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Thursday, March 1, 2007

Forecast: Watching the Tide

Wary of their own instincts and fears, industry prognosticators see rotorcraft markets chugging along for the foreseeable future.

James T. McKenna

IF THERE’S A DOWNTURN IN THE OFFING, IT’S HARD TO find someone who has a hint of it.

As many of us packed our bags and prepared to wade into the hubbub of this year’s Heli-Expo in Orlando, Rotor & Wing surveyed the industry on the promises and pitfalls that 2007 and beyond may hold. Normally a skeptical lot, the helicopter industry veterans with whom we spoke shared nothing but optimistic views about the coming months, and even years.

Contracts are lined up, be they for new aircraft, flight support, or maintenance, modifications, and completions. The pace of operations is expected to remain strong, even painfully so, whether the sorties are in the eastern U.S. business corridors, the North Sea and Gulf of Mexico, or more precariously in Iraq.

In the Gulf of Mexico, for instance, offshore operators are being kept busy not only by the pace of oil and gas exploration and production activities but by ongoing efforts to repair extensive hurricane damage to rigs and pipelines.

The common complaint for those in casual attire, business suits, and camouflage alike is that they can’t get enough new aircraft or get them fast enough. (A woe countered nearly universally across the table by the manufacturers’ complaint that they can’t build helicopters fast enough.)

Perhaps all that optimism should make us nervous. In things economic, the broad inability to spot any dark clouds on the horizon is often a precursor to gloom. Indeed, just at press time came a bit of caution when oil and gas companies in the United Kingdom warned that investment in and production from the North Sea may be dipping (see page 60). Still, their warnings seemed to say, "Things are good, just not as good as we thought." They also smacked of a pre-emptive message intended to head off thoughts in Westminster of mucking with tax laws.

This new year has gotten off to a bit of a rocky start. Sikorsky Aircraft entered it stinging from a shot across from a key customer, the U.S. Navy, which was unhappy about the effect the manufacturer’s efforts at outsourcing had on the quality of H-60 Seahawk variants it was receiving. We enter Heli-Expo’s exhibit halls without one of the most gregarious participants from last year’s event, Mike "Red" Redenbaugh, whose ousting as Bell Helicopter CEO has been attributed to complaints about production delays from the U.S. Marine Corps, or the U.S. Army, depending — apparently — on what day of the week is showing on calendars in the headquarters of Bell parent Textron.

A concern likely to dominate the industry this year is safety, in large part because industry leaders are drawing attention to it. The International Helicopter Safety Team, for instance, is moving into a key phase: identifying measures that it should recommend to operators as the best options for preventing and reducing accidents.

Set up in 2005 with the goal of slashing the helicopter accident rate 80 percent in 10 years, the international team in November received the report of a working group that spent a year analyzing 195 accidents in the database of the U.S. National Transportation Safety Board.

That group’s goal was to isolate the most common contributing causes of helicopter accidents. Its findings have been handed off to another working group charged with coming up with measures of mitigating the most common causes.

That and other spotlights on safety will inevitably drive demand for expanded and improved flight training.

"I’m confident that 2007 will be a strong year for the rotorcraft industry, both in aircraft sales and in our steadily improving safety record," said George Ferito, director of rotorcraft business development for FlightSafety International. "FlightSafety expects continued growth in training sales as operators place increasing emphasis on safety training, especially training tailored to the unique demands that different missions make on pilots and crew. Mission-specific training that emphasizes the human component will continue to be the key factor in enhancing safety."

Digital Simulators

"Digital simulators have over the last few years made such significant advances in fidelity, reliability, and affordability that they are now available to even the smallest flight schools," said Terry Simpkins, president and CEO of FLYIT Simulators. "Over the past year, FLYIT has received over 100 inquiries from entrepreneurs, in the United States, Canada, Mexico, and Central America, that are planning to open new flight schools with simulators integrated from the beginning.

"We expect FLYIT’s business for 2007 to easily double over 2006," he said.

Another key concern for the industry this year is how well the big manufacturers can meet the challenge of ramping up and sustaining at reliable levels production to meet demand that, from every quarter, borders on unprecedented (if not surpassing that mark). Clearly, that will be foremost among the concerns that Lutz Bertling discusses when he makes his Heli-Expo debut as head of Eurocopter.

"Eurocopter will continue to grow in 2007," Bertling said. "Its multi-national military programs, the Tiger and NH90, are now in the delivery phase while picking up new orders, especially in the case of the NH90. Law enforcement will remain a strong sector in view of the terrorist threat. Many EMS operators are acquiring new-generation helicopters, and there is presently a big increase in the demand for new helicopters by the oil and gas industry."

To broaden its portfolio, "one of Eurocopter’s major goals for the future to become a full customer-mission solution provider, rather than merely delivering helicopters," he said.

The need to ramp up is a matter of widespread import in the industry, since a high level of deliveries drives the demand for completions and other support services, Likewise, problems with deliveries disrupt the workflow and revenue of the shops that provide those services.

Air Methods’ Products Div., for instance, is completing an extensive re-organization and expansion of its manufacturing and completion capability to accommodate its current backlog of commercial and military programs.

"The helicopter industry is enjoying a sustained growth period," said Michael Slattery, that division’s director of marketing, and "OEMs, completion centers, and aircraft operators are working diligently to meet the demand."

"During the past 18 months, we have seen an increase in the need for customizing and completion services on additional helicopter manufacturers models," said Paradigm Aerospace President Ed Pears.

