LCI Analytics: ‘Helicopter market could further tighten on market turbulence’

LCI Analytics's Steve Robertson probes the impact of gloomy economic data.

Gloomy economic data is pointing towards volatile times ahead, writes Steve Robertson, MD, LCI Analytics. The affect on the civil helicopter market will depend on whether the stock market sell-off transfers into the real economy, and also whether the helicopter supply/demand imbalance remains as-is on both legs of the equation. Let us assess some dynamics.

Market Turmoil

Data released by the US Bureau of Labor Statistics (BLS) on August 2nd, 2024 revealed unexpectedly low employment growth in July, alongside downward revisions to June’s figures. This slowdown in the US labour market, which has now seen unemployment rise in four consecutive months, sent shockwaves around the world’s financial markets and raised concerns about a potential recession.

The ‘Sahm Rule’ has observed, without fail, that the initial phase of a recession has started when the three-month moving average of the US unemployment rate is at least half a percentage point higher than the 12-month low.

This latest data also arrives at a point in time where there is considerable geopolitical flux. Aside from the fact that over half of the world’s population are voting in elections in 2024, there is growing unrest in the Middle East that many fear could escalate into a major multi-national conflict.

Keep Calm and Carry On

What does this mean for the civil helicopter business? The sad reality is that neither economic turmoil nor major military conflict have been unusual phenomena over the past decade. We, therefore, have an understanding that:

• Mission-critical rotorcraft in roles such as emergency medical services (EMS) or search and rescue (SAR) often operate under long-term contracts by end users (as long as 10 years or more), making their demand relatively inelastic to short-term economic fluctuations.
• The military sector has absorbed a growing share of manufacturing capacity over the past 10 years. According to data from Cirium, the proportion of turbine helicopters delivered between 2014-2023 was 37% military and 63% civil. This compares with 30% military and 70% civil over the preceding 10-year period.
• OEMs face not only heightened demand from the military sector but also persistent supply-chain problems that have been present since the Covid pandemic. These have resulted in lead times for new aircraft stretching out to over two years for some popular models.
• Utilisation of modern, twin-engine rotorcraft in mission-critical sectors is currently high, with many models effectively ‘sold-out’ and no spare capacity available.
• The energy sector, particularly oil, does see cyclical activity linked to macro-economic trends. While recessions typically lower oil prices, conflicts in the Middle East tend to drive them up. This makes the direction of future oil prices uncertain.
• The civil helicopter labour market is particularly tight at the moment, particularly with regards to pilots, engineers and certification experts.

Missing Units

The civil helicopter market has experienced slower delivery rates for new aircraft since 2019, with delays influenced by several factors including specific conditions in various end-markets.

• A key factor is that many production facilities are operating at full capacity, with military orders absorbing a substantial portion of available resources and consequently delaying civil orders.
• If we use 2018 civil helicopter deliveries as a datum (the most recent completely Covid free year), we estimate that 326 helicopters were ‘undelivered’ from 2019 to 2024(f).

• This matches the fixed wing experience (Aercap estimate that ~2,100 narrowbody aircraft have been ‘undelivered’ over the same period and ~1,100 widebodies, from page 9 of their excellent Capital Markets Day presentation).
• This all suggests that new-build, civil helicopter supply issues will persist for many years.

Summary

In summary, the demand-side picture for mission-critical rotorcraft remains robust, whilst supply-side issues may persist or intensify, depending on exactly how military demand impacts the OEMs.

In terms of rates of change going forward, helicopter demand can be relatively elastic in certain sectors, and can be moved by oil prices or by events in the real economy.  Helicopter supply is relatively inelastic and cannot easily be changed.  Furthermore, even small changes will not reverse the magnitude of the undersupply from 2019 to 2024.

Given the likely slew of economic, political and geo-strategic data in the coming year, LCI Analytics will continue to monitor developments and keep you updated.