sun Country Airlines (SNCY). These are both small cap air carrier companies providing scheduled passenger transportation. UP trades at 2.5x revenue and SNCY trades at 4.8x revenue. I’ve given BLDE a slight premium to both given its branding and ‘tech’ angle, but not a material increase given the unprofitable nature and sub-scale compared to these platforms.

There is a legitimate case in my mind that this business never turns profitable and trades a much lower multiple or goes through workout, but that should all be contemplated as upside.

Other Considerations

MediMobility: This has become a meaningful portion of Blade’s strategic vision after their acquisition of Trinity Air Medical (with MediMobility now contributing ~65% of 9M21 revenue). Although this is currently a meaningful portion of Blade’s revenue, in management’s projections they do not assume this to be the strategy they pursue and underwrite the revenue growth in their core product of commuter travel.

That being said, MediMobility although provides a strong underlying revenue base, it is unprofitable and lower growth in the long run. Blade is far from a first mover or meaningful player in the market. There are a number of air ambulance and medical air transport players in the market namely: MedJet, Angel MedFlight, AirMed, and a number of others. This is a fragmented market with little competitive differentiation with the only differentiator being availability, making regional presence critical.

Hopefully we get more info in the 10K around the margin profile by revenue segment (i.e. core versus MediMobility) but currently we don’t. That being said, I don’t expect there to be margin uplift due to revenue mix shift as this should be a lower margin business from lack of differentiation, influence from insurance companies, and rebates.

EVAs / eVOTLs: I didn't do much analysis here as I believe this is a far off adoption that is outside the range of the rerating contemplated. However, I would note that I don't see this as a core driver of growth. I grant there is some ESG upside, and there could be mild additional adoption, but the margin problem will remain the same. There will still need to be pilots which are the main driver of variable expenses, unless true autonomous flying vehicles are adopted but that is a 10+ year tail risk given were things. Even management contemplates this as a 2025E+ growth opportunity, which I believe will be outside the timeframe that this gets rerated or similar competitors enter the market and begin to take market share / limit growth.

Investors: The investor base is reputable being led by KSL, HG Vora, and ARK. The main fear I have with a short here is the ARK / Reddit short squeeze potential. The short float is minor in the stock currently only ~5% currently which makes this lower risk, and this seems to on the lower end of priorties for ARK as it gets little airtime in their discussions. There could be potential for ARK to take out their position, as it is only ~$40m, and would cause a significant pullback of retail. Finally, I would expect KSL to begin realizing their position as their investment horizon is coming to an end, and would be an opportunity to show some slippage.

Catalyst

• Rerating of the stock
• Miss on FY'21 / FY'22Revenue
• Current sponsor (KSL) trades out of the stock or ARK trades out of stock
• Continued margin compression 
• Outsized need for growth capex
• Competitors go public