By Douglas W. Nelms | November 1, 2005
The international helicopter industry appears to be going into an era of prosperity following decades of flatness. That's the good news. The bad news is what's helping it along.
OVER THE PAST TWO YEARS, CIVIL HELICOPTER OEMS have been filling their order books, with both Bell and Sikorsky on track to double their sales and revenue by decades end, Eurocopter reporting equally solid sales and Bell/Agusta Aerospace predicting the sale of 50 AB139s per year over the next 20 years.
S0--What's going on? Why is the helicopter market booming for the manufacturers after decades of absolutely flat sales?
One reason is the growth of the EMS industry, with both expansion and replenishment of that industry's fleets. Another is the growth of the offshore industry, which also is expanding and replenishing its fleet.
Jeff Pino, Sikorsky senior vice president, sales and commercial products, noted that Sikorsky recently announced the two biggest commercial orders in the history of the company, "and possibly the two biggest commercial orders, ever." Both had to do with oil exploration. These included an order for 35 S-76s to Offshore Logistics with an option on an additional 24 S-76s, with deliveries to start this year and be completed by 2012.
Unfortunately, there is also the worldwide oil crisis, not to mention hurricanes. It is not the cost of a gallon of jet fuel itself that is a major factor to the industry. Pino said that "the actual percentage of the cost of operation of a helicopter when you double the fuel price is really not huge to the operators. It's not insignificant, but it is not enough to keep them from flying."
However, what is impacting the industry is the cost of a barrel of oil and the impact of hurricanes on the oil industry. While offshore activity will obviously increase after the destructive forces of hurricanes in the Gulf of Mexico, the industry has also started to see an increase in onshore exploration. "Oil wells that have been capped are being uncapped, drilling is up significantly and exploration will continue," said Larry Roberts, vice president, commercial affairs for American Eurocopter. "Ultimately that will mean a certain percentage in helicopter sales. I can't tell you how much that will be, but it will certainly mean an increase in the market."
Pino noted the cost of fuel as a "two-edged sword." While it costs more to fly, it also means that the oil companies "are able to spill over some money into our primary commercial market and allow them to replace equipment and buy new equipment."
One of the biggest impacts of hurricanes on the helicopter industry for the coming year will be the images of helicopters responding to the destruction of the U.S. Gulf Coast states. "You sit and watch the major news channels and see all the wonderful work that's been done by pilots and helicopters in New Orleans, and it is very hard to dismiss in any measure the lifesaving work the helicopters have done," Roberts said. "From the president on down, the attention that has been given to helicopter operations is huge. It will open up a lot of eyes of folks who may not have considered helicopters in the past. I think that will impact not only at the commercial level, but also for local flying. When you see the wonderful work that has been done by helicopters down there, I think it is going to generate sales. The image certainly will increase the view of the general public, who always thinks of helicopters as being unsafe."
Another factor in the growing market for new helicopters is that the used market has become virtually extinct.
"A few years ago helicopter sales were down and the OEMs cut way back on production," said Ron Bower of Bower Helicopters. "The production rate of JetRangers was cut back to single digits per year, while Long Ranger production was in the low double digits. And it's not just Bell. It's all the manufacturers. So now it's hard to find a good, low-time used helicopter."
The Weak Dollar
Ed Eckhart, president of Eckhart Helicopter Sales, said that good used helicopters should start coming on the market within about 18 months as operators take delivery of new aircraft. However, the current long lead time for deliveries of new aircraft (as much as 2.5-3 years), will cause that transition to be gradual.
He said that companies such as Air Logistics down in the Gulf have ordered a large number of Sikorsky S-76s and Bell 407s, "so you're getting big orders like that, and the next thing you know the (order book) is sold out for the next couple of years. So you have people who have good five- or seven-year-old aircraft who are thinking of turning them over, but they can't because they can't get a replacement ship for two years."
