by Thierry Dubois and Mark Huber
The rarefied deepwater oil and gas market has spawned new players and big deals in the helicopter operating leasing market, but to date these transactions have largely been confined to medium and large helicopters. What will be the impact of leasing on the industry as a whole, especially for smaller operators with light helicopters in the non-oil-and-gas segments, and will it ever become as predominant as it is for airlines, where approximately one-third of the fleet is leased?
The worldwide credit crunch and the trend for more deepwater energy exploration have created an environment for expansion of the leasing market, and new players–and some smart money–have entered the fray. These new rotorcraft leasing companies–Milestone Aviation, Waypoint Leasing, LCI Aviation, Lobo Leasing and Macquarie Rotorcraft Leasing among them–are promoting operating lease (an arrangement under which the lessor retains ownership of the helicopter), as opposed to financial lease, and are thus opening new possibilities for the operators to expand their fleets. Money has rapidly flowed into, and aggressive aircraft orders have been placed by, these new leasing entities: Milestone Aviation, as of September 30, had acquired more than 115 helicopters valued at over US$ 1.7 billion. It had closed leases with 25 operators in over 20 countries on six continents. It had raised $541 million of equity and $2.4 billion in committed debt financing.
Milestone Aviation has placed significant orders–mainly for medium twins–with AgustaWestland, Eurocopter and Sikorsky. Milestone is now talking to Bell, according to managing director Robert Dranitzke. LCI placed an order for $400 million worth of AgustaWestland helicopters in 2012.
Waypoint Leasing, capitalized with $375 million, made its first transaction in April with CHC and has placed a major order for several models of new AgustaWestland helicopters. Last fall, it announced that it had closed on a five-year $335 million (U.S.) revolving credit facility. Financial institutions involved include Credit Suisse, Goldman Sachs and Union Bank.
Milestone was founded by NetJets creator Richard Santulli; Waypoint is backed by funds–hundreds of millions of dollars–from personal computer impresario Michael Dell and global investor George Soros; Macquarie is run by former Sikorsky CEO Jeff Pino. Perhaps reflecting past loyalty, Macquarie has already placed orders for new Sikorsky S-92s and S-76s.
Revenue Stream for Operators
The smart money and minds are jumping into rotorcraft leasing for one simple reason: Often leasing is more lucrative than operating. Sometimes, even the operators know this. In September 2012, Bristow Group, one of the world’s largest OGP helicopter companies–it owns and/or operates 350 aircraft and its affiliates operate another 127–bought a $250 million minority stake in Canada’s Cougar Helicopters. The deal included the purchase of Cougar’s eight S-92s, which Bristow promptly leased back to Cougar and have been the source of revenue growth, according to Bristow’s latest quarterly report.
Bristow is playing both sides of the leasing coin, buying and leasing helicopters to others while leasing helicopters for its own operations. Indeed, leasing has become an integral part of its business strategy over the last several years. In its form 8-K filed with the Securities and Exchange Commission in May 2012 Bristow specifically targeted operating leases as a strategy for “lowering the cost and amount of capital needed to grow.” Twenty-two percent of Bristow’s fleet, worth approximately $750 million, is leased and that percentage may grow; the company’s goal is to boost the total share of its leased fleet to 30 to 35 percent, according to its most recent financial filings.
The strategy appears to be paying off: Bristow’s share price has increased from $48 to a high of $84 over the last 12 months and the company was able to fuel growth with an amazing $340 million worth of new capital expenditures over the first six months of the year, while at the same time boosting its overall cash position and improving liquidity.
However, leasing is not cheap. Many lessors now require lessees to protect the value of assets by enrolling them in hourly maintenance plans with engine, avionics and airframe manufacturers; these are either add-on costs or part of the base lease rate.
“Lessors recognize the costs to operate the helicopters, especially the engines and major components. To protect their asset value, one thing lessors like to have is a guaranteed maintenance program. It could be Power by the Hour on the engines, or in some cases tip-to-tail coverage,” said David Wyndham, president of aircraft consultancy Conklin and de Decker.
For operators like Bristow, which need to buy ever more expensive helicopters to meet customer demand, leasing has become an integral part of their business strategy.
The leasing companies can make large fleet purchases at a discount, further increasing their margins, while the OEMs can better predict demand in fluctuating markets–up or down. At last year’s Heli-Expo, Milestone’s Santulli cautioned OEMs against over-expanding production during boom times, counsel that meshes with lessors’ strategy of monopolizing production-line capacity during economic upswings. Milestone is partnering with Eurocopter on marketing its helicopter portfolio and offering customers the OEM’s parts-by-the-hour program.
How the Boom Began
Banks have long offered financial lease services for helicopters. At the end of the lease period, the lessee–usually the operator–becomes the owner. Therefore, in the operator’s accounting books, the helicopter has to appear as an asset.
What new players are offering is operating lease. In that instance, the lessor retains ownership of the helicopter. The operator buys a service, which appears in its results. “This is a major difference in accounting, as the helicopter no longer appears as an asset,” Fabrice Arfi, Eurocopter’s head of business development, explained.
“For an operator, having helicopters on financial lease tends to have a negative impact on the balance sheet, reducing the capacity to get into debt and thus impeding growth,” Arfi said. Operators are eagerly expecting a way to improve their balance sheets. This is the need the new leasing players are meeting. “Some companies, even those with access to plenty of capital, understand the benefit of having a portion of their fleet [typically 20 to 40 percent] off balance sheet; this frees capital for other aspects of their business,” Dranitzke said.
