Making Waves – Article from Vertical Magazine
2013-06-11 by Oliver Johnson of verticalmag.com
Rotorcraft leasing is hardly a new concept — Calgary, Alta.-based Eagle Copters Ltd. has, for example, been doing so for the past 30 years — but Milestone is undoubtedly leading the charge of a host of ambitious new companies, including Lease Corporation International Helicopters (LCIH) and Waypoint Leasing Ltd., that have been launched in the firm belief that investment in rotary-wing aircraft is the next big thing in aviation finance. Why now? What is it that makes the helicopter industry suddenly so appealing to financiers? And what benefits, if any, are operators likely to see from this sudden rush for their business?
“It’s a really interesting market,” said Usman Ahmed, an aviation analyst with consultancy firm IBA Group Ltd. “There were lots of banks who were in to helicopter financing before the recession, but they were not really interested in anything below $15 or $20 million. . . . I think the reason you are seeing suddenly an influx of lessors coming into the market is that they’ve realised just how liquid the helicopter is in terms of its value retention.” In stark contrast to the fixed-wing market, where aircraft such as a Boeing 737 or Airbus A320 may be worth just 50 to 60 percent of their purchase cost after 10 years, Ahmed said helicopters generally maintain, at the very least, 70 to 80 percent of their value over the same time frame. For financiers, this makes them a relatively lowrisk asset and market in which to invest. Add to this a new wave of technologically- advanced — and expensive — medium to heavy helicopters entering a booming oil-and-gas transport sector that’s providing high demand, allied with an upcoming replacement cycle for older offshore models, and it adds up to an enticing package for many financiers.
The New Colossus
Since its launch in 2010, Milestone has been appearing with growing frequency in industry headlines for the size of its orders and contracts with operators. At Heli-Expo 2013, it announced an astonishing batch of orders with Eurocopter and Sikorksy that included 14 EC225s, five EC175s, 23 S-92s and seven S-76Ds. Launched with $500 million of equity seed, it’s headed by Richard Santulli, the founder and former chairman and CEO of NetJets, the ground-breaking fractional private jet ownership company. However, Santulli’s history with the rotorcraft industry stretches back almost 30 years — he founded another helicopter leasing company, RTS Helicopters in the early 1980s, and ran equipment leasing for Goldman Sachs.
“I guess I have an affinity and fondness for the space,” said Santulli of his return to the rotorcraft industry in an interview with Vertical. “It really is the fact that [helicopters] hold their value much better [than fixed-wing aircraft]. They don’t go through cycles. If you go back 30 or 40 years, those that work on producing revenue, hold their values.” And it’s those “revenue-producing” helicopters — rather than VIP or corporate aircraft — with whom Milestone wants to do business. “We won’t do VIPs, executive transport. We don’t have any interest in that. From day one we’ve said that we will do helicopters that earn a living, that earn revenue,” said Santulli. “A company or individual can wake up that day and say I want to sell that asset.” Whereas a revenuegenerating helicopter “really is the lifeblood of a company,” — meaning that the operator is very unlikely to risk losing it by not make a lease payment.
While Milestone has lease arrangements with operators working in helicopter emergency medical services (HEM S), the bulk of the company’s business is in the offshore transportation sector, where the operating giants have been quick to partner with it. When Milestone and Bristow announced the signing of an operating lease for five aircraft valued at $125 to $135 million in February 2012, Bristow CFO Jonathan Baliff said it reflected a new fleet strategy for the operator. “We are reducing the number of aircraft owned by Bristow in favor of a mixed fleet of owned and leased aircraft,” he said. “This, combined with selling off our older model aircraft, will enable us to accelerate the shift to the latest technology aircraft preferred by our clients.”
Santulli said that when Milestone’s founders were raising the capital for the company, a lot of potential private equity investors thought that they would never do business with the big operators. “We said that eventually we would,” said Santulli. “Did it happen sooner than we thought? Maybe. But the two biggest players in the space account for almost 50 percent of the business — CHC and Bristow. So if you’re not doing business with them, you’re not going to be a very big company.”
Perhaps one of the longest-standing major lessor in the industry, Eagle Copters has been leasing helicopters for the last 30 years. The company has a diverse range of activities that also includes maintenance, repair and overhaul support; product development (such as the Eagle Single and the much anticipated 407HP — an STC program that re-engines the Bell 407 with a Honeywell HTS 900); completions; and aircraft sales. According to Spyke Whiting, vice president of sales and marketing at Eagle, the growth of the leasing side of the business has been very organic, and was begun by company founder Mel O’Reilly “with nothing more than a gut feeling,” with aircraft added to the fleet as the company’s capital allowed. Today, the company has more than 70 helicopters — primarily Bell medium-lift aircraft — out on lease, including what Whiting believes is one of the largest fleets of Bell 205s still in existence.
