The recent announcement by the Bristow Group that 130 jobs are at risk in the UK Sector of the North Sea is an ugly enough headline for an industry that, up until 12 months ago, couldn’t get enough pilots to fill helicopter cockpits around the world. But underlying that announcement, the structural effects on the medium heavy offshore helicopter market coping with an oil price oscillating between $50 and $75 a barrel may be a bigger issue. Sikorsky are feeling it already, as evidenced by their recent job cuts announcement, but what about the helicopter leasing industry whose rise was driven by massive offshore expansion and the cheap credit rates that emerged from the financial downturn?
It doesn’t matter whether you are Milestone Aviation Group, Waypoint Leasing, Lobo Leasing, Lease Corporation International or Macquarie Rotorcraft, all of these lessors have funded their expansion into the helicopter business through large asset-backed lending on international markets. Some entered the market having been already active in the fixed wing sector but others like Milestone, Waypoint and Macquarie are relatively young companies borne out of the investment sector and predominately located in the low tax regime that Ireland offered such companies as it exited its own debt related recession. The advent of helicopter leasing, rather than holding mortgage backed capital debt, was something that the helicopter industry was slow to take up in comparison to its airliner cousins.
This latter issue is one which must now be starting to worry the lessors whose long-term investors were optimistic that these assets, particularly the medium to heavy lift twin-engine helicopters, would retain their value while generating strong lease rates. As the oil price has fallen and oil companies have demanded more efficiency across the operating spectrum aircraft, from the approximately 1950 strong offshore fleet, are being offloaded. Airbus have identified this already and have set up Vector Aerospace as their subsidiary MRO in the UK to take to converting such aircraft for other uses. However, this will not cover all the aircraft and there is already a softening of the second had price for older types such as the AS332 and S76, as the demand for them begins to wane quickly.
Taking these issues into consideration the question must be how long investors are going to keep their nerve with the helicopter leasing market. Rates of return are sure to fall as operators look to reduced leasing costs in exchange for aircraft retention or perhaps even to offload such aircraft back to the lessor. How are the lessors going to cope with aircraft returns and is there going to be an emerging market for aircraft storage and upkeep maintenance, something which is apparently already under consideration by one company. One thing you can be sure of though is that as long as the oil price stays where it is pressure is going to mount on the lessors. Its not subprime yet but it won’t take much of a shock to make it one, just ask the 66 pilots at Bristow who are likely to be looking for work soon.
Simon Sparkes – Nova Systems
Reproduced from LinkedIn with permission of Nova Systems. This is NOT a press release. HeliHub.com has an exclusive agreement with Nova Systems which allows us to reproduce articles posted on LinkedIn. Copyright and full responsibility for the content of this article remains with Nova Systems.
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