HeliInvestor 2018: Alliances or Band-Aids?

HeliInvestor 2018: Alliances or Band-Aids?

5-Feb-2018 Source: Allan Blake

When helicopters are not needed and put into long term storage, either by lessors or operators, they are wrapped in a cover that protects them from the effects of humidity.  Steve Hanna is the CEO of the company that provides these covers, over 300 of them so far, and his business success and attendance for the second year running at HeliInvestor is indicative of the continuing state of the industry. Steve gave out numerous packs of band-aids to delegates to advertise his business, a pretty good analogy for the state of the solutions currently being pursued in the ailing offshore helicopter businesses and for its lessor financiers.

HeliInvestor is always a good conference to assess the state of the helicopter market, primarily offshore oil and gas, wind, SAR and EMS.  This year was no exception.   HeliInvestor 2018 took place over two days in London from 31st January to 1st February with attendance figures up on last year to 250 delegates. The day before the delegates gathered news came through of changes at the top in Waypoint, one of the main helicopter lessors with over 150 helicopters and a portfolio value of about $1.6 billion. Ed Washecka, Waypoint’s CEO, has been replaced by Hooman Yazhari, most recently CHC Helicopter’s General Counsel and Chief Administrative Officer.  There is a bitter irony in this appointment, CHC having caused Waypoint great financial pain during their Chapter 11 procedure.  Waypoint initially objected vigorously to the CHC/ Milestone agreement, stating they had up to $300 million at risk (see Waypoint tries to scupper CHC marriage to Milestone (October 17th 2016) Helihub).

Despite the changes at Waypoint, illustrative of some of the current strains in the helicopter financing business, proceedings kicked off in an optimistic if cautious note and I spoke to quite a few new potential investors who were attending for the first time.   Mike Platt, the CEO of LCI, introduced the proceedings.  His helicopter leasing company has about 40 helicopters with a portfolio value of c.$516 million and no exposure to the heavy helicopter market; hence his optimism. Providing helicopter support for offshore wind developments is one of LCI’s target growth areas where they project a 39% growth in helicopter expenditure through to 2021 and some increases in lease rates. However, even Platt complained that the helicopter manufacturers were still over supplying the current market preferring nil growth so that the market could stabilize.

Carl Fessenden, CEO of CHC, emerged from the huge pressures of a pretty successful Chapter 11 restructuring.  He also saw small signs of a recovery in the market particularly wind farms, SAR and EMS but was one of the first at the conference to emphasise the need for operators to develop different contractual arrangements with clients concerning the relationship between cost, safety and risk; this became a common theme.

Tony Cramp, Vice-President Aircraft at Shell echoed the view from most oil and gas producers recently that, although the price of oil has increased, they will still base investment decisions on $40-$50 per barrel. Throughout the conference there was agreement that recent increases in oil price could be temporary as US shale drillers can bring on more rigs quickly and there are big new projects in Kazakhstan, Canada and Brazil all of which could mitigate the impact of OPEC led reductions. Cramp raised four concerns that Shell have on helicopter safety, two of which have been raised by this author previously in Helihub reports:

  1. Legacy helicopter types acting as a drag on safety improvements;
  2. Airworthiness issues with new types, questioning whether the regulatory oversight system was sufficiently rigorous. Similar concern was expressed in the preliminary report of the Accident Investigation Board Norway into the H225 fatal accident of LN-OJF (see LN-OJF Preliminary Report: H225 Concerns Remain Open (May 3rd 2017) Helihub.com).
  3. The burden on operators with not enough active airworthiness management by OEMs, illustrated by the poor HUMS support for the operator in the S-92A tail rotor incident (G-WNSR) in December 2016 (see HUMS: Safety Alert (February 3rd 2017) Helihub); and
  4. The impact of industry wide early contract cancellation clauses (which vary between 45 -90 days): Cramp is seeking to have them negotiated out of Shell contracts. One reliable source has informed me that this has already happened with one Shell contract award.

