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May
04
2015
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Posted 9 years 206 days ago ago by Admin
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Leasing — it’s not just for automobiles anymore. As proven by the growth of the helicopter leasing industry, rotorcraft operators are increasingly obtaining leases to boost their capabilities, without adding millions in debt to their balance sheets.
Helicopter leasing company Milestone Aviation Group was founded just five years ago in 2010, but now owns 168 helicopters valued at over $2.8 billion and has leases signed with 26 operators in more than 20 countries. Milestone also has $3 billion of new aircraft on order, including AgustaWestland AW139s, AW169s, and AW189s, Airbus EC175s and EC225s, and Sikorsky S-76Ds and S-92s. In the fall of 2014, the company was acquired by GE Capital Aviation Services for $1.78 billion.
After two years in business, Waypoint Leasing now has more than 85 helicopters in its $1.1 billion fleet, including aircraft from AgustaWestland, Airbus Helicopters, Bell Helicopter, and Sikorsky Aircraft Corporation. The young company also has firm and option orders for 80-plus more helicopters to be delivered over the next five years.
Lease Corporation International (LCI) has roots in fixed-wing aircraft leasing, with customers such as Air France, British Airways, Iberia, Shanghai Airlines, Singapore Airlines, and Virgin Atlantic. Having witnessed the rapid growth of helicopter leasing, LCI has taken the plunge into this market by making substantial purchases from helicopter OEMs. From AgustaWestland, LCI has ordered 24 AW139s, 12 AW169s, and 16 AW189s. From Airbus Helicopters, the company has ordered six EC175s, up to four EC225s, and 15 EC225es.
“There are a lot of new players coming into the helicopter market, and like the existing ones, they are all strongly financed,” said Brian Foley, aviation analyst and president of Brian Foley Associates. “These companies see that there is a real opportunity for leasing helicopters globally and they’re seizing it.”
Why Lease?
For the average helicopter operator, leasing offers many advantages over buying. The first big advantage of an operating lease is capital cost. Rather than take out a bank loan and pay millions of dollars upfront, an operator gets to pay for their leased helicopter just like they do for their telephone and internet access.
The benefit isn’t just a matter of cash flow. “When you finance a helicopter purchase, it cuts into your overall available credit at the bank,” said Foley. (Note: A financial lease is like a loan, because it shows on the balance sheet.) “In contrast, an operating lease payment is just a monthly expense; it leaves your balance sheet alone, which means it does not cut into your ability to borrow.”
Thus, the leasing company (the “lessor”) finances a leased helicopter, similar to how a landlord finances a rental apartment. This means that the lessor also takes the risk of carrying the multi-million dollar cost of the aircraft, which reduces the financial exposure of the lessee.
Not having to pay outright for helicopters has been a big boon for the oil and gas industry … and for the sector’s helicopter providers who are widely acknowledged as the driving force behind helicopter leasing growth. Their preference for operational leasing makes sense, as oil and gas helicopters are typically expensive medium/heavy twins at the high end of the price scale. The growth of the oil and gas sector, and its demand for worldwide service, is a time-sensitive opportunity. In many instances, it is smarter for a helicopter operator to lease a third party’s available helicopters today rather than order and wait for new ones of their own. Waiting could leave their customers’ unsatisfied demands to the competition.
While helicopter leasing started in the oil and gas industry, newcomers are now tackling other industries. Fabrice Arfi, vice president for business development and sales coordination at Airbus Helicopters, is observing this trend. “Some of the early players are leaving the oil and gas industry with a particular interest in non-military governmental markets, such as training, and search and rescue.” He adds that police and EMS services are also becoming more interested in helicopter leasing because it represents a way to outsource helicopter purchasing to the private sector in an affordable and predictable manner.
