Friday, April 1, 2005
Many Nations, A Single Need
Latin America's helicopter industry is diverse, bureaucratically challenged and expensive. But the region is a growing market for those willing to take advantage of strengthening economies.
First off, the good news. The Latin American helicopter industry is growing steadily and is expected to continue to do so for at least the next 20 years.
And now the bad news--the Latin American helicopter industry is schizophrenic. On the one hand, helicopters are desperately needed throughout Latin America. It is still a politically and socially young region with vast stretches of underdeveloped highway infrastructure and growing industries ranging from offshore oil and fishing to financially stable corporations and expanding electronic news-gathering and paramilitary operations. These all make the helicopter a natural option to fill its needs.
On the other hand, the region is still caught up in the quagmire of old political bureaucracies and tax structures that work against the very equipment that can help build and stabilize its economies.
The reason why the helicopter industry is not growing at a faster pace is basically cost, said Ernesto Rois-Mendez, president of the Latin American Aeronautical Assn. (ALA). "There is a very high cost for both buying and operating helicopters. Purchasing a helicopter in Latin America is very costly on a relative basis because of the wealth of the country. In many cases it is more expensive to operate a helicopter in Latin America than in the United States. Not on a relative basis, but on a net basis." U.S. buyers do not have to pay import duty on the helicopter or its parts. In every country in Latin America, "you have to pay import taxes on the purchase of the helicopter as well as the parts to maintain it. Then you have sales taxes that in most countries are a lot higher than in the U.S."
However, most countries have lowered import taxes, Rois-Mendez said, so now they average about 15 percent. "It used to be in Brazil that duty taxes were over 100 percent, so a $1-million helicopter became a $2-million helicopter." Today duty taxes are down to about 20 percent. "That is the trend in most countries," he said, "with some countries having the duty tax as low as 5 percent."
So while import and sales taxes and the fees involved in getting the aircraft from the manufacturer to the customer are getting better, the cost of the helicopter is still a major impediment to growth of the industry. With the added cost of having to send pilots and mechanics to the United States for training, "helicopter ownership is a lot more expensive than in the U.S. both on a relative basis when we compare economies of scale, as well as on a net basis," Rois-Mendez said.
As in the United States, insurance is a major cost factor, although it is particularly high and more expensive than in the United States in areas where helicopters tend to be confiscated because of illegal activities such as drug smuggling.
Marcelo Carceller, project manager for Miami-based ARG Reinsurance Brokers, LLC, and a specialist in Latin American aviation insurance, said insurance costs 7-10 percent of the aircraft hull value each year. This is generally true throughout Latin America, with the exception of Colombia, where full coverage climbs to 15 percent of the aircraft's agreed value each year. "It is clear that insurance costs have a big impact in the purchase process, keeping in mind that in no more than 13 years the operator will pay in insurance the same amount as a brand-new helicopter," he said.
While insurance rates have been rising about 15 percent a year since September 11, 2001 the industry is now getting softer, with operators able to obtain the same rates as last year, Carceller said. "In some particular cases, the underwriters are offering small reductions, basically with regard to airline businesses and commercial operations throughout Latin America." In countries with a more developed insurance net, such as Mexico and Argentina, "the competition is bigger and the prices in general terms are cheaper than in other areas of the region. The only country that is clearly impacted by local conditions is Colombia, based on the fact that the guerrilla still represents a huge threat for aircraft operators, mainly in airports that are not properly guarded by the Colombian army." That requires operators in Colombia to pay 10-15 times higher hull war rates than those other countries.
While trade associations are working to reduce these barriers to helicopter growth, a primary challenge is the diversity of the region.
"Every country is different," Rois-Mendez said. "The ALA has done a little bit of lobbying to get taxes down, but mostly we can only voice concerns. We cannot take on the role of lobbying" because his group is very small and not highly capitalized. "But besides that, while it is feasible to lobby in a single country, Latin America has 27 countries. We really cannot do lobby work in so many countries with every country being totally different in a political sense."
This is not to say that the various Latin American governments are not aware of the need to support the helicopter industry.
"The governments are very aware of the needs and benefits of the helicopter, but Latin American countries are notorious for being bureaucratic," Rois-Mendez said. "Sometimes they do things that impact negatively on the helicopter industry, even though they may not be doing it to deliberately affect the industry in a negative way. But that ends up being the result. For example, in Venezuela, gasoline is very cheap, possibly the cheapest in the world. But in some countries it is very expensive. In Brazil, aviation fuel has been increasing at such a rate that it is making it very expensive to operate any aircraft, period. So this is a government that is probably not trying to attack the aviation industry directly, but for tax reasons and to support the high costs of the airport or whatever other reason, they are heavily taxing aviation fuel and that is affecting the helicopter operations."