All are confronting the challenge of getting suppliers to step up to the pace of production being demanded of the OEMs by their customers. At times it seems an impossible task to convince suppliers that their production priorities should be aligned with those of their helicopter customers. All of which is reminiscent of the observations last year of perhaps the industry’s newest executive participant, MD Helicopters owner Lynn Tilton, who warned at Heli-Expo 2006 that both MD’s and the industry’s supply chains are broken.

Tilton and her management are still wrestling with finding the right combination of suppliers to meet production demands, which, happily for MD, are increasing.

‘Changed Forever’

Tilton offers a rosy view of the helicopter industry’s prospects.

"Global demand has changed forever," she said. "We will see ebbs and flows, as history always repeats itself. But we will never see the contractions we’ve seen in the past, because the market’s just bigger. There are countries all over the globe with rising infrastructures that need helicopters that weren’t part of the marketplace before."

She points to the Middle East as an example. "I think we’ve had 10 firm orders from the Middle East" since the Dubai Air Show in early December 2006.

MD’s new distributor for that region, Action Aviation, has ordered 30 MD helicopters. That’s a minimum of 20 Explorers and 10 single-engine MD products

The high demand and lengthy order backlogs at manufacturers like AgustaWestland, Bell, Eurocopter, Schweizer Aircraft and Sikorsky will continue to create opportunities for counterparts like MD and Enstrom Helicopter that have some excess production capacity.

In this market, "you can sell everything you can produce," Tilton said. "There is no new supply coming on this market. Sikorsky’s not going to go to 1,000 helicopters a year."

MD, in fact, reports it has sold out production through 2008. "Of course, I’m going to try to increase production," Tilton said.

Such "sold out" talk makes salesmen unhappy. Pete Schweizer, newly promoted to market the turbine Model 333 of that Horseheads, N.Y.-based Sikorsky subsidiary, notes that many of Schweizer’s production line slots have been sold to dealers. "We don’t want people to think they can’t a Schweizer," he said.

Most analysts and observers expect the helicopter market to remain tight, both for new and used aircraft, for the next couple of years — barring some horrific event.

Enstrom reports demand for its turbine 480B remains strong, with its deliveries outpacing those for the piston F28F and 280FX. Enstrom President and CEO Jerry Mullins said he expects to deliver 14 turbines this year and 10 pistons.

Enstrom continues to take advantage of the backlog at other manufacturers by offering deliveries of new aircraft within 90 days of their order. It is building aircraft on spec to meet that goal.

The high demand lessens the pressure on major manufacturers to come up with new commercial products, in large part because they are too busy filling current orders. That combined with the lengthy order backlogs for new aircraft logically creates opportunities for those offering modifications and upgrades to make current fleets more efficient and appealing.

Tight New and Used

The hoist manufacturer Breeze-Eastern, for instance, expects a double-digit percentage increase in sales in Fiscal 2007 and continued market growth "as the public continues to rely on the helicopter to save lives as a result of recent disaster relief and rescue efforts, which have increased commercial and military operator’s awareness for their aircraft to be able to perform life-saving missions," said CEO Robert White.

The tight market for new and used aircraft can create some interesting problems. Regulators in the U.S., Europe, and Canada are newly concerned about transactions that bring surplus military helicopters across international borders for use in civil operations.

Regulators and manufacturers worry that surplus aircraft built specifically for military orders, such as Bell UH-1s and Eurocopter (nee, Aerospatiale, nee Sud-Est) Alouettes, are being sold to civilian operators even though the helicopters do not comply with civil type certificates.

Such helicopters should fly only under rules for experimental aircraft in civil uses.

FAA officials reportedly have found a number of cases in which paperwork and data plates for such aircraft appear to have been falsified. Helicopter manufacturers are considering developing lists of specific aircraft serial numbers covered by type certificates and sharing them only with regulators as a means of making falsification harder.

The high demand is coming from all quarters.

In the United Kingdom, one of the hottest markets is wealthy individuals looking to ease the commute to their country homes.

In addition to a swimming pool and tennis court, the list of critical amenities for such homes has come to include helipads.

Reports have the wealthy commuting to London from points as distant as the Isle of Man, north Wales, Scotland and the Channel Islands.

The Helicopter Club of Great Britain reports its roster of 400 members is expanding rapidly. The number of helicopters registered in the United Kingdom has risen nearly 30 percent since 2002, according to the Civil Aviation Authority, from 1,021 helicopters to 1,314.

Consultants to the yachting industry likewise report that luxury mariners are insisting on airborne options. Specialists report that a new large commercial yacht code is being rushed through and that a new consultant category, helicopter support manager, is on the rise.

The industry news site MegayachtNews.com reports "there is every indication that 2007 will be the defining year for helicopter integration into the yachting industry."

India is a vibrant and intriguing market.

For example, Deccan Aviation Ltd, the operator of India’s biggest low-fare airline, is planning to spin off its helicopter business into a separate company and raise money to expand it. The Bangalore, India-based company plans to sell a stake to private investors in the proposed helicopter company. An initial public offering could follow. Such moves would test investors’ appetites for rotorcraft operations. Kingfisher Airlines and other Indian companies are reported to be starting helicopter services.

The moves are spurred by demand from corporate customers in the world’s second-fastest growing major economy. India’s economy is forecast to grow 9.2 percent in the year ending March 31, following a 9-percent gain the previous year, according to the Indian government.

"Helicopters are going to be a big business in India," said Kapil Kaul, chief executive officer of the Centre for Asia Pacific Aviation in India.

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