Exclusive: Chris Bradshaw explains how ERA is staying afloat during the downturn
Now is not the best of times to be a helicopter operator in the oil and gas market.
Even the giants of the market are not safe from the effects tumbling oil prices and the lack of new offshore contracts. In the last year, we have seen PHI and Bristow file for Chapter 11 bankruptcy protection, driving potential investors even further away.
However, one company that has avoided much of the discussion is ERA Group despite having the vast majority of its helicopter fleet in the oil and gas market. Since 2015, the operator has kept its head down, maintained strong relationships with its existing customers and strived to keep its fleet utilisation steady through contracts in new markets and its own in-house leasing business.
In July, ERA Group released its H1 figures for 2019, revealing a stable balance sheet with an increase in operating revenue and EBITDA over last year.
Helicopter Investor spoke with ERA Group’s CEO Chris Bradshaw to discuss exactly how ERA has weathered the downturn and what exactly it is doing differently from other large operators in the space.
Helicopter Investor: What bolstered this jump in EBITDA and revenue?
Chris Bradshaw: I think we were aggressive at the beginning of the downturn, really starting in 2014 and taking steps that we thought would be necessary with the new state of the market. And we were focused on four key principles:
- Achieving the highest possible standard of service;
- Maximising fleet utilization;
- Realizing efficiencies in our cost structure; and
- Protecting our balance sheet.
I think we were very proactive and early in the downturn at adjusting our cost structure to the current state of the industry. I think that put us in a position where we’ve been able to generate positive free cash flow throughout the downturn from 2015 through to Q2 of this year.
We used a lot of that cash flow to pay down debt to protect our balance sheet. And now even more recently over the past couple of months we’ve used that positive cash flow to buy back about a million shares which is roughly. 5 percent of the previously outstanding unrestricted share amount.#
HI: A lot of operators are focused these things, what is ERA doing differently?
Chris Bradshaw: I think we were earlier and more aggressive in adjusting our cost structure. And I think some participants in the industry were counting on the market bouncing back sooner. Obviously that just hasn’t happened.
HI: With most of your fleet in oil and gas, are you focused on maintaining the relationships you have in the offshore helicopter market or are you still finding some new contracts?
Chris Bradshaw: We have been very focused in protecting relationships with our existing customers and continuing to provide them with safe and reliable service every day. But we have also been focusing on diversifying wherever possible.
This is one of the benefits of having our hybrid operator and lessor model. We have been able to maximize the utilization of our fleet by leasing out our aircraft to other regions where we do not have an operating certificate.
Mexico is a great example of that. We grew our relationship with one of the large operators in Mexico and were able to lease three AW139s there which has allowed us to benefit from the growing demand from international oil companies there without having our own infrastructure and operations.
That is one example but we’ve done something similar in India for example and more recently we have been able to sign up to new contracts in our emergency response services. We have also been focusing on market diversification wherein we have a new contract to support one of the leading players in the commercial space industry, separate from oil and gas.
HI: What would you say is the most stable market that you’re operating in at the moment?
Chris Bradshaw: WelI, just to take them in turn, I think the U.S. Gulf of Mexico is getting better. It is going to be a gradual recovery. We don’t think it’ll be a linear one, there may be some variability from quarter to quarter but we do think the recovery is underway. I also think Brazil — which is our second largest market today — has been in a steady state but we look at 2020 as being a year when the international oil company projects start to ramp up. So, there should be a growth in demand for helicopters to service that IOC activity.
And then we look at markets like Mexico as being really bright spots that are growing faster than the broader offshore market.
HI: Why did you sell DART?
Chris Bradshaw: Dart is an investment in which we held a 50% interest in for a number of years. But we had never really realized any cash proceeds of a significant amount from the investment. It’s a nice business — it had more recently grown to more of a critical mass on its own and it had developed an independent management team. This put us in in a place where we could realize value for our shareholders by monetizing the investment.
So that’s why we decided to sell our interest along with our partner that owned the other 50%. So, 100% of the company was sold to a private-equity firm. We were very pleased with the proceeds that we received from that investment.
