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Forecast: Turbulence

By By R&WI Staff | October 1, 2015


 

CHC Group has sent out the call for industry leaders interested in presenting at its prestigious Safety & Quality Summit next April in Vancouver, British Columbia.

The annual event has become world renowned as a venue to forward-thinking safety professionals to share their victories and challenges in enhancing helicopter and industrial safety. Last year’s event—hosted by CHC Helicopter, the operating company of CHC Group—drew more than 750 delegates from two dozen countries. They discussed topics that ranged from compliance monitoring to systems for reducing safety and business risks.

The next summit, titled “Back to Basics: Prioritizing Safety in a Challenging Economy,” will be rather fitting considering current trends. When it comes to aircraft leasing, 2015 has been the definition of a challenging economy and 2016 promises to stay that way.

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This year began with the major leasing companies solidifying their positions in the helicopter market and also rotorcraft operators easing up on their belief that the way to run their businesses is to own their aircraft. Operators began to embrace the concept and the benefits of the aircraft operating lease.

In fact, as 2015 draws to a close, key operators are taking full advantage of flexibilities in operating leases. As oil prices dropped throughout the year and offshore exploration and production waned, the helicopter outfits supporting those operators removed less profitable leased helicopters from their fleets swiftly and returned them to lessors.

Meanwhile, smaller lessors serve flight schools, air ambulance services and other operators by offering aircraft acquisition options other than purchases.

No one is giving up on the helicopter leasing business.

“Whilst certain sectors face challenges, the helicopter leasing industry overall remains buoyant,” said Crispin Maunder, executive chairman of LCI, which claims a total helicopter fleet of 90 delivered and ordered AgustaWestland and Airbus Helicopters aircraft.

Turbulence might be considered a form of bouyancy, and the offshore sector that has become helicopter leasing’s great strength is certainly turbulent. When CHC’s chief financial officer, Lee Eckert, discussed the company’s most recent quarterly performance Sept. 9, he pointed to that turbluence. Since CHC’s previous quarterly report three months earlier, he said, the per-barrel price of North Sea crude oil had dropped 18.3%, from $62.01 to $50.68.

It is worth reviewing the advantages of the operating lease, which is the product on which the major lessors have been building their businesses in the past few years.

An operating lease is considered a form of “off-balance-sheet” asset financing. It allows an operator to get the benefits of a new aircraft without the increase to the overall debt-to-equity ratio that a purchase would cause.

Typically, an operating lease does not require the down payment of debt financing for a new aircraft. A fixed, monthly rental fee covers the costs of the aircraft. In many cases, the leasing company assumes all the risk associated with the value that remains in the helicopter (or the residual value) at the end of the lease term.

An operating lease typically does not incur the large “balloon payment” often included in debt-financing agreements.

Leases have allowed offshore operators to rapidly reconfigure their fleets by shedding older helicopters and focusing on more advanced and efficient ones required by their customers. Photos courtesy of Airbus Helicopters, Sikorsky

Flexibility is the Key

Flexibility, as we said, can be the real advantage. Lease terms are based on the type of helicopter you want and how long you want it. Most of the major lessors have substantial orders with helicopter OEMs.

At the Paris Air Show in June, for instance, Milestone Aviation Group announced orders and options for 28 super-medium twin Airbus H175s and a letter of intent to acquire 20 Bell 525 Relentless super-medium twins. Milestone also has a multi-year agreement with AgustaWestland to purchase up to 45 of its helicopters.

Such orders support the possibility that operators can obtain new, advanced-technology helicopters to satisfy the requirements of short-term business opportunities. This also lets operators avoid the need to wait in line for deliveries of the new aircraft from OEMs, as well as the constraints of a multi-year fleet plan.

Rapid Fleet Changes

A major lessor typically can arrange short- or long-term leases to meet operator needs, which lowers risk for the operator’s financing strategy.

Flexibility has become a powerful tool for offshore operators this year. As oil prices fell, oil and gas producers focused on reducing costs. That compelled the likes of CHC, Bristow Group, Era Helicopters and Erickson Inc. to do the same. They were driven to focus on more efficient means of transporting offshore workers to and from rigs, which generally meant greater use of newer helicopters like the AgustaWestland AW139, Airbus H225 and Sikorsky Aircraft S-92 and S-76C++.

