LCI’s ‘marriage’, market prospects & ESG
Last week’s Helicopter Investor Virtual Summit began with LCI’s “marriage” to Nova Capital Aviation Ireland before considering the over supply in helicopters serving the oil and gas sector and environmental concerns.
“We have sort of got married,” said Crispin Maunder, executive chairman, LCI commenting on the company’s agreement to acquire Nova Capital’s twin-engine helicopters and fixed-wing aircraft. Nova Capital will retain its single-engine helicopter leasing portfolio. The acquisition takes LCI’s portfolio to more than 140 twin-engine rotary and fixed-wing aircraft. More than 80% of the fleet will be aircraft dedicated to emergency medical services, search and rescue, offshore wind and utility missions.
“We are thrilled to announce today [December 1st] that LCI has acquired Nova Capital Aviation Ireland,” said Maunder. “We are forming a collaboration and between us we should be able to cover the whole helicopter spectrum.”
Nova Capital CEO & founder Olivier Piot agreed the acquisition would enable the larger company to cover “the whole side of the helicopter business” with LCI focusing on twin engine operations. Nova Capital, which before the deal grew its portfolio to more than $500m with 100 aircraft, will focus on single engine and some related business.
Pat Sheedy, Milestone Aviation president & CEO, preferred to continue the lessor’s organic growth achieved over the past 10 years since its acquisition by GE. “For us, it’s about continued organic growth – we’ve added a lot of leasing companies to the book,” said Sheedy. “We are not looking at mergers or the acquisition of other leasing platforms.”
Maunder highlighted the need for diversity in the lessor sector. “Maybe the number of lessors will grow as the market grows,” he said. “We have very low penetration compared with the total market.”
Turning to the likely demand for lift from key sectors, Sheedy, from Milestone Aviation, acknowledged the long-term decline in the oil and gas market over the next 20 years but highlighted the continued demand. “There will be a place for [helicopters] to service oil and gas and exploration over the next 20 years. The industry is in wind down but it’s a multi decade wind down.” Demand for lift from offshore operators would be sufficient to occupy the currently installed fleet and even to increase utilisation rates over the next 10 years.
LCI’s Maunder thought the growing offshore wind sector would lead to increasing demand for helicopters. For evidence, he cited research from Air & Sea Analytics that predicted the installation of another 400 – 500 windfarms, creating demand for additional 100 helicopters. “This is not a feast, but it is typically 10 or more aircraft a year,” he said. Also helicopter transport (by 135 or 145) to offshore installations was up to 300% less polluting than transport by ship, Maunder added.
Aside from smaller niche markets such as offshore wind, Jaspal Jandu, CEO, LCI urged delegates to consider the main prize. “There could be quite a renaissance for the replacement cycle,” he said. “Between 100 to 200 aircraft will become more than 20 years old over the next couple of years and the manufacturers are putting out 500 – 700 helicopters a year. So, there could be a lot to do over the next 18 months.” But the size of the demand would depend on greater stability or an increase in oil prices particularly from deep water wells, he added.
Luc Bentolila, Airbus Helicopters, head of Marketing & Sales Development, said flight hours were still below those achieved in 2019. But a full recovery was expected next year. Jandu and Bentolila agreed significant replacement demand was likely to arise from the arrival of new helicopters with the latest safety systems while older aircraft would gradually become less capable and more expensive to maintain.
There was similar optimism from Roberto Garavaglia, Leonardo Helicopters, senior vice president Strategy and Innovation. “In 2021, thecivil sector is about 20% better than last year in terms of deliveries. I hope and think that trend will continue upwards,” said Garavaglia. The fact that helicopter manufacturers produced dual use assets – for civil and military use – was to the industry’s advantage because the cycles were not phased, he said.
“The process of renewing the fleet with newer technology is not over yet,” he agreed. The nominal fleet to serve offshore operators is about 1,400 helicopters worldwide, he said. Of those about 47% is accounted for by 12-seat intermediate aircraft. “Half the intermediates are 139s and the others tend to older generation models and there is still room for more 139s or other helicopters in this category.”
Asked in an audience poll when the helicopter fleet serving offshore operators would move from long-term over supply into balance, 53% of respondents predicted it would within five years. A further 25% expected balance to be restored in three years while 22% thought it would take 10 years. The poll was in response to a question asked by Alastair Fallon, IBA helicopter aviation analyst.
Both Sara Dhariwal, Ascend by Cirium valuations manager, and Gérard Deterne, Pteron Valuations, CEO & founder, dissected the theme of over supply in the offshore helicopter market. While oil and gas will be needed for the foreseeable future, there was significant over capacity in the numbers of helicopters serving the market, said Dhariwal. “The challenge we have with [helicopter] values for the offshore sector is the excess that it is still in it,” she said. “The past couple of years have really exposed that excess.”
Despite the upturn in both rigs and exploration noted in 2018/2019, the green shoots (known as “seaweed” in Ascend by Cirium) it generated faded away during the pandemic. Deterne agreed the world would continue to need helicopters in the oil and gas sector for the next 10 to 20 years – not least for further exploration. “Helicopters will be a key asset to continue pumping oil. Therefore, helicopter values should keep up-to-date and in good shape.”
The current focus on ESG (environmental, social and governance) topics represented an opportunity and a challenge for the helicopter industry, according to Jandu from LCI. “The [ESG] genie is now out of the bottle.” Policy makers are writing the rules (including EU taxonomy) now on ESG and this offered an opportunity for the helicopter industry to highlight its social contributions. This was particularly in the field of emergency medical services (EMS).
Also, as a lessor in the commercial market looking for capital, LCI is facing questions from capital providers about its environmental footprint. Similar questions are being asked of the providers themselves, he added.
Staying with low-carbon transport, lessors continued to monitor developments in eVTOL technology but thought it would be some time before the sector offered commercial opportunities for them. Piot from Nova Capital said: “I’m not sure eVTOL will be on the lessor plate within the next upcoming years because at the moment the market is a business financed by venture capital from the manufacturers of those assets.” But other forms of asset finance will be needed in future and “We want to be ready to do so when the time comes,” he said.
Maunder, from LCI, was equally cautious. “With a few exceptions, most of the [eVTOL] products in the market – and there are so many – are from manufacturers or putative manufacturers who don’t have any track record as far as product support development and the rest.”
Milestone Aviation’s Sheedy was also unenthusiastic about lessors’ involvement in the eVTOL sector. “We are obviously looking at it. But we are an asset-backed lender. Our first recourse is the asset and then we look to credit and other things after that,” he said. There were big questions marks over residual value and asset redeployment.
On the subject of helicopter storage, Steve Hanna, Protective Packaging Corporation president & CEO, highlighted the need to guard against corrosion. His company offers a packaging process that controls the environment around the aircraft. It’s a cocooning process that wraps the aircraft in flexile moisture barrier films designed to prevent exposing the aircraft, its engine and electrical parts to humidity. Hanna said the process, which guarantees no corrosion for a minimum of five years, was more cost effective and less costly than storage in a controlled environment warehouse or hangar.
“We were under the manufacturer’s microscope from the very beginning, but we assured them we were not changing the maintenance manual in any way,” said Hanna.
The Helicopter Investor Virtual Summit took place on Wednesday December 1st. You can watch the summit here.