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Saturday, November 1, 2008

Middle East Update: Mid-East Market Slow to Take Off

Giovanni de Briganti

The current economic turmoil is hitting worldwide helicopter markets. The Middle East is no exception; military sales are sparse and civil sales are not materializing. The region is on stand-by.

Markets have a way of defying predictions, and during the past year the Middle Eastern helicopter market proved this true once again, as it has borne out none of the short-term predictions industry was making just a year ago.

The industry executives attending the Dubai Air Show were in general agreement that growth in the regional civil market would focus on public service operations, while in the military market operational outsourcing and support would grow at a faster clip than hardware sales.

None of this has happened. Sales of helicopters, mainly military, have continued to pile up, putting increasing pressure on manufacturers already hard-pressed to keep up with demand, while civil sales have slowed and service/outsourcing contracts have mostly failed to materialize.

That it not to say that military support contracts have not been awarded; simply, they have been fewer and of lower value, when that can be measured and anticipated.

The largest such award to have been made public was given in September to Sikorsky Aerospace Services for the support of the Saudi Ministry of Interior’s (MOI) new helicopter fleet. Sikorsky said that the contract (value was not announced) covers operations and maintenance support for the 16 S-92s, 15 S-76s, and nine S-434 helicopters purchased by MOI in late 2007. To date, Sikorsky has delivered two S-92s under the 2007 contract.

"Logistics programs of this type provide customers with tailored solutions to meet their mission requirements while enabling them to transition swiftly into operational capability after receiving our aircraft," said Jeffrey P. Pino, Sikorsky president.

This is only the second such deal won by Sikorsky in Saudi Arabia: in the early 1990s, it helped the Royal Saudi Land Forces Aviation Command with the initial stand-up of its fleet of S-70 Desert Hawk aircraft, but did not win an extension of that lucrative business.

Training is another service that was due to grow at a fast rate, but in fact only one significant deal has been announced: the delivery by Boeing of the Kuwait Air Force’s first Apache Longbow crew trainer, a full-mission, high-fidelity flight simulator that provides training for individuals, crews and maintenance test pilots.

Manufacturers are not alone in providing MRO and other support in the Middle East. Earlier this year, DynCorp International won an $11.8-million, two-year contract extension to its AH-64 Apache maintenance support contract with the government of the United Arab Emirates. DynCorp International has provided such services to the UAE for more than 14 years. It and other firms are also active in this field, but contracts are generally not announced, so it is difficult to keep track of them.

Military helicopters, however, have continued to sell in the Middle East, far overtaking sales of services and maintenance. And the United States has continued to dominate the Middle Eastern market, where the expected breakthrough by Russia in Saudi Arabia has failed to materialize, and where France has also failed, so far, to win one or two consolation contracts that it was expecting.

In September 2008, the Pentagon notified Congress of a planned Foreign Military Sales to Saudi Arabia, for 12 AH-64D Block II Apache Longbow attack helicopters. Including its support package, but not weapons, this contract could be worth as much as $598 million.

Although not quite in the Apache category, the UH-60M Black Hawks that the Pentagon wants to sell to the United Arab Emirates also pack quite a punch.

As described by the Defense Security Cooperation Agency (DSCA) in its Sept. 9 notification to Congress, these helicopters will be armed with Hellfire missiles, 2.75-in rockets, GAU-19 Gatling guns and M-134 Miniguns. Under this contract the UAE will buy 14 new UH-60M airframes, and weaponize nine other airframes ordered by an earlier contract. Also planned are complete self-protection suites comprised of IR countermeasures, missile warning systems and laser warning systems. The total cost of these powerful and well-equipped Black Hawks is estimated at $774 million, excluding the nine additional airframes.

Moving well down the combat capability scale, the DSCA also notified Congress of the planned sale to Egypt of four UH-60Ms, fitted with self-protection systems including flare and chaff dispensers, and Safire FLIRs but no weapons, at a cost of $176 million.

Iraq has also begun to order various U.S.-financed weapons, as its armed forces come online and begin taking on combat missions. In the helicopter field, the Pentagon has notified Congress of the sale of 24 light helicopters to the Iraqi Army-either Bell Armed 407s or Boeing AH-6s-the decision is left open for the present time. These helicopters would be armed with Hellfire missiles, 2.75-in rockets,.50-in machine gun pods and Minigun pods, but practically no countermeasures. As the helicopters are only part of a much larger package, their cost is impossible to compute, but can be estimated at approximately $1 billion.

The only other U.S. military sale announced in the area is to Pakistan, which will receive eight refurbished AH-1F Cobras for $115 million. Since 2004, Pakistan has also received 25 Bell-412 helicopters, based at the Qasim Airbase, near Rawalpindi, under a lease/buy arrangement financed by the U.S. government.

If, in the past year, Eurocopter scored no military sales in the Middle East, AgustaWestland made at least one very significant sale, of 18 AW139 medium twin utility helicopters to Qatar. Announced in July, the contract value is in excess of $350 million and includes crew training and initial spares package. Agusta says this contract brings the total number of AW139s sold in the Middle East to more than 100, where the second military operator is the UAE.

On the basis of the contracts notified to Congress and manufacturers’ statements, the hardware contracts listed above have an estimated value of approximately $3 billion, which is quite an achievement in a region where military helicopter sales were expected to drop.

Thus, military sales continued strongly, and military outsourcing work remained sparse, but the anticipated boom in civil helicopter business in the region also failed to materialize. Public service helicopters, such as police, EMS and fire fighting were expected to show the strongest growth as MidEast governments invested their windfall oil revenues to improve public services.

In fact, in its latest market outlook report, Honeywell predicted that operators in the Middle East would need to replace or expand more than 30 percent of their existing fleets during a five-year period. The estimated renewal rate for the Middle East was 32-35 percent, compared to 25-27 percent in North America and Europe. However, demand in the U.S./European market has boomed, while stagnating at best in the Middle East.

While the overall forecast may still be true (although this is increasingly unlikely, given the financial upheaval in September and October), the market has not yet begun to move in this direction, and neither AgustaWestland nor Bell nor Eurocopter have announced any sales of any significance in the MidEast civil market in the past year.

This points to a possible systemic problem, as during previous economic cycles the civil helicopter market grew whenever oil prices generated higher revenues for Middle Eastern oil exporters.

The situation is similar for the corporate/commercial market where, again, purchases have not materialized.

One possible explanation is that very long delivery times (as long as 2-3 years for some popular light helicopters) and a world shortage of pilots may make it ever more difficult for civil customers to obtain and operate helicopters, even if they were able to pay them.

Another is that prospective Middle Eastern buyers may have been dissuaded by the strong jump (30-plus percent and more in two years) in euro-denominated prices of AgustaWestland and Eurocopter models, especially since these buyers live in virtual U.S. dollar economies.

But, even if civil helicopter business has yet to take off, it is eagerly awaited. The Dubai Helishow 2008, due to be held Nov. 11-13, will see the launch of the Middle East Helicopter Association, whose goal is to "focus on the development of a highly professional and safety conscious industry and will promote heliport development, operational efficiency and economic viability in the region," according to its organizers.

Air ambulance, air rescue, air evacuation and other medical transport services are expected to show fast growth in future, so much so that Dubai Air Medical & Rescue Show 2008 is being held in parallel to Helishow. The organizers also mention air taxi as a new business opportunity for helicopter charter companies in the UAE.

These is little doubt, in conclusion, that the helicopter sector will grow at a fast rate in the Middle East, as most industry observers believe. The only questions are when this growth will begin, in which market segments, and at what rate. As often in the Middle East, only time will tell.

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