Making Waves

June 12, 2013
Source:  Vertical

Something akin to a revolution is taking place in the helicopter industry. And it isn’t a particularly subtle one. Just a few short months ago, at Helicopter Association International’s Heli-Expo 2013 in Las Vegas, Nev., the helicopter leasing business had a very public coming of age. The big headlines at the show were not made by new product unveilings, but enormous blockbuster deals. And standing toe to toe with perennial industry heavyweight Bristow Group in announcing these deals was Milestone Aviation Group, a leasing company that hasn’t even completed its third year in business — yet already has a leasing fleet valued at over $1.3 billion US, and has orders and options for additional aircraft worth another $2.2 billion.

Rotorcraft leasing is hardly a new concept — Calgary, Alta.-based Eagle Copters Ltd. has, for example, been doing so for the past 30 years — but Milestone is undoubtedly leading the charge of a host of ambitious new companies, including Lease Corporation International Helicopters (LCIH) and Waypoint Leasing Ltd., that have been launched in the firm belief that investment in rotary-wing aircraft is the next big thing in aviation finance. Why now? What is it that makes the helicopter industry suddenly so appealing to financiers? And what benefits, if any, are operators likely to see from this sudden rush for their business?

“It’s a really interesting market,” said Usman Ahmed, an aviation analyst with consultancy firm IBA Group Ltd. “There were lots of banks who were in to helicopter financing before the recession, but they were not really interested in anything below $15 or $20 million. . . . I think the reason you are seeing suddenly an influx of lessors coming into the market is that they’ve realised just how liquid the helicopter is in terms of its value retention.” In stark contrast to the fixed-wing market, where aircraft such as a Boeing 737 or Airbus A320 may be worth just 50 to 60 percent of their purchase cost after 10 years, Ahmed said helicopters generally maintain, at the very least, 70 to 80 percent of their value over the same time frame. For financiers, this makes them a relatively lowrisk asset and market in which to invest. Add to this a new wave of technologically- advanced — and expensive — medium to heavy helicopters entering a booming oil-and-gas transport sector that’s providing high demand, allied with an upcoming replacement cycle for older offshore models, and it adds up to an enticing package for many financiers.

The New Colossus
Since its launch in 2010, Milestone has been appearing with growing frequency in industry headlines for the size of its orders and contracts with operators. At Heli-Expo 2013, it announced an astonishing batch of orders with Eurocopter and Sikorksy that included 14 EC225s, five EC175s, 23 S-92s and seven S-76Ds. Launched with $500 million of equity seed, it’s headed by Richard Santulli, the founder and former chairman and CEO of NetJets, the ground-breaking fractional private jet ownership company. However, Santulli’s history with the rotorcraft industry stretches back almost 30 years — he founded another helicopter leasing company, RTS Helicopters in the early 1980s, and ran equipment leasing for Goldman Sachs.

“I guess I have an affinity and fondness for the space,” said Santulli of his return to the rotorcraft industry in an interview with Vertical. “It really is the fact that [helicopters] hold their value much better [than fixed-wing aircraft]. They don’t go through cycles. If you go back 30 or 40 years, those that work on producing revenue, hold their values.” And it’s those “revenue-producing” helicopters — rather than VIP or corporate aircraft — with whom Milestone wants to do business. “We won’t do VIPs, executive transport. We don’t have any interest in that. From day one we’ve said that we will do helicopters that earn a living, that earn revenue,” said Santulli. “A company or individual can wake up that day and say I want to sell that asset.” Whereas a revenuegenerating helicopter “really is the lifeblood of a company,” — meaning that the operator is very unlikely to risk losing it by not make a lease payment.

While Milestone has lease arrangements with operators working in helicopter emergency medical services (HEM S), the bulk of the company’s business is in the offshore transportation sector, where the operating giants have been quick to partner with it. When Milestone and Bristow announced the signing of an operating lease for five aircraft valued at $125 to $135 million in February 2012, Bristow CFO Jonathan Baliff said it reflected a new fleet strategy for the operator. “We are reducing the number of aircraft owned by Bristow in favor of a mixed fleet of owned and leased aircraft,” he said. “This, combined with selling off our older model aircraft, will enable us to accelerate the shift to the latest technology aircraft preferred by our clients.”

Santulli said that when Milestone’s founders were raising the capital for the company, a lot of potential private equity investors thought that they would never do business with the big operators. “We said that eventually we would,” said Santulli. “Did it happen sooner than we thought? Maybe. But the two biggest players in the space account for almost 50 percent of the business — CHC and Bristow. So if you’re not doing business with them, you’re not going to be a very big company.”