This trend leaves little room in offshore fleets for older-technology helicopters. Therefore, operators have been returning those older aircraft to lessors. These include Eurocopter AS322Ls, L1s and L2s, AS365s, EC135s and 145s, Bell 412s and Sikorsky S-76A++s and C+s.

The drop in demand for offshore support has eaten into the leasing market.

“Helicopter values have fallen concurrently with oil prices and rig counts,” said Sharon Desfor, president of the international helicopter appraisal firm HeliValue$. “Supply is up, demand is down and profit margins are falling. Heavy twins are available on the market, which never happens.”

Just like the fall in oil prices, the decline caught businesses by surprise. GE Capital Aviation Services (GECAS), GE’ aircraft-leasing, closed on its acquisition of Milestone for $1.775 billion early this year, just as oil’s decline was taking hold. (The deal also included GECAS’ assumption or payoff of Milestone debt.)

The acquisition “is a key part of our growth strategy for 2015 and beyond,” said GECAS President and CEO Norman Liu, adding that helicopter finance represents a fast-growing sector in aviation.

Milestone calls itself the world’s leading commercial helicopter leasing company, with a fleet of more than 187 helicopters worth $3.2 billion supporting more than 30 operators in 26 countries on six continents.

LCI is adjusting to the changing market, its executive chairman said.

“Since its inception, LCI Helicopters has carefully managed its exposure across all operational sectors and within helicopter type categories,” Maunder said. The company has focused on maintaining a balance across major sectors like air ambulance, search and rescue, and offshore support services.

Striking a Balance

Leases have allowed offshore operators to rapidly reconfigure their fleets by shedding older helicopters and focusing on more advanced and efficient ones required by their customers. Photos courtesy of Airbus Helicopters, Sikorsky

“Although the helicopter leasing industry is relatively young,” Maunder added, “it is clear that helicopter operators are now starting to reap the benefits of leasing where they can introduce the latest helicopter technology without the need for the major capital expenditure that purchasing requires.”

The company in late 2014 closed a five-year, $325 million asset-backed credit facility for the helicopter-leasing arm. In July, it appointed a new vice president of capital markets, Rory McQueen, a 25-year veteran in the aviation-finance industry.

LCI’s fleet consists of AgustaWestland AW139s, AW169s and AW189s and the Airbus H175 and H225s. Its helicopters are flying in Australia, Asia, Africa and Europe.

Waypoint Leasing remains committed to the market. In September, it said it had placed $200 million in senior secured notes with private investors for the launching of its capital-markets financing campaign. Calling itself the largest independent global helicopter leasing company, Waypoint said it would use the proceeds to expand its business and free up secured, revolving credit.

Adding Financing

Waypoint offered the seven-year notes to “a select group of leading institutional investors from top-life insurance and pension companies,” the company said.

The company’s scale and credit rating made its first capital-markets transaction possible, said CEO Ed Washecka.

Waypoint CFO Alan Jenkins said the transaction adds longer-term financing to the company’s debt profile and further reduces its cost of capital, “a benefit we bring to our helicopter operators.”

The transaction brings Waypoint’s total debt commitments to more than $1.3 billion. With previously announced equity commitments, its total financing is more than $1.75 billion. Waypoint’s acquired fleet includes 108 aircraft operating in 25 countries, with total assets of $1.3 billion.

Waypoint also is expanding global operations. It plans to open a Latin American office in Rio de Janeiro, Brazil, in January. The office will be headed by Waypoint’s Steffen Bay.

The company has delivered 10 aircraft to several operators in the region, including Lider Taxi Aeréo S/A and Brazilian Helicopter Services Táxi Aéreo. Waypoint has offices in North America, Europe and Asia.


A Cutting-Edge Lease Deal?

LCI in July said it had completed the first helicopter leasing transaction that complies with Islam’s anti-usury precepts.

That religion generally prohibits the acceptance of interest or fees associated with loaning money. LCI said the multi-year financing arrangement, a secured helicopter pre-delivery payment covering the Airbus H175 and H225e, is a “master Murabaha facility agreement.”

Such an agreement is similar to a rent-to-own deal. For example, the outfit that wants the helicopters would arrange for a third party to buy them.

That party then sells them to the outfit at a profit equivalent to the proceeds of interest payments. The outfit can pay the profit in a lump sum or in installments.

Because no interest is charged, such a transaction is considered in compliance with Islamic religious law.

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