“We may not be what’s considered a typical finance company, but we sure do lease a lot,” said Whiting. “We compare to them, we just happen to have somewhat different helicopters that make up the lease portfolio.” Although many of the leased aircraft are working in utility operations, Whiting said the company doesn’t box itself in to a particular market segment. “The other big part of our business is buying and selling helicopters, and it gives us a unique opportunity to cross multiple platforms,” he said. “Not only do we have the capability to configure the helicopter, we also have a pretty good idea of where the market is for that particular piece of equipment.”
The Eagle lease fleet is being continually grown and updated — any helicopter added to the portfolio right now is either larger or newer, said Whiting, with the company looking at a range of platforms. “We are known primarily for our Bell specialty,” he said, “but as other manufacturers introduce the helicopters people want, you’ve got to be able to move with that – so we are considering diversification as a growth opportunity.”
Era Group Inc., parent company of renowned offshore operator Era Helicopters LL C, joined the leasing industry with the launch of Era Leasing LL C in 2005. According to Era CEO Sten Gustafson, the move into leasing offered many advantages, allowing the operator to take full advantage of the flexibility of helicopters by tapping into different markets. “These things are very expensive, so to generate a sufficient return, you’re always focused on making sure that an aircraft works as much as it possibly can and is generating revenue,” he said. “From our perspective, our primary business is servicing the oil-and-gas sector, but having the leasing angle allows us to have access to a much broader market for helicopters — without all the cost and infrastructure.”
While Era doesn’t currently lease any helicopters to Bristow, it does lease to CHC, and is happy to lease to companies that may be deemed competition, said Gustafson — although this would be in areas Era doesn’t operate in. This provides the company with access to places like the North Sea, West Africa and Australia, offering the benefits, albeit indirectly, of these working in these markets. And while fleet leases may be more desirable for many leasing companies, Gustafson said that for Era, sending aircraft out in ones or twos was “more of our sweet spot.”
Currently, of Era’s total fleet of 175 helicopters, around 40 are out on lease. There is no “leasing fleet” per se — when an aircraft finishes a contract (whether operated by Era or a lessee), the company will simply assign it where it will generate the highest return. That could be on another Era contract, out to a lessee for work in HEM S or searchand- rescue (SAR), for example, or it could even be sold — an option that is particularly viable in the rotorcraft industry, with the extremely high value retention of the aircraft. “We have sold a lot of aircraft and, on average, we have sold at a very meaningful premium to book value,” said Gustafson. “We have made over $25 million of profit above where we bought the aircraft. It’s a pretty unique asset that can do that.”
In terms of future growth opportunities, Era will be looking to further explore what it deems untapped leasing markets. “I think we probably haven’t really fully accessed all the different potential areas into which we could lease helicopters,” said Gustafson. “We’re going to really explore opportunities outside the traditional oil-and-gas sector, get out the map if you will, and say, ‘Here are all the potential uses for a helicopter, are there people that we can lease them to in those areas?’ And really make a very targeted effort.”
Lease Corporation International (LCI) has been leasing aircraft to the fixed wing market since 2004, but launched a subsidiary, Lease Corporation International Helicopters (LCIH), in 2011. “The operating leasing of helicopters is a pretty new concept and we were able to get in on the ground floor,” said Mike Platt, CEO of LCI. “With few other competitors, there’s a real opportunity for us being here in the early days — we see lots of opportunity for growth.”
In particular, Platt said the company liked the underlying user base for the offshore fleet, with oil and gas companies offering very strong credit — as compared to fixed-wing airlines that are dependent on the changeable appetites of the public. “Oil companies don’t tend to come and go, and as long as the operators are doing their job I think it’s a good and stable place to be.”
LCIH currently has about $400 million of helicopters on order with AgustaWestland, including AW139s, AW169s and AW189s. In April 2013, it made its first delivery (an AW139 to Bond Offshore Helicopters in Aberdeen, Scotland), and while the supply of medium-to-heavy helicopters to the oiland- gas transport and SAR sectors is certainly LCIH’s initial focus, Platt said the company would also be looking at the HEM S and law enforcement sectors, with orders for smaller helicopters considered, dependent on demand.
The latest major entrant into the helicopter financing market is Waypoint Leasing Ltd., which is headed by Ed Washecka, the former CEO of Era Group. Washecka oversaw the launch of Era’s leasing business, and was keen to enter the market with his own company following his departure from Era in 2011. At Heli-Expo 2013, the fledgling company signed a deal with AgustaWestland for four aircraft (GrandNew, AW139, AW169, and AW189 helicopters), and then in early May, Waypoint announced that it had secured $375 million of equity growth capital from three major investors (MSD Capital, Soros Fund Management and Cartesian Capital Group), allowing it to build business.
