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Wednesday, October 1, 2008

Segment Update: Corporate Versus the Economy

Douglas Nelms

Corporate operators insist that greater appreciation of the helicopter’s capabilities is sustaining demand despite a growing global economic downturn.

With skyrocketing fuel prices and an economy sliding into a recession, companies around the world are starting to tighten their respective belts. How this will impact the corporate helicopter market remains to be seen.

If there is one message that the National Business Aviation Assn (NBAA) in the U.S. has been trying to get across to the corporate world during the past four or five decades, it’s that the business aircraft is capital equipment just as important as a company’s manufacturing equipment or computers. Apparently, businesses are starting to take that to heart.

There is no doubt that the U.S. and nations in Europe, Asia and South America are facing severe economic hardships, generally led by the collapse of housing markets. This has triggered a $500 billion loss in credit markets worldwide, with the total collapse of companies such as the major U.S. securities firms Bear Stearns and Lehman Brothers, banks being closed down because of loans defaulting and major companies in other industries reporting large losses or serious reductions in projected revenues.

Yet, despite a worsening economy, the helicopter industry feels that it can weather the storm without serious harm ("Are We Recession-Proof?" July 2008, page 50).

In the last decades of the 20th century, the industry was generally described simply as "flat." It was surviving, but wasn’t exactly booming.

However, in the first few years of the 21st century, the helicopter industry did begin to boom, with order books being filled 18 to 24 months in the future. This was helped to a great extent by large military orders, although civil markets contributed to the helicopter boom through industries such as oil and gas exploitation, emergency medical services, law enforcement and a greater awareness of the value of the executive aircraft by corporations.

Now, because of the economic turmoil, the helicopter business has once again appeared to plateau, but at a much higher level. New deliveries and resale transactions are down both for the first half of 2008 and the 12-month period from the last half of 2007 through the first half of 2008. Amstat Inc, a leading provider of corporate aircraft fleet and market data, reported a 10 percent drop in new helicopter deliveries and a 20 percent drop in resale transactions for the U.S. market for the 12-month period July 2007-June 2008. Non-U.S. transactions were up 1 percent for new deliveries but down 22 percent for resale transactions.

However, the latest Rolls-Royce forecast is projecting a need for 6,096 civil turbine helicopters through 2016 while Honeywell’s forecast is for 4,450 civil turbine aircraft during the next five years. Two-thirds of these are projected to be for the corporate, EMS and law enforcement segments. Order books are full, used helicopters are selling at a premium, and the corporations still recognize the need for the helicopter’s capability.

This appears to be holding true even in the corporate side of the industry, an area that traditionally gets hit the hardest in hard times as corporate bean counters start looking for ways to reduce expenses.

Despite fuel prices being at an all-time high and now accounting for roughly 50 percent of a helicopter’s direct operating cost, it would appear to be less of an impact than expected for the helicopter industry.

Rick Hale, owner of the Youngstown, Ohio-based FBO Winner Aviation Corp, said that it is the nature of the helicopter and how it’s used that is preventing a large impact from fuel costs. "I don’t see how they can cut back on their hours. If they are needed, they’re needed. The operators can’t allow the large-value asset to just sit there because of the price of fuel. It’s still going to eat money whether it’s being flown or not. I haven’t seen anyone looking to get rid of their aircraft."

In general, FBO operators are reporting a 10-12 percent drop in fuel sales, although that is mostly coming from fixed-wing sales.

Getting a definitive feel for the economic impact on executive helicopters operations is difficult, since most large corporations don’t even want to admit that they own helicopters, must less discuss their flight operations with journalists. However, a few were willing to talk to Rotor & Wing, with mixed messages. While some said they were cutting back, most reported a "business as usual" approach to their corporate flying.

Jim Grove, aviation director for Springfield, Mass.-based Massachusetts Mutual Life Insurance, said, "When the helicopters need to go, they go. We use our helicopters for anyone who has a business need, not just the executives. For example, flying down to New York City for business purposes. We essentially operate almost a shuttle service to and from the city." The company operates two Sikorsky Aircraft S-76s.

Reportedly, the strength of the corporate market tends to be industry-oriented, with one of the industrial areas hardest hit being the real estate market. The U.S. housing market dropped to a 10-year low in the second quarter of this year, with the median price for a single-family house dropping 7.6 percent, compared to a 1.8 percent drop in 2007. That was probably the first drop since the 1930s, according to the National Assn of Realtors.

While this has caused a serious drop in new-home starts, there is still a need for helicopters in the land-development business, according to Cary, N.C.-based Preston Development Co. "We are still using the [Bell 407] just as we have before," a spokesperson said. "We do land development, both commercial and residential. Whenever we need to travel to nearby cities we use it. We have projects that are about two-and-a-half hours away, so when we have meetings we can just pop down there, then come back. We also do aerial surveys."

