HI Uplift: Heli demand to rise – but from growth or replacement?

Dissecting demand at the HI Finance Forum. Second left to right: Pat Sheedy, Milestone, Con Barber, Macquarie, and Nigel Leishman, LCI.

Touring the European Rotors event in Madrid last week, excitement was in the air. It wasn’t just the prospect of paella and Rioja Gran Reserva. There was no doubting the resurgence in demand for new helicopters. Demand signals are strong.

Operators are clamouring for new aircraft, as offshore oil and gas markets reawaken from their long slumber and other sectors benefit from strengthening economic growth bolstering demand for lift. (Not forgetting, of course, the seemingly inexorable rise in lucrative military contracts).

But is demand founded on genuine growth in helicopter markets or simply aircraft replacement? And will the manufacturers be able to keep pace? We sought answers at Helicopter Investor’s Finance Forum, The Future of Helicopter Leasing, staged at the event on Wednesday, November 29th.

Pat Sheedy, president and CEO, Milestone Aviation sums up the background like this: “We have stable, if not increasing, demand and an oil price that has remained relatively stable for 24 months. Plus, an interest rate environment, which is encouraging operators to look at various sources of capital and finance provision – including looking at lessors.”

Nigel Leishman, chief commercial officer, LCI began with a plea for partnership to keep the market economically sustainable – not just environmentally sustainable. The industry was beginning to see much more engagement from end users to make the business more economically sustainable, he said. He saw a lot of interest in the super medium market (“which has been a long time coming”) driven through growth in that market. He also hoped to see more growth in emergency medical services (EMS) markets.

Con Barber, chief investment officer, Macquarie noted excess demand in certain asset types, notably offshore AW139 helicopters. “Demand is driven primarily in offshore, where there is a very strong energy market driven by oil and gas prices,” he said. “We are seeing leading indicators that this is going to continue.” Current global daily oil production is about 25m barrels, forecast to reach 30m barrels by the end of the decade, with similar indicators for gas. There’s a long-term trend towards offshore energy sources – predominantly gas – that is driving demand, he said.

In the offshore sector, Macquarie saw continued resilience for helicopter emergency medical services (HEMS) and for search and rescue (SAR), which correlates strongly with growth in GDP, he said.

So, does that add up to demand fuelled by genuine growth or driven by aircraft replacement as helicopter airframes near the end of the primary mission life? For Sheedy, at Milestone, the answer over the next decade is both.

But replacement is a powerful factor. Starting with the heavy segment of the market, from 2024/2025 the first S-92s will reach 20 years of age, he said. That’s the limit oil companies regard as the end of helicopters’ primary mission. Milestone estimates 10 to 15 S-92s will hit that 20-year cut off every year from 2025 onwards.

Even assuming no market growth, Milestone estimates there are probably between 60 to 80 super medium or heavy helicopters that need to come onto the market, simply in terms of pure replacement lift, said Sheedy. “It’s conservative to estimate no market growth and the demand for super mediums or heavies to be just replacement. But even at that, there is sufficient demand out there in terms of replacement to justify the staged introduction of the super medium,” he said.

Macquarie’s modelling offers a useful perspective on the supply/demand balance. The lessor estimates annual demand for about 600 Western-built helicopters across the board from singles to heavies. That includes 350 helicopters arising from new demand and 50 from replacement demand. “Compared with demand for 600 helicopters a year, current OEM production is closer to 400 aircraft,” he said. Plus, manufacturers don’t have much extra capacity to increase production without opening new plants.

All plants – with perhaps one exception – are operating at full capacity, he added. During the helicopter industry downturn, manufacturers have backfilled existing lines with military production. Delivery lead times are probably running at between 12 to 24 months.

Leishman, at LCI, highlighted supply chain challenges further frustrating the supply of new aircraft. “It’s not just the OEMs – it’s all their suppliers too. I think that is more important. If you go down the supply chain looking at what they are supporting – sometimes multiple different types, the OEMs are actively competing for some of their equipment with their own suppliers.”

For example, Pratt & Whitney Canada PT6 turboprop engines are in high demand to power both rotary and fixed wing aircraft. “If you look at the AW139 market today, there are about 1,200 aircraft out there,” said Leishman. “A lot of these [PT6] engines are starting to come off wing and go through overhauls. They need supporting with spares, so there is a supply chain issue there that is much wider [than the production shortfall].” They are in demand – not just for new aircraft but to serve as replacement engines for powerplants coming off wing for overhauls.

So, will rising demand and constrained supply inevitably force prices up? Barber, at Macquarie, thought so. “We think valuations are going to start picking up. The OEMs are not producing enough aircraft to fulfil current demand year-on-year. And they won’t be able to do so for some time because they just don’t have the output capacity,” he said. “So, there’s going to be a shortfall of new product coming onto the market in the next couple of years.”

Watch out for more reports from European Rotors in Madrid – including prospects in the offshore wind market – next week. And if you enjoyed reading this free newsletter, please share this link, so colleagues can sign up too.