From the Analysis Desk: Vertical Flight Expo Highlights Rise and Fall of Global Helicopter Market Trends

 In White Papers

Unlike HAI HELI-EXPO and other busy Helitech shows, the Vertical Flight Expo this year was very quiet.

It was symptomatic of an era dominated by the oil and gas market crash, Brexit uncertainty and shifting interests towards drones. The waning conference energy raised questions about the viability of some civil helicopter markets.

But conference panelists reminded attendees that the civil helicopter market has traditionally been a very conservative, turbulent and well-diversified market.

The oil and gas helicopter market has gone down, much like the business aviation sector in 2008 due to the financial crisis, while the Emergency and Medical Services (EMS) market nourishes constant interest and has grown steadily with little disruption over the last 10 years.

However, those very same parameters were also used to advocate for more leasing deals across the oil and gas market 10 years ago, so, what went wrong in the oil and gas market?

Vertical Flight Expo: The Slick and Sticky Fall

Many Vertical Flight Expo attendees came from the oil and gas helicopter market and leasing industry, and they could not help but wonder if they were bearing witness to the end of the oil and gas market.

Leading helicopter OEMs and systems suppliers almost unanimously agreed that the market for oil and gas helicopters has not recovered from the 2014 oil crash. Five years later, market recovery remains slow, with few signs that it will return to the same levels recorded in 2010-2014.

Given that oil and gas helicopters account for almost 30 percent of the value of the total civil rotorcraft market, according to one panelist, the crash understandably had significant repercussions on helicopter operations and future orders, but other factors contributed to the fall of the helicopter market as well:

  1. Delayed pay day: There is no secret that oil companies are slow and sometime short payers; helicopters are at the end of the food chain of oil activities. Rotorcraft are an essential link, but not the most essential one for oil firms.
  2. Too many operators: Across each big oil hub (e.g., North Sea, Gulf of Mexico) there were traditionally two main operators and a smaller third one to swing market prices. Today, we observe five to six operators per hub, and this intense competition keeps the operating prices reasonably low. Consolidation among helicopter operators would increase their bargaining power, but somehow that has been rarer than expected—and filing for bankruptcy has been more common than anticipated.
  3. Accidents: The deadly crash of the H225 in the North Sea in April 2016 cast another shadow on helicopter safety. Operators experienced substantial financial losses as some countries grounded rotorcraft for several months for safety inspections.
  4. Oil price volatility: The oil and gas market is reacting almost instantaneously to any event occurring in the Middle East. Damage to an Aramco oil plant Saudi Arabia last September immediately triggered an oil spike to $68.42 per barrel (against an annual average of $56.30). High volatility is not a good friend of medium-term investments, such as offshore helicopter leases.
  5. Working shifts: Shifts on the offshore platforms have progressively changed from two to three weeks at a time, implying a different operational pace, slowing down helicopter activities.
  6. Finance delays: Due to all of the above, obtaining financing plans for new rotorcraft has become more difficult than before.

New Hope Through Diversification

Vertical Flight Expo attendees also wondered about the status of medium and heavy helicopter backlogs. The market is still over capacity with more than 150 units in the backlog waiting for customers and nearly $1.37 billion waiting to be paid.

In this regard, companies are turning to cabin reconfiguration and operations diversification. Business aviation and search and rescue (SAR) activities have been given top priority to convert oil and gas helicopters, even though the cabin configuration requirements are costly and pose challenges.

Opportunities among the armed forces are another place to consider as western ministries of defense are looking at relieving some budget pressures and patching urgent operational requirements. In 2010, US Armed Forces awarded more than $650 million to Columbia Helicopters, Evergreen, Vertical de Aviacion, Aviation Worldwide Services, AAR Airlift Group and Canadian Helicopters to provide cargo missions in Afghanistan.

This burgeoning trend not only revealed high military budget sensitivity (US sequestration started in 2012) but also highlighted the military’s demand for heavy lift capabilities. With the US Armed Forces contracting with Air Center Helicopters to fly H225 Pumas for cargo and SAR missions for the US Navy, and the French Armed Forces ready to operate Puma on lease to bridge capability gaps in 2019, a second life seems feasible for oil and gas helicopters.