“Now that we have the capital backing, we are certainly interested in speaking to OEM s, but our focus is going to be providing capital to operators by doing sale-leasebacks with their existing fleet, or by supporting their new deliveries that they’ve already ordered,” said Washecka. He said MSD and Soros had the capacity to commit more capital once the initial $375 million was invested. “These firms are all very long-term focused, and I think that’s very good for our business — and I think that’s good for the industry.”
For Waypoint, diversity is the key, said Washecka. “We’re not going to focus on one sector, one manufacturer, [or] one part of the world.” Like the other major financial leasing companies, Waypoint will steer clear of leasing to corporate or VIP customers, but every other sector will be explored. “I would like avoid being too concentrated in oil-and-gas,” said Washecka. “I think oil-and-gas is a great market . . . but the fact is, I’d prefer the diversity of having some contracts through search and rescue, others that are EM S, and I think the challenge will be that there’s a lot of growth opportunity in oil-and-gas, so how do we make sure that we don’t get too concentrated? That will be the challenge.”
But is there a danger that the market could soon become saturated by the sheer number of leasing companies now entering the market? “I think that’s certainly a risk,” said Washecka. “It’s a niche market where one or two well-capitalized and experienced operating lessors can succeed, but not the type of environment where numerous companies will compete and thrive.”
According to IBA aviation analyst Usman Ahmed, the liquidity of the helicopter as an asset is, in addition to its flexibility, due to the fact that there’s a relatively limited supply from the OEM s. “The only concern we have is that the more the leasing fleet grows, the asset itself may not be as liquid as it is now,” he said. “If the industry grows at an alarming rate whereby operators are simply finding lots of leased helicopters from lessors, if the production and delivery industry is not as disciplined as it is now . . . that would drive down the value of the helicopter.”
Financing your helicopter
From an operator’s perspective, what are the benefits of acquiring an aircraft through a lease? With the huge cost of the latest and greatest technology being beyond the reach of some operators through traditional financing means, the very ability to acquire a helicopter at all may be a key reason, with the deep pockets of lessors providing access to the required capital that banks may baulk at. In addition, “there definitely is an aspect of some risk mitigation,” said Era’s Gustafson — with the asset appreciation or depreciation absorbed by the lessor rather than the lessee. “Also, if you need an aircraft quickly . . . you probably have a better ability to access an aircraft faster through a leasing company,” he said.
Chuck McGuire is managing director of aviation finance, lease, and consulting company Avstar Finance. “[Leasing] is the lowest cost of capital you will find because the depreciation and tax benefits are being kept by the financial institution and they’re giving those back to you in the form of reduced payments,” he said. He added that while the older generation of operators often think of their aircraft’s residual value as part of their retirement savings, this attitude may be changing among the next generation. “If you want to grow your business, leasing allows you to do it quickly and at lower cost. But when you go to buy the helicopter at the end, if you want to buy it, you’ll probably pay [its original purchase price]. A loan, of course, gives you the full utilization of the asset as well, plus the equity at the end — but it’s going to cost you a little bit more money in the middle.”
McGuire said there are a few key things operators should be doing before they finance a new aircraft. “If you go to any of the big OEM s, a key question to ask is: ‘Do you have any relationship lenders or lessors that you recommend we talk to?’ ” he said. “Nine times out of ten, they know the people that really understand their particular product, the value retention of that particular product compared to the others, and who really likes to [finance] that product. You’re not asking for help, you’re just asking for a little direction.”
Secondly, McGuire recommends talking to peers and friends within the industry to benefit from their experiences. “The last thing, and oftentimes the most important, is to have a candid look at yourself,” he said. “It’s amazing that each and every day the helicopter operator goes to work and he knows what his proprietary niche is, why he is better than anyone else, and why he should win the contract. Seldom do these guys ever tell this to their banks or their financial institution. They need to provide a financing package that is as well thought out as a proposal for a contract.”
According to IBA figures, only five percent of the world helicopter fleet is currently composed of leased aircraft — but with the current boom in leasing companies, that figure is likely to soon grow. “You will see a lot of operators will switch to the leasing option,” said Ahmed. “The smaller operators, who are operating four to five helicopters, that is the large proportion of the market — and this market is untapped, basically. There’s hardly any support from banks at the moment. So we are trying to have the banks [see that] the benefits to the banks are too good; and for operators, it gives them the flexibility of having that cash available for difficult times rather than tying it up in the asset.”
One thing is for sure: the increasingly large pool of potential lessors vying for operator business is only going to get bigger. But the extent to which the benefits of this will trickle down from the major operators to those managing smaller fleets remains to be seen.
Oliver Johnson is managing editor of Vertical Magazine. He can be reached at firstname.lastname@example.org.