The annual Helicopter Investor Conference brings together about 200 helicopter lessors, financiers and manufacturers, with some operators and others closely tied to the financing of the industry. There is a primary but not exclusive focus on the offshore helicopter industry. This was my first visit and a very appropriate time to listen and talk to helicopter financiers about the state of the offshore business. Helicopter financiers were hit very hard in 2016, Robert Van de Hurst, General Counsel at Waypoint Leasing stating that “nothing on this scale has happened before”, a view echoed by many speakers particularly those affected by the CHC Chapter 11 proceedings. One company alone, Protective Packing Corporation, has placed 252 helicopters in storage preservation around the world for companies like Bristow, Babcock and ERA.
Clark McGinn, SVP Sales & Relationship Management at Waypoint Leasing started the Conference proceedings and was full of optimism for the offshore sector arguing that “cyclical self correction” would correct the downturn. This involves manufacturers curbing oversupply by restricting their output of new helicopters (which Airbus said they would), oil and gas companies rebooting their investment as oil prices rise and new style lessors with plenty of liquidity supporting the ailing market. The majority of other speakers were far more conservative in their approach to the current market, including John Mannion of the Kylemore Group, Mike Platt, CEO of LCI Helicopters, Marina Ianova, an Analyst at Douglas-Westwood Consultancy and especially Dan Rosenthal, President of Milestone Aviation.
Ianova’s excellent objective and factually based presentation detailed a very low demand for helicopters from oil and gas companies through to at least 2022 as they explore low cost onshore and shallow water prospects. Rosenthal in a keynote presentation that packed the room agreed, noting that a lot of forecast new oil production will be undertaken through ‘Tiebacks’, connections between a new oil and gas discovery and an existing production facility – these generate no need for extra helicopter capacity. Ianova did state that there is the potential for new deep water activity primarily in Guyana, Senegal, East Africa and Egypt but agreed with Mike Platt that one of the main growth areas would be support for increasing offshore wind developments with small helicopters, particularly in China.
Rosenthal is very well placed to provide informed analysis given GE’s recently enhanced presence in the oil and gas sector having acquired 62.5% of Baker Hughes. He has unrivalled access to data on oil and gas developments that promote offshore helicopter activity. Rosenthal was forthright that nobody is forecasting positive oil and gas capital expenditure in 2017 and that there is a determination within oil and gas companies to retain the benefits of cost cutting achieved with sub-contractors. He confirmed a number of systemic problems in the industry which many others had also commented on, including:
- Too many helicopters coming into the market with legacy aircraft that are not being retired or fed into other work fast enough;
- The need for a global maintenance and repair network to generate efficiency amongst operators with sufficient type certifications, capacity and commercial flexibility; and
- The ability of oil and gas companies to cancel helicopter contracts on 90 days notice or less creates uncertainty.
A lot of this isn’t news to the helicopter operators who are caught right in the middle between the manufacturers/ lessors who share a joint responsibility for increasing helicopter supply and powerful clients forcing through cuts in pricing but maintaining the requirement for highly specified aircraft on 30-90 days contractual notice.
Mike Platt projected a developing migration from heavy helicopters to the “super mediums” H175 and AW189 following concerns about the future of the H225 and sole reliance on one heavy type, the S-92A . Leonardo’s Roberto Garavaglia was an ardent supporter of this prospect of course, as Leonardo don’t have a heavy in the market; the forgotten and very expensive AW101 is only certified for the military market. Garavaglia started a clarion call which echoed throughout the Conference that “16 is the new 19!” (passengers of course).
The H225 ended up being the main focal point of the presentation by Regis Magnac of Airbus Helicopters although understandably he really didn’t want to talk about it. He also commented on the significant spare capacity in the market stating Airbus production rates are being scaled back to match the decreased demand. On the grounded H225, he declared that Airbus are:
“…committed to the the future of the H225 which is a critical asset for the offshore market…The H225 may be cleared to fly everywhere very soon”.
