Opportunities in Helicopter Leasing
During the years following the sovereign debt crisis, the growing regulatory environment greatly impacted financing conditions in the aviation sector. In particular, obtaining financing for helicopters from commercial banks became a less viable option. To fill this gap new players started to step into the market providing the needed equity and credit financing facilities.
Due to attractive yield levels and solid macro fundamentals, the pace of capital and funding flows into the helicopter segment continued to accelerate. In order to deploy capital quickly, lessors started to focus primarily on the medium and heavy helicopter segment. For many decades now, the main business opportunity for medium and heavy helicopters has been in servicing the offshore oil and gas industry. At the peak of the cycle in 2014, the optimism was palpable: Waypoint, a helicopter leasing company was launched and backed by high profile financial investors. Moreover, CHC – the world’s largest helicopter operator – received $500mln in funding from private equity firms. At that time, the oil price per barrel was trading over $100 and oil companies were venturing further out in the search for new oil projects.
But suddenly, with the downturn of the oil and gas market in 2015, the helicopter industry was faced with severe challenges. With the oil price plummeting below $50, oil and gas multinationals started to cut costs aggressively. In particular, they started canceling and renegotiating existing helicopter leasing contracts. This led to an estimated 30% of all offshore helicopters being parked by 2016 (1). In the same year, CHC filed for bankruptcy. At the end of 2018 Waypoint, whose largest customer had been CHC, was forced to follow the same path and file for bankruptcy as well. The numbers revealed that at that time 22% of Waypoint’s helicopter fleet was parked, compared to 0-6% during 2014 (1).
Where to go from now? A more diversified approach
We think that as of today the medium and heavy helicopter segment still faces many debt repayment and cost cutting challenges. However, a recovery in the oil and gas sector might be in sight as large oil companies are starting to look more into new exploratory projects.
What we currently like from an investment perspective are light helicopters in the Emergency Medical Services (EMS) and the Search and Rescue (SAR) segments. EMS has seen growing demand as helicopter support moves from luxury to necessity. Also the SAR segment has been strong as maritime nation seek to guard national waters. In addition, the older generation of SAR helicopters is now reaching end of useful life and will have to be replaced (2).
Moreover, we think that market demand for almost 22'000 helicopters over the next 20 years will be supported by robust economic fundamentals (2). The drivers of new demand will mostly come from emerging markets, whereas the demand for fleet replacements will come from mature regions.
(2) Global Helicopter Forecast, Airbus
The new age of helicopter leasing, LCI