The helicopter demand paradox

Brian Foley, the aviation market analyst, has looked at Heli-Expo from an different perspective pointing out that although the commercial helicopter is booming, attendees ignored the “elephant in the room” that is declining military spending.

Must read: The elephant at Heli-Expo 2014

Foley argues that even a thriving commercial market will be hit by an impending military crunch. He also points out that: “A recurring quandary in the industry is that the buyer pool is known and finite, with OEMs competing for the same business year after year.” He adds: “The industry must find new markets, and that means non-traditional.”

Paradoxically this finite pool is a major strength for investors in helicopters. And it is a fundamental difference between helicopters and the commercial aircraft market (which is wrongly often used as a comparison).

Fixed wing aircraft manufacturers try to stimulate demand and are fiercely competitive about market share. This means they take risks, particularly when countries open up to new airlines, as India did in 2004, or when new airlines are launched. In the past they were happy for these emerging airlines to operate old aircraft. Now they sell them new jets. Last month VietJet, a Vietnamese low-cost carrier, for example, ordered 63 A320s worth $6.4 billion at list prices (which it clearly did not pay) with options for another 38 aircraft.

VietJet, which now operates 12 aircraft, could be the next Southwest or Asia’s Ryanair. Or it could be another Kingfisher, which ordered 107 Airbus jets and took delivery of just 25 aircraft before it failed. It is too early to say.

You can, however, be certain that many of the 5,556 aircraft on Airbus’ orderbook or the 5,085 on Boeing’s will not be delivered to the airlines that originally ordered them.

Even if they wanted to compete like this, helicopter manufacturers cannot. If you give a power company 20 discounted helicopters it will not build a new electricity network. The same is true in other markets.

If you give a power company 20 discounted helicopters it will not build a new electricity network.

Operating a helicopter is rarely a core business for the end customer. Oil companies, utilities, police departments, hospitals and governments all need helicopters, but they are a cost. Airlines use aircraft to generate revenue. (Manufacturers could stimulate demand in the large VIP market by discounting, but helicopter production lines are constrained so it does not make sense.)

Foley may be right that helicopter manufactures need to find non-traditional markets to stimulate demand. But helicopter investors will be quite happy if they do not.

Alasdair Whyte

Alasdair launched Corporate Jet Investor and Helicopter Investor in 2010. He has more than 15 year's experience as a financial journalist and has specialised in aviation for much of this time. As well as editing the website, Alasdair helps to organise our international conferences and events. He also regularly chairs them as well as other industry gatherings.

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