From the operator’s perspective, there is also the benefit of shifting the asset residual value risk to the lessor. “In addition, an operating lease generally allows matching the lease term with the underlying customer contractor length,” said Andrea Cicero, CFO of the Avincis group (better known under its Bond and Inaer brands). The cash-flow factor is important, too. “We start charging lease fees when the operating contract starts; this is different from buying a helicopter, where you typically have to put up a minimum of 15 to 25 percent of the aircraft’s capital value (the bank providing the rest) and start paying financial costs before you have an aircraft that generates revenue,” Dranitzke noted.
Leasing can provide tax advantages to lessees as well. Lease costs can be amortized and deducted over the term of the lease and “leasehold improvements,” which could include engines, avionics and interior refurbishments, can be deducted up to 50 percent within the first year of placing the asset into service–an important consideration when leasing a used or incomplete “green” helicopter. The cost of other improvements can be recovered over longer periods. Additional fixed costs associated with the lease can also be deducted.
By equipping operators to show they have aircraft available for the contract, the new leasing companies are enabling deals with oil companies that otherwise would not have happened. According to Bob Kokorda, Sikorsky’s v-p for sales, in the past, when a bank told an operator “You cannot take on more debt,” the operator had to pull out of competing for a contract.
Some believe the 2008-2009 financial crisis helped spawn the new lessors. “With the credit crisis, other lessors such as us looked at the world differently,” Ed Washecka, Waypoint’s CEO, told AIN. Moreover, the industry has undergone changes in company management. Traditionally, the operators’ bosses were mostly pilots. This began to change in the early 2000s, when more MBA graduates took the helm. They learned the helicopter industry’s culture, Arfi said, and did not want to disrupt the way their companies were run…until the 2008 crisis. Then, they felt free to institute new fleet management methods, Arfi believes.
Now, less than four years after pioneer Milestone Aviation started with the new model, operating lease agreements account for large numbers of helicopters. For example, Avincis has 24 aircraft under such terms. “We expect this number to increase to approximately 100 aircraft over the coming years,” Avincis’ Cicero added. According to Sikorsky’s Kokorda, Milestone owns about 50 S-92s, a combination of the ones it ordered directly from Sikorsky and the ones it bought from operators under leaseback agreements.
Will other segments of the industry take advantage of operating lease services? Not all operators are convinced yet. Christophe Rosset, president of SAF Hélicoptères, an EMS/aerial-work specialist in France, told AIN that his company has chosen not to lease. “This industry is very capital intensive; when you have finished paying for a helicopter, you begin earning money or you can sell the helicopter for a good price,” he explained.
Likewise, Air Methods CEO Aaron Todd told AIN at the start of the recent leasing boom that his company could attract capital for new helicopter acquisitions more cost effectively from the capital markets, as opposed to partnering with leasing companies. Air Methods is the largest helicopter EMS operator in the U.S., with 31 percent of market share and more than 400 aircraft operating in 42 states. It has grown in recent years through the acquisition of competitor companies and has embarked on an aggressive strategy of paying off aircraft leases that came with those transactions, spending more than $110 million in lease buyouts last year. The company says this strategy will reduce interest and depreciation expense.
From the lessors’ perspective, the offshore oil-and-gas industry was the low-hanging fruit. Nevertheless, Eurocopter’s Arfi is convinced other segments of the industry will come round to the idea sooner or later. “Aerial-work operators are not finance experts yet but it’s just a matter of time,” Arfi said. Meanwhile, lessors will have to get out of their comfort zone and educate segments other than oil-and-gas. This may be the strategy for survival in an increasingly crowded market.
Milestone’s Dranitzke said he would be happy to work with firefighting, pipeline surveillance and search-and-rescue specialists, providing the operator has a contract for using the helicopter. After oil and gas, EMS could be the next segment but the aircraft are smaller and less complex (and thus less expensive) and the fleets are smaller, according to Kokorda. Most attractive for lessors will be those EMS operators that fly relatively large helicopters on long-range missions such as hospital transfers, he said.
Leasing to EMS would translate into orders for smaller aircraft. “There is a market for lighter aircraft; [in fact] we have a letter of intent for Eurocopter EC145s,” Waypoint’s Washecka said. He noted, however, that his company’s portfolio of light singles and twins is unlikely to grow large. It’s just as much work to lease an AStar as a Super Puma, he explained, but the light single is 15 times cheaper, making it more difficult to justify the time.
On October 30, Kroll Bond Rating Agency assigned a rating of BBB, with a stable outlook, to Milestone. On the positive side, Kroll Bond mentioned the “significant advantage over newer entrants” the company has in terms of scale and senior management relationships with helicopter operators and manufacturers. However, while helicopters are an asset class with strong residual value, Milestone has a “somewhat high level of asset encumbrance,” in Kroll Bond’s view. The rating also reflects the “limited income and cash flow associated with Milestone’s short operating history.”
Early in January, Milestone announced that it had completed the private placement of US$ 575 million of senior secured notes, which Kroll Bond rated “BBB+.”
The commercial helicopter leasing industry is still in its infancy, the agency said, but this doesn’t seem to have dissuaded Milestone’s institutional backers. To date, Milestone has attracted the financial support of global banking heavy-hitters such as Lloyds, Barclays and Lombard, the asset finance division of the Royal Bank of Scotland; and the U.S. Export-Import bank is backing the sale of $187 million worth of Sikorsky S-92s to the lessor.
Expanding leasing downstream to light helicopters may in time drive sales to smaller operators, if they can meet lessor covenants, maintenance and other asset protection requirements. However, the parapublic markets might be more ripe for the taking, at least indirectly, as governments outsource traditional helicopter missions to private contractors such as Bristow, which recently landed a SAR contract in the UK, and the growing list of U.S. civil operators serving the U.S. Department of Defense.