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Leasing companies call for discipline in supply of ‘stable’ offshore helicopter demand

By Oliver Johnson | June 11, 2024

Estimated reading time 10 minutes, 10 seconds.

Executives from several leasing companies have called on the helicopter industry to take a “disciplined” approach to the offshore sector to avoid the mistakes of a decade ago, when enormous speculative orders led to oversupply and helped send the booming industry into freefall.

Speaking at the Helicopter Investor conference in London, England, last week, the executives said the offshore sector has largely returned to strength over the last couple of years, with excess aircraft capacity absorbed, and contracting terms and conditions offered by energy companies improved to a “more sustainable” level.

Con Barber, chief investment officer at Macquarie Rotorcraft, said the company saw “really strong structural demand” in 2023, but that he was now seeing some “froth” in the market.

“I think we’re now going into a phase where we’re starting to see the beginning of cyclical demand as well,” he said. “What we don’t want to do is, we don’t want to amplify that cyclical demand — and that requires a lot of discipline on the part of all participants.”

Pat Sheedy, president and CEO of Milestone Aviation, described 2023 as “a year unlike any other for Milestone” in terms of leasing transactions, with over 120 completed — two and a half times more than the company would typically expect.

But while he said the leasing company has seen a big improvement in the general state of the market, he cautioned that the balance between supply and demand remained delicate.

“We have seen speculative orders,” said Sheedy. “If we look at the numbers on super mediums [helicopters] in particular, there’s about 50/60 firm super medium orders. That doubles the super medium fleet — it’s about 25 percent of the total offshore heavy fleet.”

Looking at lessons learned over the last decade, Barber said the offshore market was overcapitalized by $5 billion in 2014/15.

“Every dollar of that was destroyed over the following five years,” he cautioned. “We need to get this very precisely right, because this market cannot be oversupplied with that frothy, cyclical demand.”

He said the original equipment manufacturers (OEMs) have a large role to play in preventing this.

“They need to hold their line, because otherwise they’re just amplifying the cycle,” he said. “Do the OEMs want those peak-to-trough [cycles], or do they want to hold the line so that we’ve got average $800 million or $1 billion in annual offshore helicopter CapEx [capital expenditure]? I think that’s a much more healthy market.”

Much of the recent investment in the sector is being driven by startup helicopter lessor GDHF. Launched in April, the company already has a substantial order book, with 50 Airbus H160s and up to 20 H175s.

GDHF CEO Michael York said his company’s approach isn’t based on an assumption there would be explosive growth in the industry — just the beginning of a replacement cycle as legacy types age out.

“I share the concerns here [about balanced supply and demand], but . . . I’m not seeing exuberance, I’m not seeing frothiness, I’m not seeing financiers pile in,” he said. “Everyone I’ve spoken to has a similar set of numbers around what replacement means, about what new technology is required in the heavy, super medium, medium space. So I think there’s an agreed set of facts here and it’s just how to meet that demand.”

Shell Aircraft’s Tony Cramp said oil-and-gas production is going to be required “well into the 2040s,” despite energy companies already having begun the transition to renewable sources.

“Offshore is there to stay for some considerable period, [but] I don’t think anybody’s seeing any massive growth,” he said. “Where we’re getting new countries coming in or new fields, that’s probably offset by the closure of some of the longer term assets — so it looks like a fairly stable picture.”

‘De-risking’ the supply chain

Delays in getting parts and supplies continue to be one of the major issues affecting the global helicopter industry.

One way energy companies are looking at “de-risking” their supply chain is by owning the aircraft themselves, said Cramp. A notable example of this was Equinor’s order for 10 Bell 525 Relentless super medium aircraft in March.

“Is the leasing company, from our perspective, just a cost — or is it adding value?” said Cramp. “Keeping the operators as financially and operationally healthy as possible — so they can deliver the service at the level, and the frequency, and the availability we need — is our primary driving factor. But then it is cost, and where can we take cost out of the business? One way is potentially owning the aircraft ourselves.”

Nigel Leishman, chief commercial officer at LCI, said this showed that energy companies are looking at the long-term. “If they’re going to invest into the asset, then we clearly know that they’re going to need the asset for some period of time,” he said.

Another challenge is the funding environment, with inflation remaining high.

“That’s leading to some difficult conversations with lessees who are seeing assets that are coming off lease — and we’re talking about extensions — and these rates are going up on a depreciated asset,” said Barber, “and we’re just passing on equipment cost.”

He said he hoped leasing rates would begin to fall as U.S. inflation data starts to improve.

All the speakers at Helicopter Investor agreed that contracting terms for operators are beginning to improve, with longer terms, or the removal of termination for convenience clauses.

“I think we’ve got to a point where there’s now greater awareness and better understanding in our supply chains of what the dynamics are within the industry,” said Cramp. “The fact that we’re starting to see longer term contracts coming in [with] a little more fairness and balanced terms in there has got to be a good thing.”

LCI’s Leishman said it was no coincidence that these more appealing terms were being offered at the same time as the industry was seeing a boom in demand.

“It has to be a good thing, but to be honest, I think it’s happened because of necessity,” he said. “The change of behavior is great — we love to see it, we need to have some discipline in this marketplace — but it’s also being driven by reality.”

Sheedy agreed, saying the improved terms are offered in order to secure much-needed aircraft in a competitive market.

“The minute that supply equation changes, I have no doubt that if the pendulum swings back into oversupply, they will look for the terms and conditions they had three or four years ago,” he said. “Then it’s up to the owners of the assets to either be disciplined and bold and try and maintain the conditions for the industry as a whole, or drop conditions. If we drop conditions, we’re back where we were.”

Macquarie’s Barber said the market “writ large” needs to “hold its nerve.”

“If one operator is willing to concede to a cancellation for convenience clause [for example], that has a material impact on the whole industry,” he said. “And so all the market participants need to hold their nerve — and that starts with the OEMs all the way down to lessors and end users as well.”

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