Friday, February 1, 2008
The Year Ahead: "Damn the Torpedoes"
Seeing this, Farragut steered his flagship, the USS Hartford, into the mines to press the attack. Lore has it that his command was "Damn the torpedoes! Full speed ahead!
The forces Farragut led prevailed.
The story comes to mind in considering what 2008 may hold for rotorcraft. Industry leaders nearly without exception are highly optimistic about growth of the new aircraft deliveries and all the various services that support them — maintenance and overhaul, completions, avionics and components, and training, to name a few.
They are undeterred by the uncertainty that has seized the U.S. and other economies — or more accurately, they were undeterred.
As we went to press that uncertainty seemed to grow daily. Weakness that started in a specific segment of the U.S. housing market quickly undermined major U.S. financial institutions like Citigroup and Merrill Lynch. Small and medium-sized U.S. businesses — a group that includes many helicopter operators and vendors — began reporting more difficulty in getting approval for loans. Fears of recession overtook those of terrorism and debate over the war in Iraq as the chief topic of discussion in the early stages of the next U.S. presidential race.
In short order, the main question shifted from whether there would be a recession in the United States to whether that recession would be limited to the U.S. economy or extend to Europe and beyond. In mid-January, the finance chiefs of European Union (EU) member nations said they were confident it would.
"It’s not about a global recession," the EU’s commissioner for economic and monetary affairs, Joaquin Almunia, told reporters in Brussels Jan. 22. "It’s about the risk of a U.S. recession."
Still, London’s Daily Telegraph reported that 20 percent of Wall Street fund managers expect a global recession. It quoted one European financier as predicting that credit-crisis losses in European will surpass those that began with the "sub-prime" mortgage crisis in the United States, which already have exceeded $100 billion.
Why, then, are rotorcraft industry executives optimistic about prospects for growth in the years ahead? The reason lies in three factors: the size, vintage, and diversity of the current helicopter fleet.
Of the thousands of helicopters flying in the world today, a large number are approaching 30 years old, the point at which helicopters traditionally are retired.
"Vintage" was the term used, though, not age, and for good reasons. A consideration that is becoming as important, if not more so, than chronological age is the configuration and design standards of the helicopters flying.
Key market segments are pushing for fleets of aircraft that meet the latest standards for safe designs and onboard safety and monitoring equipment, including some sort of flight recorders and vehicle health monitoring systems. The companies that contract helicopter services to support offshore oil and gas exploration and production have led the charge in that area. But emergency medical service (EMS) operators are beginning to make the same demands of airframe makers. Manufacturers expect concerns over the vintage of current aircraft in the fleet to accelerate demand for replacement aircraft.
A past fleet renewal cycle, in the early 1970s, was cut off prematurely when the oil market collapsed. That was because the main customers for civil helicopters then were in the oil and gas industry.
"The industry’s much broader today. EMS, offshore, law enforcement, international, military are all driving it," said Bell Helicopter’s senior vice president of marketing and sales, Bob Fitzpatrick. A downturn in one industry today is not likely to trigger a steep decline in helicopter demand.
We’ll take a close look at the market for military helicopters in our April issue, and focus here on the civil markets.
The research firm Teal Group last year forecast production of 12,643 rotorcraft worth $138.7 billion between 2007 and 2016, including 7,138 for civil users, worth $28.9 billion. That works out to slightly more than 700 new civil deliveries a year over that 10-year period, a number that seems to be a rough consensus today.
The engine maker Turbomeca over the last year has done extensive analysis of the coming demand for helicopters. It crunched its own numbers, including data from the major airframe manufacturers and taking into account the prospects for markets in China, India, and Russia. It then compared its results to the forecasts of other engine makers.
"What we see at this stage is a stabilization of the market," said Philippe Couteaux, Turbomeca’s vice president of aero engines. "We anticipate the market is to remain at about 1,400-1,500 helicopters on a yearly basis. What we consider is that it’s going to be evenly split between civil and military" — or 700 or so new civil helicopter deliveries a year worldwide.
That’s a dramatic change.
Looking back to 2003-04, the industry was delivering 400-450 aircraft a year. It is delivering roughly 650 today, and operators "would like to have about 800 aircraft," said Fitzpatrick of Bell, whose forecasts are slightly higher. "We see it actually being peaked at 900 and staying there for quite a sustained period of time. So the whole industry’s actually going up in terms of overall deliveries, literally doubling the size of the market."
The driving markets for that demand will overwhelmingly continue to be North America and Europe, he said, and others agreed.
The dominant player in the civil helicopter market, Eurocopter, testified to the persistent strength of the current market with its tally of deliveries and orders for last year.
Eurocopter reported an all-time high in sales in 2007, surpassing what was a very good year in 2006. Last year, the European conglomerate said, it delivered 488 new military and civil helicopters. Orders reflected the high demand for new helicopter models and services, totaling 802 new aircraft valued at 6.58 billion euros ($9.53 billion). Of that total, 44 percent was for civil helicopters.
Eurocopter said its order backlog at the end of 2007 was at a new record, exceeding 13 billion euros ($18.8 billion).
"One year ago, I had just taken up my position of CEO and believed 2006 was a historical year in terms of order bookings," Eurocopter chief Lutz Bertling said. "I underestimated what we were able to achieve in 2007." Orders rose by nearly 200 compared to 2006, he said, "while our deliveries increased by more than 100 units in comparison to 2006."
