Friday, January 9, 2015
The Impending Bloodbath in the Offshore Market
When we last got your input for our State of the Rotorcraft Market study 18 months ago, it was easy to see where the big competition in the market for new aircraft sales was going to be. While the air medical segment continued to show the strongest buying signals overall, the study showed a significant uptick in plans to purchase new aircraft among corporate and offshore operators. Of those two, there was no contest as to which was going to get the attention of the airframe providers. Those of you who make your living flying out to oil platforms tend to buy the most expensive aircraft, and you buy them in large quantities in comparison to all other operators, so you tend to get the most attention.
Of course, your buying intentions did not surprise the airframe manufacturers. They all know the average age of your fleet, and they have all been working in concert with you to develop the next generation of offshore helicopters to ensure that their aircraft will meet all your demands and expectations. So, while most other operators may have a choice between one relatively new airframe design and another two or three designs that are at least 20-30 years old, you have your choice of not one, but three new designs. The AW189, EC175 and Bell 525 have all joined the ranks to compete with the S-92, and their more aged brethren such as the S-76, Pumas and Super Pumas of the world offshore fleet.
But what happens when oil prices tumble as they have recently? Exploration all but stops and production is curtailed in the big oil company strategy to boost prices back up to a more palatable level. I am told it has something to do with that whole supply and demand thing. Oh yes … and new helicopter purchases to support exploration and production get shelved for the duration.
Boy, those guys really know how to foul up a business plan, don’t they?
Make no mistake – the stakes here are very high. With the military market in the down cycle and governments making less up-front investments in new aircraft R&D, airframe manufacturers had to bet big on getting more than their share of the impending spike in sales to offshore operators with their new airframe designs. They have all made huge investments from their own pockets to develop these aircraft. There is not a military derivation of any of the three to shoulder any of that R&D burden. So what happens when the market simply goes into indefinite hibernation as it has? Who will profit, and who will suffer?
Bell, for one, probably isn’t complaining because it gives them more time to develop and sort out their issues with the 525. They were almost too late with an entrant, but they made up for it with one of the glitziest new aircraft roll-outs ever at Heli-Expo. The fact is, AgustaWestland was showing a production aircraft there at the show and Airbus was showing a prototype, while Bell was showing a total mock-up. If Bell had not gotten there with that mock-up as a placeholder, they were looking to get shut out of the game entirely.
But timing is everything, and it all hinges on the price of crude oil. If oil prices go back up, AgustaWestland stands to do well. If prices stay low for an extended period of time, it may work somewhat more in favor of Bell and Airbus Helicopters, but not entirely. The big winners in that case are more likely to be the leasing companies that are now proliferating within our market. With cash in their pockets and big investment banks behind them, they are perfectly positioned. The airframe manufacturers need to sell these new aircraft to start recouping their cash, and for all practical purposes the leasing companies will be the only game in town to whom they can sell.
But the leasing companies will demand and they will get huge discounts on their purchases because none of the players can afford NOT to sell to them. Anyone who does not sell to the leasing companies not only misses out on the cash-flow now, but they will have to compete with them later.
Whatever happens, it is liable to have lasting impact on the long-term health and viability of the airframe manufacturers involved.