R. Danny Maldonado, Bell Helicopter's vice president of Latin American sales, agreed the large import tax burden is a problem for helicopter sales. He noted, however, that in dealing with the tax issue and other government obstacles, "we have found that the regulatory agencies of the individual governments have been willing to talk to us." They are accessible and willing to discuss issues if industry can make a good case why something needs to be done and perhaps suggest ways of initiating change. "They respond very positively and they help us."
Relationships in Latin America are very important, whether dealing with government officials or customers, Maldonado said. "Everything starts with relationships in Latin America. You don't go down and just start talking business. First you go down there and start making friends. Then you talk business."
Despite the high costs and bureaucratic roadblocks, the helicopter industry has been growing steadily for 20 years "and will continue to grow for the next 20 years," Rois-Mendez said. "More and more companies are realizing they should put more emphasis in Latin America."
According to Honeywell's latest market forecast, Latin America should account for 14.1 percent of the more than 2,500 turbine-powered helicopters to be purchased in the next five years, or just over 350. During 2005, the overall turbine fleet should grow 23.2 percent, with 14.9 percent being replacement aircraft and 8.3 percent being new additions, Honeywell says. This compares to a total 14 percent growth last year, of which only 2.6 percent was additions to the fleet.
That forecast does not include the large number of piston helicopters entering the Latin America fleet. About half the helicopter population of Sao Paulo, Brazil--Latin America's busiest helicopter market--are Robinson R22s and R44s. Thomas Exenberger, owner of Helipan Corp., a Panamanian fishing company, said the fishing fleet uses "as many as 100 helicopters," with most being R44s and a few R22s. Most of the R22s are being replaced with R44s, and even those R44s are being replaced. "It's not too much of a growing market, but it's a demanding market because the helicopters do not last forever."
Getting exact figures for the number of helicopters imported into Latin America is difficult, since many helicopters sold to customers there tend to be used and not purchased directly from the manufacturer. The latest figures available from Aerospace Industries Assn., which represents the U.S. industry, show that only 13 new U.S.-built helicopters were imported in 2002 and 22 in 2003, compared to 59 in 2001 and 55 in 2000. An ALA study for 2000 showed that while 55 new U.S. helicopters were imported, a total of 186 helicopters were sold in Latin America.
One of the biggest issues impacting the growth of the helicopter industry in Latin America is the stability of economies there, particularly Brazil's. It is the largest, most populous country in the region and its economy has a major impact on the countries around it. It also has the largest helicopter population, according to ALA, with 1,145 helicopters, of which slightly more than three-quarters are turbines. Of that total, about four in 10 are operating in Sao Paulo, with one-third of those being pistons and two-thirds turbines. Sao Paulo is the third most helicopter-dense city in the world, behind New York and Tokyo.
Brazil is also the home of Helibras, the only Latin American producer of helicopters. A subsidiary of Eurocopter, Helibras is a sales representative for Eurocopter products and provides operational support, maintenance, spares, and repair of components. Helibras, in turn, is represented by Lider Taxi Aereo, which had previously represented Bell Helicopter in Brazil. Taxi Aereo Marilia (TAM) now represents Bell.
Helibras also assembles Eurocopter helicopters, the most popular being the Esquilo HB350 and HB355, its version of the AS350 and AS355. Helibras said that there are currently 290 Esquilos in operation in Brazil, almost 10 percent of the worldwide fleet. Last year Helibras sold 18 helicopters, compared to 14 the year before that and 10 in 2002. However, in 2000 it sold 24 helicopters and 21 in 2001. The company expects increased sales this year, according to Julien Negrel, commercial and marketing director. He said Helibras is responsible for 70 percent of new helicopter sales in Brazil, and that 10 percent of its sales over the past 25 years have been for export. He said that of the turbine helicopters in Brazil, slightly less than half are Helibras models.
Despite a recent dip in the value of Brazil's currency, the country's overall economic situation is stabilizing, which helps support the economies of surrounding nations. "Once the economies start to stabilize, and that has already started to take effect for the most part because of the high commodity of petroleum prices, that speeds funding for the military and for the general economy to buy more helicopters--something they really want but haven't been able to afford lately," Maldonado said. "But you can see (the economic improvement) in the growing number of customers who are calling and asking for additional information."