Magnac did clarify to me that the clearance to fly is of course dependent on the approval of regulatory authorities in the UK and Norway and that the restoration to flight of the H225 would be subject to the current flight restrictions involving inspections every 10 flight hours. Rosenthal saw the H225 as “a major topic as we enter 2017” and is clearly concerned about the dilemma the future of the type presents given their presence and value within the Milestone portfolio and the impact on helicopter supply if they do return to service. I have written elsewhere that my concern is on safety grounds:
“The European Aviation Safety Agency and FAA response to this incident, allowing the H225 to return to service, are both surprising and precipitate. The cause of the accident may be known, but there is still no proposal for effective monitoring of this critical area: the H225 should not be brought back into service until there is” (HUMS: Safety Alert).
David Fowkes, Managing Director of Seabury Corporate Advisors has been involved in many mergers, acquisitions and restructurings in both the fixed wing and rotary arena; we both worked together on the Bristow acquisition of Airnorth, a fixed wing company in North Australia. His analysis of the significant differences in restructuring fixed wing and rotary businesses in financial difficulties is based on experience in both sectors, most recently in the helicopter world as advisor on the CHC Chapter 11 proceedings. The main differences he saw between fixed wing and rotary restructurings were:
- Sheer size of the operations, with rotary much smaller, creating a significant imbalance of power between the oil and gas client and the operator which is reflected in the contractual terms;
- The complex legal structures required for helicopters to operate across different aviation jurisdictions impeding the easy physical movement of helicopters between jurisdictions;
- The significantly greater number of AOCs required to operate in the rotary sector; and
- The variation in specifications of the same type of helicopter making transfers between countries and clients difficult to manage, a systemic problem also identified by Rosenthal.
Fowkes urged offshore operators to consider increased diversification so as not to remain totally reliant on volatile and increasingly less profitable offshore oil and gas revenues. This could be both vertical diversification (e.g. fixed wing, travel management for oil and gas passengers) and horizontal diversification (e.g. SAR, EMS, drones, boat transfer).
To summarise, the main themes that emerged at the Conference were:
- Oversupply of Offshore equipped Helicopters: even with the H225 grounded there are still 20 idle S-92As and one company has preserved and stored 252 helicopters. The emergence of the Super Mediums and possible return to service of 176 H225s, 120 of them allocated to oil and gas, will only exacerbate this situation.
- Demand for Helicopters: the main areas of increased demand through to 2022 will be outside of oil and gas requiring mainly small and medium helicopters.
- Cost & Price: For offshore helicopter companies, low prices and a continued focus on costs will continue to be the driver from their powerful oil and gas clients. Therefore, different models may start to emerge in the delivery of offshore helicopter services. For example, both Fowkes and Rosenthal agreed that operators could contract out to a common maintenance and overhaul provider rather than duplicating the provision at the same location. Certainly, a combined CHC HeliOne/ Bristow initiative in this area would make great economic sense for both parties. This could also lead to the rationalisation of the number of offshore providers in each geography. Diversification will also have to occur to deliver any significant profitable growth.
After the Conference closed, Rosenthal backed his continuing concern for the offshore helicopter industry with an announcement that Milestone Aviation are to provide a $230 million secured term loan facility to Bristow, secured by Bristow’s helicopter assets. As part of the agreement, Bristow will extend select Sikorsky S-92 leases with Milestone, and Milestone will defer lease rentals on select leased H225s. Rosenthal explained:
“Bristow is a world leader in industrial aviation and our long-time partner, and this funding agreement symbolizes GE and Milestone’s confidence in the Bristow strategy and management team…We understand the challenges that exist in the current environment, and we look forward to continuing to ensure the long-term success of the global helicopter industry.” (Press Release, 2nd February 2017)
This was a well organized and focused conference that highlighted major structural concerns for the offshore helicopter market, reflected in the Milestone/ GE provision of asset backed cash liquidity for the two major global operators totaling $380m. However, there are clear opportunities for helicopter providers to act strategically in this difficult environment. A positive note was the real opportunity for growth outside of oil and gas, particularly the provision of small and medium sized helicopters. Leasing companies with a low oil and gas profile such as LCI Helicopters who have no exposure to heavy helicopters and only 30% of their business in oil and gas were understandably more optimistic about the future. Those companies with more exposure to oil and gas and heavy aircraft are very glad 2016 is over and only marginally more optimistic about 2017.
Copyright and full responsibility for the content of this article remains with Allan Blake, is an independent Aviation Consultant & Journalist. He is the author of “Dynamic Directors: Aligning Board Structure for Business Success” (Macmillan). He was a guest of Seabury Corporate Advisors at the Conference.
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