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Monday, October 1, 2007

Operations: Pursuing the Fair Share

James T. McKenna

While many operators are prospering in boom markets, the rotorcraft industry is still fighting for its place in European regulatory arenas.


As is the case with most other major markets in this industry, the region is enjoying a level and scope of activity across nearly all its sectors that were unimaginable just three years ago. While that tempo tests the nerves of industry veterans burned more than once by past downturns that followed boom markets, indications are that this boom isn’t likely to end any time soon. Indeed, market prognosticators talk of a new plateau in aircraft deliveries reflective of a fundamental increase in the size of the overall rotorcraft market.

Today’s growth is remarkable not just for its breadth and intensity, but for the conditions under which it is taking place. Oil prices have been near record levels for nearly two years, a development that benefits offshore support operators by boosting demand for their services but wrecks the budgets of other outfits. Also, we are in the midst of what is essentially a world war between established states and terrorists organizations, in which the streets of New York, Bali, London, Madrid, or any other major city are as much the front lines as battlegrounds of Afghanistan and Iraq.

"The international community seems to have learned to cope with war," said Robert Garavaglia, AgustaWestland’s vice president of product marketing.

Only now, as financial institutions and governments in the United States and Europe confront fears about the collapse of credit markets, is there a hint of dark clouds on the horizon.

Whether those clouds pass or dim the future, European operators face persistent, long-term challenges that haven’t been eased by the boom. Helicopters often are barely an afterthought in discussions about and design of airspace and air traffic procedures in European nations. Likewise, rotorcraft typically have been overlooked in debates and formulations of operational regulations.

Concerns about the disadvantages those practices impose on operators are only aggravated by the ongoing consolidation of Europe’s air traffic control and the melding of national civil aviation authorities into the European Aviation Safety Agency (EASA). "We have to ask for attention all the time. We don’t want them to forget the helicopter," said Jan Willem Stuurman, executive director of the European Helicopter Assn. "We’re very anxious about that."

Europe’s industry remains a long way from achieving a view among air traffic service and regulators that integrates rotorcraft into civil air operations in a coordinated way and fully utilizes the unique capabilities of vertical lift. But Stuurman and others are optimistic that they are progressing toward that goal, in part by gaining membership on key consultative bodies like the Helicopter Sub-Sectorial Team and the EASA advisory group and in part by building relationships with officials of the European Parliament and other European Union politicians.

The growth of rotorcraft markets worldwide is strong and widespread, and points to a fundamental change in the industry.

"The overall situation continues to be very bright," said AgustaWestland’s Garavaglia. "If in the past deliveries for turbine-powered aircraft around the world averagesdabout 500 aircraft a year, we anticipate it will now average 700, 800, even 900 units a year."

Bell Helicopter’s senior vice president of business development, Bob Fitzpatrick, concurred. Bell’s recent market analysis confirmed the industry "has reached a new plateau."

With deliveries rising to about 900 a year, "the civil market will go from a $2.5 billion market to $4.2 billion over the next 10 years."

Garavaglia pointed to the latest market assessment of the research group Teal Group. The Fairfax, Va.-based firm surveys the global aerospace and defense industry. In its August 2007 World Rotorcraft Review, the firm concludes that rotorcraft "is the fastest growth market in Teal Group’s coverage universe."

While high demand from military customers, mainly to support force mobility, is the leading driver, Teal Group notes "the long-stagnant civil sector is growing to a new level, too."

The firm forecasts production of 12,643 rotorcraft worth $138.7 billion between this year and 2016, including 7,138 aircraft for civil users (valued at $28.9 billion). The values are figured in 2007 dollars. That represents 100 percent growth over the previous 10 years, when Teal Group says production totaled 7,837 rotorcraft valued at $66.3 billion in 2007 dollars.

"These numbers understate the actual importance of this market," the firm’s vice president of analysis, Richard Aboulafia writes. "Very high levels of utilization in tough operating environments, coupled with aging fleets, mean strong and profitable aftermarket work" for the prime rotorcraft manufacturers. "There’s also heavy upgrade activity — our numbers cover some of the more extensive rebuilds, but there’s considerable work that isn’t captured in our forecast."

Aboulafia says several drivers spur the civil market growth. High energy and other natural-resource prices, particularly for oil, "have helped lead this recent growth," he notes. "Exploration and extraction is getting more expensive as operators look to more distant oil fields and mine sites to meet growing raw material needs."

He points as a bellwether of the offshore and mining support sector to CHC Helicopter Corp., which he calls the largest helicopter service supplier to the oil and gas industry. "In June, the company announced a fourth quarter, 25 percent profit rise, and issued a forecast for ‘very high’ demand over the next several years," he observes. "CHC operates 250 helicopters, with plans to add at least another 70 in the next five years."

Another growth driver has been public sector demand, Aboulafia notes, including law enforcement, emergency services, and border patrol. "The experience of Hurricane Katrina confirms a basic fact: helicopters are the single most survivable and robust part of the transportation infrastructure," he writes. "They are essential for disaster relief, medical evacuation, and community recovery."