However, Chuck Higgins, VP marketing for St. Augustine, Fla.-based SK Logistics, said that the only real change for his company has been in the land-development market. A Part 135 charter operator, SK Logistics flies a Bell 206 and AgustaWestland A109. "Land development is the only segment that has turned down for us," Higgins said. "We had several big developers [as clients], but they’ve cut way back. All the other market segments have been strong. Fuel costs have been going up, but it hasn’t cut into our hours at all." The company has now added a fuel charge to its hourly rates.

It is not the just the U.S. market that is challenged. Due in part to the current economic turmoil, the helicopter market in Ireland is dipping. The number of helicopters registered there swelled by 16 percent last year to 162, according to the Irish Aviation Authority, but more have likely been flying there, since many aircraft in that country are registered in the U.K. or the U.S.

That boom has been tied to the property market, with eight of the 10 largest privately owned helicopters linked to construction companies and many smaller developers snapping up entry-level models to oversee their fledgling empires. As the property market falters, the boom seems to be faltering.

Dealing with the rising cost of fuel is key. Carolyn Marino, director of sales and marketing for Danbury, Conn.-based Associated Aircraft Group, the on-demand charter Sikorsky subsidiary (which has a fractional- shares program), said that the rising cost of fuel has not impacted their business at all.

"Our crews are really diligent about refueling at home, so we are able to save in that respect," Marino said. "And because of what the aircraft does and the trips that we do for our clients, I can’t really say that it has affected our business at all. We are actually flying more hours because time is of the essence to our clients and they need to get wherever they are going. With these people, time is money."

Some areas are reporting strong growth in the corporate charter market, particularly the market for flights from New York City to the Hampton beaches on eastern Long Island.

For Keith Vitolo, owner of Mamaroneck, N.Y.-based Awesome Flight LLC, the business for runs from New York City and Westchester County to the Hamptons has been very successful.

"I get a lot of Hampton trips," Vitolo said. "There is a mix [of business and non-business people]. Probably 60 percent or more customers charter for the benefit of their business. The majority maintain a better work/life balance by saving wasted commuting time which can be used with their business or personal lives."

The New York area actually has numerous competitors in the corporate charter business, ranging from Vitolo and his Robinson Helicopter R44 to operators of Eurocopter AS350s and S-76s.

"But the helicopter business has really been booming," Vitolo said. "You’d think with a depressed economy business would be slow. But the wealthy will always be wealthy, and even for the business person who may be struggling, they are going to realize the value of time savings. If they need to get somewhere to make a deal, speed is of the essence. If they don’t get there quick, they lose the opportunity. So you look at the time savings as an opportunity. More than 90 percent of my customers pay for their flights personally, even though they may be business-related. In economic downturns, it can be hard to justify charter to large corporations, even when to not charter may be penny wise and dollar foolish."

Charters are by Davis Aviation, Inc and Vitolo has access to additional R44s nationwide operating under their certificate in addition to his own. Vitolo said that his business has doubled each month since he started flying charters early this summer.

Prior to starting this operation, Vitolo was a banker specializing in aircraft finance. "We were doing a lot of helicopter loans, perhaps more than the bank wanted us to do. Banks tend to be risk-averse, and view helicopters as risky business. I had to prove to them that these loans were no riskier than any other aircraft loan and that they were good loans with guarantors and collateral backing them. In the aviation industry the helicopter segment is generally doing very well."

Robinson Looks to Corporate Sales of R66

By Douglas Nelms

Robinson Helicopters is aiming its new turbine-powered R66 in part at corporations and individual businessmen looking for a small, five-person helicopter with both a low acquisition and low direct operating cost.

"The corporate market is one that we are targeting," said Kurt Robinson, the company’s vice president of product support. "As fuel prices rise and corporations have more of a focus on costs, we think we are in the perfect position to offer them something that is a lower-cost alternative to doing what they are used to doing. There are a lot of companies that don’t look at [using a helicopter] because they think it is too expensive. But by coming in with a lower purchase price and a lower operating cost, we think the R66 is going to be a perfect opportunity.

"We also see that with the R44. When you look at the turbines that are burning at least 25 gal an hour versus a 44 that is burning 15 gal an hour, it makes economic sense for people who want to keep flying, but don’t want to incur the cost. It is a great opportunity for us, and anytime there is an economic crunch it tends to work in our favor. The feedback from the field, from our dealers and our customers, is one of the reasons we went forward with the R66."

While the R44 already has a large corporate and Part 135 market on its own, "the R66 will have an entirely new market. The goal is not to cannibalize the R44 market, but to create a new and bigger market. Where companies have to have the cargo space or the altitude performance, that’s where the turbine will make sense. And for us, that opens up completely new markets."

The company will not accept orders for the new R66 until it has "a pretty good forecast as to when the aircraft will be certified," Robinson said. They could start accepting orders next year, with certification expected toward the end of next year, "although that could change," he said.

Robinson also noted that the company is backlogged with the R44 Raven 2 until June of next year, "and that’s considering a production rate of 20 a week. So there is no reason to rush a product out until we’re ready for it."

The Rolls-Royce RR300, a new engine producing 300 shp at takeoff, powers the R66. It was certified last March.

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