The largest single operator of turbine helicopters in Brazil is the military, with 248 aircraft, followed by paramilitary forces with 80 helicopters, according to ALA. Negrel of Helibras said that the civil market accounts for 455 turbine helicopters while there are 53 involved in offshore operations. Of that 53, 45 are flown for Petrobras, Brazil's state-controlled energy company, which expects to increase its output by 17 percent this year with production from new offshore wells.
One of the major impacts on the growing economic stability of Latin America has been the emergence of free trade agreements. Along with the North Atlantic Free Trade Agreement (NAFTA), trade alliances such as MERCOSUR, Latin America Integration Assn., Central America Integration System, as well as the G-3 accord among Colombia, Venezuela and Mexico and the Free Trade Areas of the Americas, are opening up Latin America to overseas trade while helping establish better trading relationships within the region. As NAFTA grows to include more Latin American countries, it will likely help both the general economy of Latin America as well as the importing of helicopters and spares made by U.S. manufacturers. The recent agreements between the European Union and MERCOSUR members should also help imports from European nations. Those agreements are expected to be strengthened even more, with announcements that both President Nestor Kirchner of Argentina and President Luis Inᣵio Lula da Silva of Brazil have put MERCOSUR at the top of their political agendas. Those nations are original members of MERCOSUR, as are Paraguay and Uruguay.
Success of MERCOSUR would be a major boost for Argentina, which is restructuring its debt. Scott Parsinen, president of The Parsinen Group, a marketing agency consulting for Enstrom in Latin America, said that Enstrom is trying to position itself this year so when Argentina's debt restructuring is resolved, "we will be in the right spot for when a bid comes out or to answer a quote request." Enstrom is using 2005 as a certification year "to make sure all of our ducks are in a row" and to "introduce new products down there," he said.
MERCOSUR will also help Paraguay and Uruguay, which have unique relationships with Brazil, "Paraguay much more than Uruguay," Parsinen said. "They are so heavily dependent on the Brazilian market so that as the Brazilian market grows, they grow as well."
A big opportunity lies in the lack of helicopter agricultural spraying and heli-ranching in those countries. "Spraying is probably more of an opportunity in Paraguay than elsewhere." Uruguay has a large meat export industry to North America, and will be a market for heli-ranching if manufacturers and operators can show "the rancher how much more work he can get done and how more efficient he can be by using the helicopter to keep an eye on the cattle," Parsinen said. However, while the potential is there, particularly for small, inexpensive piston helicopters, the two countries together barely account for 1 percent of Latin America's helicopter fleet.
The other member of MERCOSUR that is a good candidate for the helicopter market is Chile, whose economy grew 7.5 percent last year and currently has more than 6 percent of the Latin American fleet. Chile is also considered most likely to become the next member of NAFTA as its political situation improves with the ongoing recovery from the Pinochet regime. Forest fires are a major problem in that country, and Parsinen said that Chile "is a real good opportunity for anyone with mid-sized helicopters that they can put down there." Chile is not as big a market for corporate operations as Mexico and Brazil, but the police "have a big fleet and they buy lots of helicopters, primarily turbines such as EC135s or 407s."
The segments of the helicopter industry that are growing the fastest in Latin America are the corporate, VIP and private ownership on the commercial side, and the military and paramilitary, such as law enforcement, on the government side, Maldonado said.
The commercial growth "is mainly due to the lack of infrastructure for safe travel" and the inaccessibility of some areas, he said. "The other is primarily anti-narcotic missions." These are geographically focused, and Maldonado said he thinks they will have "large requirements for helicopters in the coming years," both military and paramilitary. "In Colombia, it will be both. They are setting up their infrastructure to be much more self-supportive. They are trying to focus much more on the way the United States is set up, with police, border patrol and even in some areas a coast guard, with the terrorist-type situation and the border issues like in Colombia and Venezuela."
Other segments that are starting to offer opportunities for the helicopter market are law enforcement and emergency medical services. "Those segments are needed and it is something that we are discussing" with potential customers, Maldonado said. For the EMS market, "there is going to have to be a change in the paradigm and the way insurance companies reimburse people for that. But once that gets established, it is a good possibility for growth in the near future."
Parsinen said that there is virtually no EMS in Latin America and there "is a lot of infrastructure and education that needs to take place for that to happen." Enstrom has tried to emphasize this market segment, "but it's been more a question of where we put our resources," he said. "They definitely do need an EMS infrastructure."
As for the types of helicopters being used, Maldonado said that the various military and paramilitary organizations are looking at models like the 412 and upgraded Huey II, "and in some cases they are seeing what the U.S. is doing and starting to look at 407s for something like a quick-attack, quick-surveillance helicopter that can also be something like a troop transport or that can go out longer distances."
