PARIS: Helicopter leasing goes global

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Walk down the assembly line for Eurocopter's Super Puma range at its Marignane plant and in front of each part-assembled aircraft there is a small board detailing the configuration and customer for the helicopter. It is a global product - customers range from Chinese search and rescue operators to the Brazilian government.

What's striking, however, is how many of the helicopters on the line are being built in the offshore transport configuration with the customer only detailed as "Ireland". That's slightly misleading, in fact, as most of Europe's offshore transport industry is clustered around the North Sea in the east of Scotland, Norway and Denmark, rather than Eire.

What the country does have, though, is the European base of USA-headquartered Milestone Aviation, the largest operating lessor operating in the helicopter industry.

Although helicopter leasing is not in itself new, what has changed is the global reach and scale of the players involved. This shift has mirrored the growth of a highly globalised oil and gas industry and, by extension, the companies that provide the rotary lift out to the rigs.

For instance, two of the big players in Scotland - Bristow Helicopters and CHC Scotia - are part of much larger groups, headquartered in North America but with a worldwide presence. And the third of that particularly trinity, Bond Offshore Helicopters, has a similar global profile through its sister companies under UK parent Avincis.

Richard Santulli, chairman of Milestone, is no stranger to the previous incarnation of the leasing market. In the early 1980s, he ran RTS Helicopters, providing assets to operators in the Gulf of Mexico. Back then, he notes, as well as being much more parochial, there was another important difference with the leasing industry - the size of the aircraft supplied.

As easy-to-access oil reserves have dwindled and rising global prices have made previously marginal deposits worth exploiting, the rigs have been moving further and further offshore.

This, therefore, requires larger and more powerful helicopters to cope with the distances and conditions involved. So whereas back in the 1980s, the aircraft he supplied were typically Bell Helicopter 206s and Eurocopter A Stars and Twin Stars, nowadays the offshore benchmarks are the Sikorsky S-92, Eurocopter EC225 and, to a lesser degree, AgustaWestland's AW139. That, says Santulli, marks a significant increase in the cost of the asset - a pair of S-92s will set you back upwards of $50 million to buy outright - a sizeable chunk of change for an operator to find.

"Many of my customers as they are today don't have the balance sheet necessary to acquire new equipment," he says. "Local banks will finance your growth right up to the point where you go in and tell them you want to buy four S-92s for $30m each," he says.

Santulli came to Milestone having previously created and run fractional business aircraft operator NetJets, but even during his tenure there he "always followed the helicopter space". Several of the management team at NetJets followed him when he left and they spent six months researching the market prior to launching Milestone in August 2010.

 avincis

 Avincis

It was quite clear that there was not really a global lessor. There were some locally but not one that would do business in all these countries," he says.When Milestone initially approached the market, however, there was not necessarily universal acceptance of the leasing model, with operators indicating that they preferred for assets to remain on their balance sheets.

"I don't blame them," says Santulli, but he outlines a scenario highlighting the potential appeal of leasing. If you are an operator with a 100-strong fleet, he says, "you are lucky if all 100 are working on oil and gas contracts". But with these commitments tending to run for a five-year period, each year, 20% of the fleet is coming off a contract and "in order to maintain that [turnover] the following year you have to put those 20% back to work".

But, if the desire is to grow the business and not simply stand still, there comes a requirement for more aircraft and the choice then is to either borrow to fund the expansion or opt for the leasing route. "You can either change the shape of your balance sheet or take advantage of an operating lease. More and more are choosing to lease," says Santulli.

His analysis of the market suggests demand for heavy helicopters "far exceeds supply" as the rigs move further offshore. The focus of oil companies on safety is another contributory factor to burgeoning demand, he adds. "More and more, the oil companies are choosing not to use 25-year-old equipment for these longer-range requirements," he says. In the event of an accident "one of the first things the [oil company CEO] asks is 'how old was the asset?'"

The popularity of the leasing model can be illustrated by Milestone's growth. Since launching in 2010, it has accumulated $1.3 billion in assets under management, with over $2 billion in firm orders and options. In March, it added to its order book with commitments for 14 Eurocopter EC225s and five EC175s - worth around $1 billion at list prices - alongside 23 Sikorsky S-92s and seven S-76Ds.

The popularity of the leasing model has in part been helped by its acceptance by operators such as Bristow Group, says Santulli, who showed there was no stigma to taking assets off the balance sheet.

Meanwhile, Milestone is no longer alone. Although other smaller lessors are in the market - for instance US firm ERA Group - a new global rival has emerged. UK-based Lease Corporation International, a player in the commercial aircraft leasing space since 2004, launched a helicopter division in early 2012 with a $400 million order for an undisclosed number of AgustaWestland rotorcraft. The deal allows LCI to choose between three types - the AW139, AW169 and AW189 - which span the weight range from 4.5t to 8t and are pitched at the search and rescue, emergency medical services and offshore markets.

In all, the lessor has 40 aircraft delivered or on order, it says, with two AW139s recently handed over to Malaysia's Weststar Aviation Services. Executive chairman Crispin Maunder says, echoing Milestone's Santulli, that the initial response from operators was "mixed".

Some were keen, he says, some were unconvinced by the need to lease but willing to listen to LCI's pitch and others flatly declined. "But now, all three groups are coming to see the advantage of leasing," he says, as they seek flexibility to better manage capacity."It is a sign of increased maturity and companies looking more critically at their balance sheets," says Maunder. Helicopter operators, he notes, are beginning to look at the finance models adopted by commercial airlines where lessors represent upwards of 40% of the market.

This, notes Maunder, is partly driven by the arrival of former airline executives at helicopter operators. "Certainly, the larger operators are bringing in expertise from the fixed-wing and other related industries."There's a trend to look outside the very narrow confines of the helicopter operating industry now [for management capabilities]."

Interest in leasing product pre-dates this shift, he notes, but "at the same time people are looking to parallel industries for people who understand that part of the market."

With the 30 ordered aircraft on its books, it will place five aircraft this year, with the first, an AW139 for Bond (G-VINC), handed over in May, according to Flightglobal's Ascend Online database. Next year's deliveries - between five and 10, says Maunder - are also allocated and it is working on placing its inventory for 2015.Although it has only ordered from AgustaWestland so far, Maunder says it is talking to all the major airframers, as operators increasingly demand "new technology with enhanced safety standards. Their mantra is safety, safety, safety," he says.

Overall, he sees LCI's interest in the helicopter market growing over the next five years to match, in dollar terms, its portfolio in the fixed-wing segment of around $1 billion.

"It's a very specialist market; it's not the same as fixed-wing. You need to have that specialist knowledge. That's why we have an advisory board including some very experienced helicopter industry experts," he says."It's a very exciting time.

It's certainly more niche than the fixed-wing market. There, you are dealing with much higher volumes and a much more commoditised product. On the helicopter side it is a much smaller market with regard to the demand profile and the operating lease part of that is in its infancy."

Both Santulli and Maunder remain relatively sanguine about one another's presence. The competition, notes Milestone's chief, "keeps you on your toes". "No-one will own 100% of the business, but we have a pretty decent head start," he says.

However, he questions whether there's a need for more players. "There's room for 10 firms if we want to do $30 million each," he says. And two rivals, says Maunder, is "adequate for the time being".