HI: Do you still think there’s more consolidation being needed. Do you think there are still more players on the pitch than are required right now?
Chris Bradshaw: Absolutely. The industry really is in dire need of consolidation. And one of the ways that we can create a more sustainable industry structure is through consolidation and spreading high fixed costs that are required to run an air carrier across a broader base and better absorption of those fixed cost.
HI: Where Era is at the moment, are you in the position to merge or acquire other operators?
Chris Bradshaw: I think we’ve put ourselves in an attractive position where we have one of the strongest, if not the strongest financial positions out of the large operators with a good balance sheet and continued free cash flow generation. And I think that that financial strength is really going to be a competitive advantage as it relates to finding potential merger partners.
HI: What is your fleet looking like at the moment?
Chris Bradshaw: We currently have 105 helicopters in the fleet. Nine of those are heavy, 46 are medium, 43 are light twins, and then 30 single engine aircraft. We do not disclose exact utilization numbers for competitive reasons but I would note that we specifically have a very high utilization on our light helicopter fleet, a decent utilization on our heavy fleet – probably better than average – and our medium lead is where we have some capacity.
We have an opportunity to drive increased revenue and cash flows getting better utilization of specifically our AW139 fleet.
HI: You are one of the few operators doing in-house leasing and you have done for a while. It seems like this is helping your success, do you plan to keep up the leasing in-house?
Chris Bradshaw: I think that will be the base case, we’re not categorically opposed to leasing helicopters where it makes sense. One thing I think is there needs to be the right match in the duration of the lease commitment and the duration of the under underlying customer contract.
I think this is an area where other participants in the industry really exposed themselves to a lot of risk when they lose customer contracts but had to continue to pay these fixed charges on the aircraft leases.
I think we would also need a cost of capital on the lease rate that’s competitive with where we can borrow elsewhere. Historically we’ve been able to borrow at very low rates on a secured basis. A small spread over LIBOR would need a release to make sense for us. It would have to be competitive versus our alternative sources from a cost of capital standpoint.
I also think the sentiment towards the sector has been significantly damaged by the financial distress and bankruptcies that have occurred in the industry.
We are in a fortunate position in that we can point to a track record where we’ve been able to generate positive free cash flow throughout the entire downturn and maintain a strong balance sheet. I think we have capital partners who appreciate that performance and remain supportive of our business. But the broader market is very challenging.
HI: This downturn has been going on for a good long time. Do you see any sort of green shoots within the next five years or so — If not within the oil and gas space then in anything to do with your business in general.
Chris Bradshaw: Yes, broadly speaking we think a global recovery is underway in the offshore oil and gas industry. We don’t think it’ll be a hockey stick recovery; it’ll be a gradual recovery and certainly there will be differences in the pace and slope of the recovery in different geographic regions. But overall, we do think it’s getting better.
We also think there are opportunities in other markets, I think the commercial space industry example that I gave earlier is it is a good one where we can get some diversification away from some oil and gas.
HI: What opportunities are there in the space sector?
Chris Bradshaw: As you may be aware the space sector here in the U.S. has really migrated from a government run program through NASA to more of these private commercial space players. We secured a contract to have two helicopters on standby and test sites.
It is the type of mission where you hope your services are never used. But they’re paying us to be there on a standby basis for that safety assurance.
This particular contract — with a leader in the commercial space industry — will see two full-time contracted AW139s with two additional ones on standby to move over to the area of operations when needs be.
HI: What can operators do to stay afloat in the market right now?
Chris Bradshaw: I think it’s going to continue to be a difficult environment out there. I think the winners in the long term are going to be companies that consolidate.
That’s the action that we can take as an industry that would do the most to create a more sustainable sector that can actually attract capital. Companies are earning well below their cost of capital so there really is not a strong interest broadly speaking for lenders to come in and fund the industry.
In the longer term this will be a big problem for the customer base because, over time, we are going to need to replace our fleets with newer models but the money needs to come from somewhere. If we as an industry can’t attract the capital to fund those investments, we won’t be able to service the customer need over the long-term.