Another reason for a depleted used market is the weak dollar. With the pound and the euro being particularly strong against the dollar, Europeans are scavenging the U.S. used helicopter market. "It's like free money," Bowers said. "You can get a 10-percent discount by buying internationally in a weak currency. But it fluctuates. When the dollar strengthens, we'll go vulture over in Europe and other countries that have good maintenance."
The movement of used helicopters to Europe may be slowed in the near future by the recently adopted safety rules of the European Aviation Safety Agency, Eckhart said. "The EASA certification restrictions are going to make it very, very restrictive on certification of aircraft that are in any way, shape or form non-factory standard," he said. "The letter of the law states that if a kit is not certified by the factory, you can't get it EASA-certified. So if you have a 10-year-old helicopter that you want to sell to someone in France, but it has an upgraded avionics package that isn't certified on the original helicopter, they are going to have a rough time getting it certified. It's making the (European) buyer think twice.
"Talking to people over there now, they are saying this will have to be relaxed. But it doesn't happen quickly," he said.
So now we are at the point "where good used turbines are hard to come by and for those that are out there the prices are getting closer and closer to what the new helicopters cost. So people start thinking about buying new," Bower said.
Roberts agreed that the shrinking of the used market will "impact favorably" on new helicopter sales. "We see very, very few single-engine corporate helicopters out there that are available, certainly from our product line. So that will generate new helicopter sales."
The fact that used helicopters will be hitting the market fairly gradually should keep the price steady, Eckhart said. "There won't be a flood on the market, there won't be so much that it will impact the prices, and the replacement cost of new equipment is so high that it holds the used price up there." He said that a really good AS365N2 is going to be "around $3 million give or take," and a new AS365 is now $6 million, but in 24 months will be around $6.5 million. "So all that is going to do is hold up the value of the used equipment. And helicopters traditionally hold very strong residual values."
A relatively new issue that has hit the helicopter marketplace is the requirement to determine the residual value of the aircraft, according to Barry Desfor, managing director of HeliValue. Under the Sarbanes-Oxley Act, which was passed following the Enron and WorldCom scandals, any company making a major capital investment must have an outside opinion made on its value, whether new or used, at the time of acquisition. Also, if there is a board of directors, the board must approve the expenditure and the company's CEO must personally assume responsibility for the purchase. This has benefited companies such as HeliValue tremendously, since they qualify as outside, unbiased professional experts, Desfor said. "This has been quite a year for new sales, far more than any year I can remember in the recent past. We get involved because our expertise is a requirement, particularly for new sales of new models, something that is fairly recent off the production line because we make the residual value projection."
About half of the acquisitions of helicopters in the commercial market are done under lease agreements, with the residual value projection used by the leasing bank to formulate what they will charge per month. "It helps form their finance lease contract numbers and also formulates in the United States some of their tax planning, which the leasing company has to do so that in the future nobody gets what is called a windfall profit. The leasing company doesn't get it back at too cheap a future value, or if the operator decides to buy it in the future, he doesn't get it at an unusually low price," Desfor said.
Only Paying For Part
The residual value projection also applies to manufacturers, he said. "For instance, Sikorsky, in introducing the S-92, and Eurocopter in introducing the EC225, two similar aircraft, want to assure their customers that the customer can get financing for this. And the financing companies want the assurance that the aircraft will hold up in value, so they look to the manufacturer to provide the guarantee. The higher the residual value, the lower the monthly payment. The lower the monthly payment, the more likely the helicopter operator can take delivery of this very expensive machine and actually make some money with it."
The end effect is that, by leasing the helicopter with a guaranteed high residual value, the operator has the use of the aircraft without necessarily having to pay full price for it. "If you have a helicopter with strong residual value, you have the lower payments because the leasing company is willing to wait for its profit until it comes back and they can either resell it to the operator or to another potential user. They make their money when the resell or release it. So both the leasing company and the original operator know that the operator is only paying for part of the cost of the helicopter," Desfor said.