Leasing, formerly a dirty word in the helicopter world, has become common across certain segments, thought quite restricted in the military. Helicopter lessors at the conference observe a penetration rate of almost 30 percent over the last 10 years, well behind fixed wing aircraft, business jets, which have had penetration rates higher than 50 percent for decades.

Leasing offers medium-term solutions to buy and operate costly heavy helicopters and to patch up specific ad-hoc requirements for the military, like cargo missions. However, it is uncertain that militarized civil platforms will be able to return to civil opportunities after operating in severe conditions with heavy wear and tear.

In comparison, conversion to the SAR market seems to offer more valuable options in terms of asset value and second-hand procurements. Opportunities across the SAR and firefighting segments, where end-users are short on acquisition budgets but desperately require new rotorcraft, could provide a more tangible solution.

Yet, in addition to cabin reconfiguration issues, the appetite for medium and heavy rotorcraft is dynamic across the SAR segment, and the renewal volume is expected be the same as the current fleet size, or even smaller.

Likewise, firefighting is also gainingmore interest, as replacing venerable S-64, Bell 412 and S-76 fleets etc. (circa 100+ units) will become crucial. Yet, this is a niche segment that represents less than five percent of the overall civil helicopter market.

Could operators start to see relief for the oil and gas helicopter backlog? Those opportunities will coincide with the entry of the following new helicopter models to service: the Bell 525, the Airbus H160 and the Russian Ka-62 (for medium only).

While it will take time for them to obtain certification, the new helicopters are recording test flight hours and generating customer interest with their disruptive technologies such as fly-by-wire, connectivity, and Blue Edge rotor blades.

They also consume less fuel and offer significant advantages regarding maintenance and repair costs, making them attractive to future end-users. The Airbus H160 may even secure the military as an anchor customer given the interest from the big-ticket French Armed Forces HIL program.

Nevertheless, voices from the operational crowd at the conference raised safety and financial efficiency concerns. New helicopters promising higher efficiency rates sometimes achieve lower availability rates than aging platforms.

There might be no rush to switch to a brand-new digitalized helicopter when the tested and approved AW139 continues to rule the medium world in the civil market. Pumas are returning to the top of the list after some troubled years, and they paved the way for the S-92 model from Sikorsky (Lockheed Martin). These lower cost, tested and approved helicopters could challenge the price points of young, disruptive choppers.

A New Dawn is Rising

Looking ahead, the civil helicopter market outlook is clouded, with sluggish market growth and challenging future market opportunities. According to the panelists and current price valuations, EMS is fairly stable, with a predicted market growth around three percent, as is the business aviation market segment. Niche markets for vertical flight experiences such as extreme sports and leisure have a positive outlook, if small.

Interestingly, business aviation helicopters, urban aero mobility (UAM) and vertical take-off and landing requirements (VTOL) requirements generated a very strong interest from the crowd. While remote-controlled flying taxis maystill be far off, helicopters are headed in that direction: experienced helicopter operators are highly valuable to urban aero mobility (UAM) ventures (e.g., city flights, regulations, infrastructures, and manpower).

Flying taxis and remotely piloted aircraft naturally led attendees to discuss the future of drones: Would they become substitutes or complements to helicopters? If we think ahead to 2030 and later, the answer is both: drones for boring and dull missions, whereas smarter helicopters optionally unmanned, cleaner, and safer will keep humans flying and to respond to emergencies.

The market may decrease in units but increase in value, due to sophisticated and costly on-board systems. Climate change may push furtherrequirement and regulations on helicopter engines, potentially getting more electric engines. Hybrid VTOL taxis will be good testbeds for helicopters.

Some Vertical Flight Expo panelists envisioned another disruptive scenario: Present and future helicopters will be in service until at least 2050, perhaps 2060. Drones will get some market share—but not all.

Suppliers must anticipate changing business models: Though hardly conceivable 20 years ago, the end of proper ownership and the rise of leasing are well underway. And if the rules of ownership are changing, it means the OEMs need to consider how they will sell their future helicopters services. In a not-too-distant future, Helicopter as a Service could become a reality.

OEMs should be prepared for this new market approach. This time it could necessitate new strategies to address how to build helicopters that are sold only through services and remain profitable. Even in the most conservative markets, disruption has entered the helicopter’s ecosystem.

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