Parsinen noted that a lot of Huey spinoffs--205s, 212s, and 412s--are ending up in Peru. "While Bell is pitted against Eurocopter in Latin America, there are some places where Bell is particularly strong because of their past Huey production, and those helicopters have really made their way into Peru, Colombia, etc." After various wars in the 1960s and 1970s created a huge surplus of Hueys, the U.S. sponsored placement of a lot of those helicopters in these countries for their military or counter-drug operations. As a result, "Bell pretty much rooted itself very well into the northwest of South America. So you have some pretty good fleets in the military and paramilitary forces in those countries," Parsinen said.
The major geographic areas of future growth are going to be Argentina, Brazil, Mexico and Venezuela for commercial helicopter operations, and Argentina, Colombia, Chile and Venezuela for military operations.
Mexico has just ended a major demand for helicopters following a three-year tender by PEMEX, the state-owned oil and gas giant. Fabrice Cagnat, commercial director, Eurocopter Mexico, said his company sold 20 helicopters last year, "the highest number ever sold in our 22-year history." Of those, at least 60 percent were sold in Mexico, primarily because of the need of operators to buy new helicopters to meet PEMEX contracts. Mexican law requires that offshore helicopters be twin-engined, so "the big sales were BK117s, EC145s and EC135s," Cagnat said.
With the PEMEX contracts set to run for five years, "there will probably not be any new sales in the offshore for that period," he said. The big market now is corporate, with the big sellers being the AS350B3 and EC130, Cagnat said. The corporate growth is being fed by a steadily increasing number of helipads. "Mexico City is not yet at the standards of Sao Paulo, which has some 200 helipads. There people are going from their homes to their offices, and even to the shopping malls, in helicopters. In Mexico City we are not quite at that level yet, but what we have seen is that in the past three years the number of helipads in the city has increased by 20 percent. So when the corporate guy sees there are more helipads, he has more interest in having a helicopter. That is definitely one of the reasons why we think the corporate market is increasing."
Bell is the major player in Latin America, primarily because the company has been around the longest, but also because of the support network built up by it, Maldonado said. A strong network of customer service facilities throughout the region gives customers comfort, "knowing that Bell is going to be there to support them. Because they have had a good experience, they keep returning to Bell."
However, both Eurocopter and AgustaWestland are making inroads into the Latin America turbine market, "increasing their proportional presence," Rois-Mendez said. Bell is still selling, but it is getting a smaller piece of the pie, albeit a pie that is getting bigger, he said. Sikorsky is growing in the offshore oil market, with Venezuela, Brazil and Chile all having good offshore contracts.
Mexico is Latin America's second largest operator of helicopters behind Brazil. One of the most notable factors is the increase in American investment, which is driving up the corporate market. This is particularly big in Mexico City, where the traffic situation "is insane," Parsinen said. "Helicopters have absolutely become a huge tool for the businessman coming from the United States to do business there or even for the local businessman."
He noted that Bell is big in Mexico and tends to dominate, although both Eurocopter and AgustaWestland are challenging it. "One of the companies that has been competing strongly lately is Agusta with its Power helicopter. In Mexico, it's hard not to look up in the sky and see an Agusta Power. They have really put a lot of effort down in Mexico City, and it's an ideal helicopter at 7,500 ft. on a warm day," Parsinen said.
He said U.S. manufacturers would benefit from considering manufacturing parts in Latin American countries for export to the United States for assembly. Eurocopter, for instance, has many components made in Brazil "and they are real hard to compete against down in Brazil. They have a huge presence with the military markets in Latin America because they manufacture parts for assembly."
Parsinen noted that Enstrom's competitors in Latin America for the 480B are the EC120, Bell 206B, Schweizer 333 and MD500. "In the piston market, Enstrom competes against the Robinson R22 and the Schweizer 300 on the training side. The R44 has its own little niche, as does the Enstrom because we are kind of a high-end piston, a beefy piston."
As the helicopter market grows, the supply of qualified pilots and mechanics is growing with it. A large number of military pilots, many trained by the U.S. Army, make up the bulk of pilots available for the commercial market.
One reason for the growing number of young pilots and mechanics is that Latin American nations have young populations, Rois-Mendez said. "The youth population is a lot bigger than the middle-age population." Also, populations are growing, "so the youth population is plentiful. Whenever you need a pilot or mechanic, they are available." He said pilots are coming from both the military and commercial traininsg operations. "Many of the operators themselves, even though they are not formal flight schools, will train personnel when they see they have someone they want to fly for them," he said. "You also see a lot of operators in Latin America who are willing to pay for initial training, even though you do not see a lot of that here in the United States."