Helicopter Market Achieves Lift-Off

August 28, 2017
Source:  Aviation Finance

The global helicopter market is slowly emerging from a ‘perfect storm’. Although still very early days, lessons have been learned, says Clark McGinn, Senior Vice President, Sales & Relationship Management at Waypoint Leasing. In an interview with Aviation Finance’s John Stanley, he says that the difficult times the industry has endured may well prove to be of long-term benefit to the leasing industry as operators increasingly recognise the role of lessors as providers of liquidity and as absorbers of technological and other risks.

Clark McGinn

What is the current state of the helicopter market in your view?

The combination of the oil price crash, CHC’s Chapter 11 and general economic woes created the perfect storm for the oil & gas industry and for the helicopter market over the past 18 months. But the good news is that we’re seeing some stability come back into both markets.

In the face of what’s happened I think the reaction of the oil companies and that of the helicopter manufacturers has been pretty robust. If you look at the international oil companies, obviously their priority became cost cutting. But now we’re seeing that even at $50 to $55 a barrel there are projects currently that on a cost benefit analysis they are prepared to start thinking about again. From our own bookings and placings of helicopters In the last three months we’ve seen a couple of investment decisions like that for virtually the first time in two years. So, while it’s fair to say that with the geopolitics currently in the background you cannot take anything for granted, for the first time in around 18 months we’re seeing an upturn in demand.

What has led to this improvement?

Unlike fixed wing manufacturers, in times of downturn all four of the major helicopter manufacturers scaled back their production. So relatively few new oil & gas helicopters have hit the market this year and we’ve seen machines being absorbed by the minor uptake. This includes some generally idle machines in the market and, of course, the machines that CHC returned to lessors, including Waypoint. So to cut a long story short, I think we’re in a much more positive place but there is still an outside risk.

What’s the position now in terms of lessor forward orders with manufacturers?

Waypoint has forward orders with several manufacturers, but we’ve always kept our appetite for new deliveries in balance with our appetite for sale and leaseback of older machines. We’re really in the middle of the market. A couple of lessors had larger order books than we had and one lessor, in particular, had no order book at all.

At the worst part of the cycle there were certainly people taking delivery of aircraft that had no home. It’s not atypical in the helicopter industry to take a delivery and place it a couple of months after, unlike in the fixed wing sector where things tend to be sorted out ahead of time. We did see some price pressure from other lessors who were long on unplaced new deliveries. If you take the widely-used AW139 as a benchmark, lease rates have been rising over the last year, albeit slowly and incrementally, and now we’re seeing most of the new delivery and CHC overhang absorbed into that market.

If you look at some older types of aircraft there’s still some overhang that may never come back. Older S76s, for example, A models and B models, are probably going to be squeezed out of the market by that overhang, so we’re seeing a gradual process of absorption and that’s principally driven by a couple of things. One, as I mentioned earlier, is that OEMs are being very rational about production and capacity. The second thing is that lessors are increasingly being seen as long term providers of liquidity in the market. That means that in a downturn the lessor will take some of the stream of overcapacity into inventory and then seek to move it between operators and continents.

A couple of years ago people were very concerned about the level of orders that lessors had. But I think now it’s going to move back into equilibrium just because the biggest commercial operators have to be more cautious in their ordering strategy.

Where do older aircraft fit in this new scenario and what implications does the change in the market have for Waypoint?

One of the issues we have in the market is that some people are owners of very old machines and it’s very hard for them to get out of them. But what we’re seeing in something like the AW139 and S92s, which have a reasonable deep base in the lessor community, people can and do return them at the end of a lease period and it’s up to us to find new markets.

Last year, for example, we put equipment into 11 new countries that probably wouldn’t even have been thought about in the boom years. So this harsh market has been a bit of a two-edged sword. It has made the leasing side of the market challenging in terms of returns and it has forced us to expand our horizons. So instead of doing a brand new ‘heavy’ in the North Sea for an international oil operator, for example, we’ve been forced to look elsewhere and that’s challenging.