Different Models
Perhaps one of the longest-standing major lessor in the industry, Eagle Copters has been leasing helicopters for the last 30 years. The company has a diverse range of activities that also includes maintenance, repair and overhaul support; product development (such as the Eagle Single and the much anticipated 407HP — an STC program that re-engines the Bell 407 with a Honeywell HTS 900); completions; and aircraft sales. According to Spyke Whiting, vice president of sales and marketing at Eagle, the growth of the leasing side of the business has been very organic, and was begun by company founder Mel O’Reilly “with nothing more than a gut feeling,” with aircraft added to the fleet as the company’s capital allowed. Today, the company has more than 70 helicopters — primarily Bell medium-lift aircraft — out on lease, including what Whiting believes is one of the largest fleets of Bell 205s still in existence.

“We may not be what’s considered a typical finance company, but we sure do lease a lot,” said Whiting. “We compare to them, we just happen to have somewhat different helicopters that make up the lease portfolio.” Although many of the leased aircraft are working in utility operations, Whiting said the company doesn’t box itself in to a particular market segment. “The other big part of our business is buying and selling helicopters, and it gives us a unique opportunity to cross multiple platforms,” he said. “Not only do we have the capability to configure the helicopter, we also have a pretty good idea of where the market is for that particular piece of equipment.”

The Eagle lease fleet is being continually grown and updated — any helicopter added to the portfolio right now is either larger or newer, said Whiting, with the company looking at a range of platforms. “We are known primarily for our Bell specialty,” he said, “but as other manufacturers introduce the helicopters people want, you’ve got to be able to move with that – so we are considering diversification as a growth opportunity.”

Era Group Inc., parent company of renowned offshore operator Era Helicopters LL C, joined the leasing industry with the launch of Era Leasing LL C in 2005. According to Era CEO Sten Gustafson, the move into leasing offered many advantages, allowing the operator to take full advantage of the flexibility of helicopters by tapping into different markets. “These things are very expensive, so to generate a sufficient return, you’re always focused on making sure that an aircraft works as much as it possibly can and is generating revenue,” he said. “From our perspective, our primary business is servicing the oil-and-gas sector, but having the leasing angle allows us to have access to a much broader market for helicopters — without all the cost and infrastructure.”

While Era doesn’t currently lease any helicopters to Bristow, it does lease to CHC, and is happy to lease to companies that may be deemed competition, said Gustafson — although this would be in areas Era doesn’t operate in. This provides the company with access to places like the North Sea, West Africa and Australia, offering the benefits, albeit indirectly, of these working in these markets. And while fleet leases may be more desirable for many leasing companies, Gustafson said that for Era, sending aircraft out in ones or twos was “more of our sweet spot.”

Currently, of Era’s total fleet of 175 helicopters, around 40 are out on lease. There is no “leasing fleet” per se — when an aircraft finishes a contract (whether operated by Era or a lessee), the company will simply assign it where it will generate the highest return. That could be on another Era contract, out to a lessee for work in HEM S or searchand- rescue (SAR), for example, or it could even be sold — an option that is particularly viable in the rotorcraft industry, with the extremely high value retention of the aircraft. “We have sold a lot of aircraft and, on average, we have sold at a very meaningful premium to book value,” said Gustafson. “We have made over $25 million of profit above where we bought the aircraft. It’s a pretty unique asset that can do that.”

In terms of future growth opportunities, Era will be looking to further explore what it deems untapped leasing markets. “I think we probably haven’t really fully accessed all the different potential areas into which we could lease helicopters,” said Gustafson. “We’re going to really explore opportunities outside the traditional oil-and-gas sector, get out the map if you will, and say, ‘Here are all the potential uses for a helicopter, are there people that we can lease them to in those areas?’ And really make a very targeted effort.”

New Entrants
Lease Corporation International (LCI) has been leasing aircraft to the fixed wing market since 2004, but launched a subsidiary, Lease Corporation International Helicopters (LCIH), in 2011. “The operating leasing of helicopters is a pretty new concept and we were able to get in on the ground floor,” said Mike Platt, CEO of LCI. “With few other competitors, there’s a real opportunity for us being here in the early days — we see lots of opportunity for growth.”

In particular, Platt said the company liked the underlying user base for the offshore fleet, with oil and gas companies offering very strong credit — as compared to fixed-wing airlines that are dependent on the changeable appetites of the public. “Oil companies don’t tend to come and go, and as long as the operators are doing their job I think it’s a good and stable place to be.”