Challenges for Lessors, Lessees, and OEMs
The move to helicopter leasing is definitely helping to increase helicopter sales and helicopter usage around the globe, just as fixed-wing aircraft leasing has allowed many smaller airlines to get off the ground by slashing capital costs. Still, leasing is not a magic bullet: it poses challenges for everyone involved in the process.
For lessors, the companies who buy their helicopters directly from OEMs and then lease them to operators, there is big money at risk. It is more than the huge per-helicopter cost. They also have to choose the right makes and models from a wide product selection.
“When you are leasing fixed-wing jetliners to commercial carriers, the choice is quite limited. I mean, do you want an A320 or a B737?” asks Richard Aboulafia, vice president of analysis with the Teal Group Corporation, an aerospace and defense industry consultancy. “When it comes to helicopters, choosing the right model, or models, is absolutely vital for the leasing company’s profitability. They don’t want to end up with helicopters that are people’s second or third choice,” he explained.
Helicopter lessors also operate in a much riskier environment than those who lease fixed-wing aircraft to the airlines. “If you look back over the years to the end of World War II, the airline industry has enjoyed pretty steady and consistent growth of 4-5 percent annually,” said Aboulafia. “By contrast, the helicopter industry’s growth has been much more unpredictable and unreliable. This makes successful, accurate planning for long-term revenues and acquisitions much harder to achieve.”
Not all helicopter lessors are big corporations. There are also smaller family-run companies, such as Spitzer Helicopter Leasing of Hayward, California. At present, they are leasing 72 Robinson R-22s and R-44s to flying schools across the United States.
“Our business is focused on the national training market,” said Rosemary Rodd Spitzer, who has been running the company since her husband and company founder, Matt Spitzer, passed away in 2013. “The challenge in leasing helicopters is to identify lease candidates who are good business people, who have the resources to recruit adequate numbers of students, who maintain the ships properly, and who pay their bill.”
Furthermore, she explains their leasing standards are high. “We have fairly stiff standards to be approved for a lease. Since we are not charging a monthly dollar minimum, but are only getting paid for hours flown, we are taking more of a risk on each lease than other companies, which require a monthly fee whether the ship is flown or not. That means we are more selective in who we lease to.”
The challenges for helicopter lessees is that the aircraft is not a tangible asset that they can use as collateral, as the aircraft does not belong to them. In addition, not every make and model of helicopter is available for leasing. Lessees have to go with whatever affordable aircraft the lessor is offering.
The trend towards leasing also puts pressure on OEMs, like Airbus Helicopters. “When we sell helicopters, we usually know the end customer and the exact mission that our products will serve,” said Arfi. “Selling to leasing companies, or leasing directly to operators, implies that we have to anticipate the various possibilities of utilization. For us OEMs, this means that we have to offer more and more standard products, with easy add-ons to be able to cope quickly with configuration changes.” The good news for OEMs is that some features seem to be universally popular. According to Arfi, these features include a comfortable cabin size, large windows, low vibration and sound levels, and greater performance and payload capability.
A second risk for OEMs is that leasing companies may artificially boost sales by over-ordering aircraft, and then slash future orders if their usage projections are too high. In the past this was not an issue, since leasing companies essentially had specific customers lined up for the helicopters they purchased. However, Arfi explains that the combination of long manufacturing lead times and competition among lessors is now motivating lessors to buy on speculation, with no end-user yet signed. This means that lessors could end up with aircraft they cannot lease immediately upon delivery, costing them money and discouraging them from buying new helicopters.
Speculative buying by lessors followed by depressed future demand can cause a ‘boom-bust’ cycle that is very hard for OEMs to manage. “OEMs will have to mitigate this risk by coming up with rules to manage the relationship with lessors,” said Arfi. “The key in the future will be the ability of the OEM and lessor to work together.”
Even with the challenges associated with helicopter leasing, there is no doubt that leasing is gaining ground in the global rotorcraft market. The trend is growing and the fundamental reason is simple: with operating leases, operators can get helicopters quickly without making huge capital outlays. With purchasing, they cannot.
