Wednesday, October 1, 2014
Rotorcraft Leasing Grows Up
Rotorcraft leasing companies continue to mature, proving that they belong in this segment of the air transportation business
An Airbus Helicopters (formerly Eurocopter) EC225 Super Puma operated by Vancouver-based CHC Helicopter heads outbound from a platform. Photo by Anthony Pecchi, Provided by CHC
Aircraft leasing was, for years, the sole province of the fixed-wing, commercial airline world. But, in the last few years, rotorcraft leasing has gone from being a niche player to a multi-million dollar, highly competitive industry that shows no signs of slowing down.
Revenues and orderbook will never match figures generated by such airliner-leasing giants as the International Lease Finance Corporation (ILFC), but the recent sales and financial figures published by the leading rotorcraft lessors are noteworthy.
In July 2014, Waypoint Leasing reported that its fleet now included more than 40 helicopters on lease and delivered from Airbus Helicopters, AgustaWestland, Bell and Sikorsky for a total asset value of more than $500 million. Waypoint reported firm and option orders for more than 80 helicopters valued at over $1 billion. To date, Waypoint has raised more than $900 million in capital to expand its fleet of helicopter assets.
Milestone Aviation Group increased its rotorcraft fleet value in the last year to $2.2 billion. The portfolio includes 135 aircraft operating worldwide. Milestone has a forward order book of more than 130 firm and option aircraft valued at over $3 billion.
Its CEO Michael Platt describes Lease Corporation International (LCI) as a “growth story.” The Libra Group division tripled its customer base in the last year. “We’ve been very active in increasing the size of our orderbook and placing helicopters,” said Platt.
At Heli Expo 2014, LCI unveiled commitments for up to 39 new helicopters worth around $925 million with additional 2014 pipeline orders for a total value close to $1 billion. It signed a contract with Airbus for up to 21 new helicopters. The order includes the EC175, the first time a leasing company has ordered the aircraft. LCI is also the launch customer for the new EC225e. Value of the Airbus order is around $645 million, with deliveries to begin in the fourth quarter of 2016. (See sidebar.)
“Leasing firms are becoming ever bigger players in the civil helicopter market,” said Ray Jaworowski, senior aerospace analyst, Forecast International. “As operator fleets become larger, and helicopters become more expensive and technologically advanced, leasing is increasingly seen by many operators to be a viable (and even preferable) alternative to purchasing a helicopter outright. Further helping to drive this trend is an increasing emphasis by helicopter operators on cost reduction.”
Partnerships and term loans are recent ways to augment the helicopter leasing business. LCI teamed up this year with specialty finance concern, KKR Financial Holdings, which has invested $100 million in LCI in exchange for a minority stake.
In May, Waypoint Leasing closed on a five-year $72.5 million term loan with a Goldman Sachs-led group. The funding is being used to refinance six existing helicopters under Waypoint’s $385 million revolving credit facility.
All of the leasing companies interviewed for this article said they would continue to focus on leasing medium to heavy new technology twin-engine helicopters, which range in cost between $15 million to $30 million per copy.
“We continue to see robust demand for the heavy helicopters, such as the Sikorsky S-92 and the Airbus Helicopters Super Puma 225 as it comes back into service,” said Robert Dranitzke, managing director of the Milestone Aviation Group. Lessors are also seeing more interest in the mid-size equipment, such as the AW189 medium, AW139 intermediate, EC-175 and the Bell 525.
“It’s a little early to pick any winners,” said Dranitzke. “Everyone is being cautious about these new helicopters, but there is a definite niche to be filled.”
Competitors agree. “I think we will see a trend of leasing light twins as they get more expensive,” said Ed Washecka, CEO and co-founder of Waypoint Leasing.
Lessors said they would consider writing operating leases to operators of smaller, turbine-powered rotorcraft, but they prefer a package deal on such equipment.
Waypoint has a number of small, single engine rotorcraft in its portfolio, but they are concentrated with two customers. “I don’t want to lease 10 helicopters to 10 customers, but 10 to one customer is fine,” said Washecka.
Regardless of size, most of the aircraft leased today come from established manufacturers in the West, although the Russians have been making large twin-engine turbine equipment for years. And the Chinese are trying to establish a viable civil helicopter industry as well.
Lessors tell Rotor & Wing they would consider leasing Russian-made helicopters, but there are obstacles, such as the lack of top flight product support and full disclosure on the operations life of the equipment, that remain in the way.
“From a lessor standpoint, it is hard to determine the residual value of Russian-made helicopters,” said Jeff Pino, CEO of Macquarie Rotorcraft Leasing. Most of the lessors would have to conduct a “deep-dive study” before investing in Russian helicopters. This is not to suggest that their helicopters aren’t good, because they are, said Pino.
“I think there is an interest in leasing Russian helicopters, but one challenge is getting banks comfortable with the idea,” said Washecka.
“Ultimately, the market will decide,” said Tony Bergeron, president of Toronto-based Element Aviation Finance. “If you look at the Russian-made helicopters operating out of Canada, you notice types of machines that have been strong contributors to specific missions, such as infrastructure development.”