Strategic presentations by Dan Rosenthal (President & CEO of Milestone Aviation and Senior Vice President of GE Capital Aviation Services), and David Fowkes (Managing Director Seabury Group) both confronted head on the serious structural issues affecting the offshore oil and gas helicopter sector and helicopter financing.  They both put forward long term solutions, broadly similar to those that they presented a year ago, which were urgently needed. (see Helicopter Investor Conference 2017: A Report (February 3rd 2017) Helihub).  Rosenthal described how investors in helicopter assets like Milestone have to take a long term perspective on the helicopter asset identifying sufficient returns for the lifetime of the helicopter, not just the first lease period which may only be 3-5 years. Factors that mitigate against achieving this required long term return on the helicopter asset include:

  • Excess helicopter capacity caused by the large number of aircraft still wrapped up by Steve Hannah and continuing new production (including enhancements to existing types that clients then demand for their next contract e.g. AW139);
  • The operational life of legacy helicopters which manufacturers need to take off the market as they release new aircraft;
  • Continuing reduction in oil and gas demand for helicopters through efficiencies, or at the most only marginal increases;
  • Operators, and therefore the helicopters, on short term contracts with oil and gas companies rather than having a long term commitment to a fleet or at least a significant proportion of it, combined with harsh no fault cancellation provisions; and
  • Too many bespoked aircraft which are difficult to move between contracts without incurring an average 20% additional cost to reconfigure – over the life of the aircraft these are significant extra costs with insufficient lease income to pay for them.

Both Fowkes and Rosenthal pleaded for radical change, Fowkes calling for a regional focus by the main operators supplemented by alliances with other operators as implemented in the fixed wing arena to provide more efficient global coverage. The Australian market for example really cannot support the present number of offshore operators. Both presenters concluded that unless there is a combined effort from all involved – helicopter manufacturers, major oil and gas companies (tying in their many smaller joint venture partners), helicopter operators and lessors – then very little will change and the future looks sick. There is clear frustration from Fowkes and Rosenthal that, although the medicine they are prescribing to cure the illness is apparent, the patients are collectively unwilling or unable to organise and take it. In many ways this was the gap in both of their presentations that they left for the wider audience extending outside of this conference to fill in – how can the much needed changes be achieved?

A potential answer to this question came from an unexpected source at the conference. Gretchen Haskins, CEO of HeliOffshore, presented to the delegates how concerted action agreed by all parties in the offshore helicopter sector, acting with a clear focus and a vehicle for delivery, can promote and achieve significant improvements in the safety arena.  Could this model of collaborative working be replicated to tackle the commercial problems identified by Rosenthal and Fowkes? There probably needs to be pressure and a catalyst to bring the various parties together for their common good.  Milestone is connected to all of them with about $4billion of assets, 306 helicopters plus significant security backed investments via GE Capital companies in both Bristow ($230 million) and CHC ($150 million) (see CHC: Rising from the ashes of Chapter 11 (December 21st 2016) Helihub). Milestone is by far the largest single purchaser, owner, lessor of helicopters and operator investor with a leader recently promoted to a wider role within GECAS (where the more profitable fixed wing sector is based with c.1,700 aircraft):  he has effectively issued a warning that things have to change for his company to continue propping up the offshore helicopter market until HeliInvestor 2019.

The necessary efficiencies that regional corporate alliances could bring to the industry as a whole also surfaced as a theme in the Maintenance, Repair and Overhaul (“MRO”) panel which I chaired. This is an area within helicopter operators that is crying out for a more efficient mode of business.   Three innovative private MROs aspiring to grow the helicopter sector within their businesses – JSSI, Patria and Hawke Aerospace (Uniflight) – were joined on the platform by two very constructive and helpful representatives from OEMs (Airbus and Pratt & Whitney). These MROs are profitable businesses and explained their ambitious growth plans which could be even further enhanced through the benefits of working together in an alliance:  a regional focus would deliver cost efficiencies to their operator clients through enhanced services such as better access to spares and wider coverage both geographically and by type.  The OEMs on the panel confirmed that they would not frustrate the MROs in their desire to deliver efficiencies for their helicopter operator clients by, for example, restricting access to spare parts. Indeed, they would work to help them. Preserving their independent status, an MRO alliance would expand each company’s network of potential clients whilst offering wider coverage both geographically and by type to their existing clients. Look out for the development of the first MRO Alliance offering an efficient global service to operators serving multiple clients on the same base.

Jack Welch’s mantra was: “Change before you have to”. At HeliInvestor 2018 Fowkes and Rosenthal in particular have warned that we are well past the “have to“  moment in the offshore helicopter industry. If there is no change? Well, I suppose we have Steve Hanna’s band-aids.

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).

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