He noted growth in all market segments.
"The oil and gas industry clearly takes the lead," he said, as the scarcity and price of those natural resources drive greater exploration and production efforts, which in turn spurs demand for helicopters.
"Hot on the heels of oil and gas," he said, "is the VIP/corporate market."
Law enforcement/homeland security remains a strong market, as does EMS.
As a reflection of the growing homeland security market, Latvia’s State Border Guard last year began operating two light twin AW109 Powers. They will patrol the eastern European border and fly other law enforcement missions. Their acquisition was funded by the European Community’s Schengen Facility program, which was set up to help former Eastern Bloc countries that joined the European Union to protect the EU’s borders.
The strength of the helicopter market and its expected growth will spur some changes this year for Bell. The company is revamping its product line, looking to concentrate on developing derivatives off a few main products in lieu of a broader line of distinct helicopter types.
It plans to start with the new light twin Model 429, for which it aims to gain Canadian certification this year. Bell is working with customers to refine a number of 429 derivatives, including a higher gross weight and a single-engine version. Bell President Richard Millman, installed a year ago to straighten out the company’s production and product-definition problems, has won the approval of parent Textron for the derivatives approach.
"We’re excited about the new portfolio and what it’s going to look like," Fitzpatrick said. "And Textron’s funding it."
The shift to that approach is supported by demands from oil and gas operators, who are pushing for greater capability, lower direct operating costs, and less costly logistics trains for their helicopter fleets. "You’re already seeing it in EMS, too," Fitzpatrick said.
As Sikorsky Aircraft has done with its acquisition of PZL Mielec in Poland, Bell is tearing a page from Eurocopter’s playbook by planning to set up local subsidiaries in key markets. Last year, for instance, "inaugurated our new Spanish plant in Albacete, founded Eurocopter UK, and took up full business activities at Eurocopter China," Bertling said.
By the end of this year, Bell plans to open a unit in Germany that would market and sell Model 407s and do final assembly and completions. It would serve customers from France, Russia, Spain, and the United Kingdom, as well as Germany.
Bell plans to do the same thing in Singapore. "We’ll be looking like local citizens in those countries," Fitzpatrick said.
Major airframers also are pushing to expand beyond selling aircraft to become providers of aircraft service packages under which the operator’s chief concern is flying. AgustaWestland has done that with the integrated operating systems contracts it has won with the U.K. Defence Ministry. That also is the premise of the U.S. Army’s UH-72A Lakota program, under which prime contractor EADS North America is responsible for providing flightworthy EC145s. The Army and National Guard basically just fly the aircraft. The bulk of their support is in the hands of the contractor team, with Sikorsky the key logistics contractor.
2008 also may provide more clues about the prospects for what are considered the industry’s key growth markets: China, India, and Russia.
Hopes had been high that the 2008 Beijing Olympics would be the catalyst for Chinese officials to loosen their grip on air traffic control to a degree sufficient for the initial development of general aviation in that nation, including helicopter operations. Now international aviation advocates are saying that such changes might start after the Olympics.
In the meantime, manufacturers are progressing with subsidiaries and affiliates set up in China, and Eurocopter is moving ahead on development of its 7-8-ton-class EC175 with Chinese partners.
India holds great promise, particularly in the offshore, corporate/VIP, and EMS sectors. Bell plans to set up its own flight academy there. "The biggest issue that we’re having in India in terms of rotorcraft growth is a pilot shortage," Fitzpatrick said.
But the market there remains stymied by government limits of foreign investment in air carriers and a policy that all rotorcraft projects must be worked through Hindustan Aeronautics Ltd.
Russia remains an intriguing market for a number of reasons, not the least of which is its government’s plan to consolidate its helicopter manufacturing base.
The French research firm ADIT recently completed a study of the Russian market and its consolidation.
"The mere fact that the government is willing to reorganize the industry, whatever the way, could be the start of a new era for the Russian helicopter industry," writes ADIT analyst Mathieu Grospeaud.
He identifies several reasons why Russia chose to consolidate its helicopter manufacturing base. One is that if Russia wants to remain a full member of the Group of Eight leading industrial countries, "it has to be a high-tech country." Also, consolidation into a public company "is a way to control the industry."
Other reasons, Grospeaud writes, include the obsolescence of the industry’s current organization, which "is clearly outdated and has to be rationalized to be more cost effective and more efficient."
He notes that the consolidation can take advantage of two specific features of the industry.
"Russia has always been a leading innovative country as regards helicopters," he writes. "It invented, among other things, the coaxial rotors." Also, "Russian helicopter engineers have, to say the least, the expertise to develop new helicopters."
Furthermore, he says, "Russia is one of the most promising countries for helicopter manufacturers... It is fundamental to keep in mind that one of the main reasons why the industry has been consolidated is to support export of Russian helicopters."
According to the Russian Ministry of Industry, Grospeaud notes, the Russian aviation industry in 2006 produced 93 helicopters, which represented a 16 percent increase compared to the year before (when 80 units were produced). He quotes Yuri Ivanov, "head of the newly formed Helicopters of Russia," as saying Russia was planning to increase helicopter production by almost 50 percent last year, making 150 helicopters.
"He also said during the MAKS air show that ‘helicopter production will increase to 300 units per year by 2015 and to 500 by 2025,’" Grospeaud says, "adding that ‘the proportion of military and civil helicopters will be 50/50.’"