Trends & Markets
The growing acceptance of advanced rotorcraft by banks as a worthwhile lending risk is one trend gaining ground. Lessors have spent considerable time educating bank executives on the value of rotorcraft leasing — operating leasing particularly — and those tutorials seem to be paying off.
“We’re seeing a lot of banks, which weren’t interested 1 1/2 years ago, are now interested in financing and leasing of helicopters,” said Platt. “The banks are also seeing the advantage of having someone between them and the rotorcraft.”
Another trend that could bode well for OEMs and lessors is the interest by large energy companies in helicopters with search and rescue (SAR) capabilities. The equipment could vary from smaller SAR configured helicopters, or large transport rotorcraft that could be augmented to also serve as SAR vehicles.
Numerous oil and gas companies are including SAR capabilities on their larger helicopters and have developed SAR departments, said lessors.
Leasing of rotorcraft for government use is another growing source of leasing revenue.
“At a time where there is budgetary pressure on governments worldwide, they are looking to the private sector to fill some services,” said Dranitzke.
Numerous governments are talking about privatizing the search and rescue functions,” said Platt. “These private companies will have to figure out the most efficient way of financing helicopters.”
The primary markets for operating leases will for the foreseeable future remain abroad. The offshore oil and gas business of western Australia and Africa is a growing segment for the leasing business, and there is a rise in helicopter activity in Indonesia, said several lessors.
U.S.-based operators often prefer to own their rotorcraft because of the favorable accelerated tax depreciation laws on equipment in the U.S. Yet the increased unit and direct operating costs of rotorcraft may force U.S. operators to rethink this practice.
A steady demand for large rotorcraft remains. Many of those aircraft are being used extensively in the Gulf of Mexico, which Pino, a former president of Sikorsky Aircraft, finds surprising. When the S-92 was introduced into commercial service years ago, “we projected that five to seven of these large helos would operate in the Gulf,” remembered Pino. “Today, there are over 40 S-92s operating in the Gulf.”
The rotorcraft leasing business is following a typical growth pattern with little activity in the beginning, followed by a handful of companies which dominate the business, followed by the entry of several boutique lessors, resulting in a crowded field of competitors which could force the consolidation of rotorcraft leasing industry.
Most executives in the leasing community believe that some consolidation in rotorcraft leasing is inevitable. But opinions vary as to whether consolidation will occur among the stronger, well-capitalized players or if the weaker players will simply exit the market.
“Consolidation will occur, definitely,” said Washecka. “There isn’t enough of a rotorcraft leasing market for all the people that are now in it.”
“It is too early to tell now, but I certainly see the possibility of consolidation down the road,” said Platt.
“It all depends on what are the strategies of the individual lessors,” said Pino. Some lessors might decide to build a book of assets quickly, and then initiate an initial public offering, while others become long-term players, said Pino.
|Jeff Pino, CEO of Macquarie Rotorcraft Leasing. Photo by Ernie Stephens|
“As a result of this transaction, we got direct access to well-established operators and manufacturers across the U.S. helicopter market and were able to take advantage of early renewals, end of lease replacements and upgrade cycles with those customers and manufacturers,” said Bergeron. EFC has total assets of around $3.3 billion.
Macquarie Rotorcraft Leasing might be a one-year-old toddler, but it has the support of its global investment banking and financial services parent, the Macquarie Group.
“It’s a robust business with a steady flow of tenders, sale/leasebacks and requests for available helicopters,” said Pino. “The change is that it has become a highly competitive business, which is good for the operators who can demand more service and better pricing.”
Pino said newcomers to rotorcraft leasing, such as Macquarie, must be flexible and inventive if they hope to survive. “Most of the low hanging fruit – those initial multi-million dollar deals – have been picked already,” said Pino. “Now, you’re seeing more tenders. Everyone is getting smarter in the business.”
Pino said the rise in rotorcraft leasing has helped manufacturers production slightly. Unlike the fixed wing airliner world, “OEMs don’t let lessor speculative orders create a false sense of demand,” said Pino. “OEMs carefully gauge the demand for rotorcraft.”
As for lessors, “we are a surrogate for operator demand,” Pino said candidly. “We are providing a little more capacity, 10 percent maybe.”
Lobo Leasing LLC, a Dublin-based helicopter leasing company, announced in February 2014, a partnership with GSO Capital Partners LP, a division of Blackstone, to build its global helicopter leasing company. Affiliates of GSO Capital have committed $200 million of equity capital to Lobo to fulfill leasing needs of helicopters operators worldwide.
Lobo president and CEO Bill Wolf stated at the time that the partnership with GSO would help the company “build a large global helicopter leasing platform.” (Wolf declined to be interviewed on the record for this article.)
Later, in February, Lobo announced a master lease arrangement with CHC Helicopter, which specializes in providing flight services to oil and gas companies, and government SAR agencies. The agreement allows for both the sale and leaseback and new-delivery lease financing of medium and heavy helicopters, including Sikorsky and AgustaWestland models located in Europe, Africa, Asia and South America.
The fast-growing commercial rotorcraft leasing business is still an adolescent, but will soon become an adult, and face the following challenge: Should it mature alone or seek a partner that could help ensure a long life? Stay tuned.