On the positive side, the benefits of leasing have reached lower down the operator community in terms of size. So now we’re dealing with smaller operators on contracts, people who wouldn’t have thought of leasing five years ago. And with the arrival of newer technologies, such as the AW 169, the 189 and the H175, we’re seeing people very interested in leasing those.

It will be interesting to see how those aircraft pan out with the oil companies over the next few years and which ones are going to be strong players in that market. We’re seeing operators not wanting to take the technological risk today and that’s where the leasing companies have made a difference.

Does that make you optimistic about increasing the penetration of lessors in the market?

Leasing penetration in the helicopter market is still low compared to fixed wing. In the oil and gas market the proportion of leased helicopters under 15 years old is probably around 15 per cent to 16 per cent, compared to almost half in the fixed wing world. So my competition isn’t really other leasing companies, it’s in convincing operators they should focus on providing the operating service without taking the ownership risk or the RV risk of the helicopter.

Investment in helicopters is a good long-term bet, so a sensible operator will always want to keep some equity in their fleet. But we’ve moved already from 90 per cent owned /10 per cent leased to 85/15 and I think another turn of the cycle will bring us to 70/30 and that would be a great leap forward.

I think in this downturn people saw what happened in the CHC bankruptcy. It was obviously a big shock and a big challenge and people have taken a lesson from that. You have to have a way to get out of idle aircraft if there’s a change in the market or if a particular type of aircraft is not in favour anymore, those sort of areas where people before took the risk as a matter of course now have the option to lay it off onto the lessor. I think people will always want to own a good proportion of their fleet, probably more than half, but they should also have a lessor as a long term liquidity provider for both new and older equipment.

What role does sale and leaseback play in the industry?

Sale and leaseback is an area to which Waypoint is very committed. We like older equipment. There is a bit of debate in the industry on this. Some leasing companies are very ‘fixed wing’ style in their approach. They would rather have brand new deliveries and brand new technology; take a discount of X per cent for a bulk order, get it on lease and sell it as a package to an investor – effectively monetizing the discount they get from the OEM.

At Waypoint we want to use our helicopters two, three, four, five times over their life. We believe the maximum return you can make is by adding a ladder of ages in the fleet and the best way to do that is to be in the sale and leaseback market. For example, we’re currently taking an older AW139 from a Colombian operator, upgrading it and putting it back on lease. So I think the sale and leaseback market is very good, but it’s challenging for some of our competitors with bigger order books because they’ve got to focus on placing those bigger orders first of all.

You mentioned that as a result of the ‘perfect storm’ Waypoint has entered new markets. Where do you see growth potential right now?

In terms of new geographies China offers great potential. even though it is difficult. Socially, culturally, economically and politically, it is different in every way and anyone wanting to do business there has to understand those differences before even making their first call. We have two aircraft in China at the moment and a pipeline that we’re working on.

The pace of growth there will obviously depend on the future liberalisation of air traffic, which is in the hands of the Chinese government and it’s a slow process. But I think EMS helicopters, in particular, have very significant potential across Greater China.

Other geographies now?

When I joined Waypoint one of the mandates the sponsors agreed was that we would have a presence on each continent. Waypoint is actually the only lessor to have an office in Sub-Saharan Africa. And from there we’re doing really interesting business across the continent. It’s a very challenging market, as you can well imagine, but the strength of having someone on the ground who understands the local practice, who understands the restrictions and challenges the operators there are facing, really means we can help them in constructing bids, in technical support, logistics support and the ability to mobilise. Those sort of things become easier if you’ve someone on the ground.

Latin America is interesting, too. Years ago people would have seen Latin America as effectively Brazil plus a bit of Mexico but we’ve now opened doors in other countries.

But all these things take time. The person on the ground has to build up a network and improve his or her understanding of the market also learn about the differences in sub-markets in countries. So it’s not an easy task but once it’s done and the person has respect locally, across their region, then that person becomes incredibly valuable.