Corporate demand has also boosted the industry," he observes. "Strong corporate profit growth has quadrupled business jet demand over the past 10 years. While helicopters have a much narrower customer base due to their shorter range and slower speed, that customer base is better able than ever to afford new models."

Those same drivers are fueling the growth in European operations, according to industry leaders.

Helicopter deliveries have been growing steadily over the last 10 years in Europe. According to industry figures, about 85 were delivered in 1997, while 172 were delivered last year. Through early June of this year, by one count, about 80 had been delivered in Europe.

Of the 172 delivered in 2006, 72 were single-engine aircraft and the rest were multi-engine birds.

While the commonly accepted wisdom is that there is not a lot of growth to be had in offshore oil and gas exploration and production, producers there are tapping some newly discovered fields and pushing into deeper water and further north. That is spurring demand for more capable and more sophisticated aircraft. (The push to more northern fields off Norway and Russia is one reason AgustaWestland is developing a full icing protection package for the AW139.)

Bell’s Fitzpatrick said one reason for confidence in a forecast of a market averaging 900 aircraft a year is that offshore operators alone are entering a major fleet replacement cycle that will require 500-600 a year.

That level is needed in part because offshore operators weren’t able to complete their last replacement cycle, which is still under way. They had ordered new helicopters like the AW139, Sikorsky Aircraft’s S-92, and Eurocopter’s Super Puma to take on the work of older airframes. But by the time deliveries of the new aircraft had begun, the offshore market had picked up to such a level that operators needed to keep many older aircraft in their fleet just to keep pace with demand.

With their added age and hours, those aircraft are even more likely candidates for retirement.

Offshore operators also are being pushed to replace older aircraft by oil and gas producers. Led by Shell, they are imposing new safety standards on the industry by eliminating bidders for their contracts who don’t meet specific safety equipment and training requirements. Since the larger producers operate worldwide, they effectively are establishing new global safety standards.

"They’ve become shadow certification agencies and put even more restrictive requirements on operators," said one senior industry official. The oil and gas producers can do this because they are footing the bill for meeting those higher requirements through higher contract rates, "and money doesn’t seem to be an issue."

The para-public sector also is a hot one in Europe, particularly helicopter emergency medical services. Industry officials point to a growing appreciation of rotorcraft not as toys but as vital tools in a health care system. "We’re clearly seeing a growing and maturation of the EMS market in Europe," said AgustaWestland’s Garavaglia. In nations like France that have moved toward concentration of highly specialized care in large regional medical centers, the need for swift transport of patients to those centers becomes more critical.

"We’ve witnessed a massive increase in flying hours in France, and anticipate another 15-20 helicopter EMS bases" being established there.

The corporate/VIP market is hot in the region, too, fueled by high real estate values and chugging financial markets. Its strength there and elsewhere has prompted Sikorsky to increase planned production of its latest version of the S-76, the D, which will have a Thales TopDeck avionics suite among other improvements.

Europe is a dilemma for Sikorsky.

"Even though we’ve sold globally for many years, we haven’t had a discrete focus on our presence internationally," said Steve Estill, Sikorsky vice president and chief marketing officer. "We’ve changed our focus."

In Europe, that has meant Sikorsky has missed out on a lot of sales. In recent years, civil and military customers there have ordered $2-3 billion worth of helicopters, but Sikorsky only booked about $100 million in new European orders.

To correct that, the company has set up Sikorsky Europe. "We are looking to become a major European player through utilization of our Sikorsky-owned capabilities in Europe or through strategic partnering with other leading European defense companies," said Bruce McKinney, the Sikorsky vice president heading that European initiative.

Earlier this year, Sikorsky took control of the Polish aerospace manufacturer PZL Mielec, which it intends to make the foundation of its European efforts. Those efforts will focus on military sales opportunities, particularly of the International Black Hawk and Armed Black Hawk and particularly to Eastern European nations.

As for the operator community, "regulatory issues are on the forefront of our minds," EHA’s Stuurman said. "The main thing is the acceptance of the helicopter. We have to work very, very hard at that, especially with local, urban European politicians."

Except mainly in the United Kingdom, which has IFR low-altitude routes for helicopters, rotorcraft haven’t found there place yet in European air traffic systems.

Realistically, as long as politicians are attacking helicopters and publicly opposing expansion of their use (as they have over the last year in London and Paris), bureaucrats in Europe’s regulatory and air traffic agencies have little motivation to integrate rotorcraft more fully into operational schemes. So while operators must work with regulators and air traffic managers, they also must reach out to the politicians who oversee those agencies.

EHA is working toward that end. Its current chairman, Vittorio Morassi, is said to be very active in briefing officials of the European Commission, the executive branch of the European Union. "He’s established footholds with members of the European Parliament and officials of the EU directorates," Stuurman said.

Morassi is president and managing director of Helicopters Italia Srl of Trento, Italy and general manager of Air Corporate in Verona, Italy.

Stuurman said Morassi has a good working relationship with Paolo Costa, a fellow Italian who is chairman of the Transport Committee of the European Parliament.

"We are optimistic about making the case for the helicopter in discussions with the regulators, air traffic people, and the politicians," the EHA executive director said. "As with many things in life, you must fight for your place."

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