Well, sadly the ball has finally dropped on CHC and they have entered the world of Chapter 11 protection. Hopefully they will arise into a new and functional organization, I wish them well, and especially the employees who are caught in the middle. This is a tough time for everyone concerned, especially with the state of the overall business and the recent tragic loss in Norway.
Interestingly, all of a sudden here on this site, the leasing organizations have become the bad guys and caused all of this this to happen! As others have already pointed out, this simply isn't the case, and is at the very least disingenuous and at most assigning the blame for the acquisition, debt and resultant management of this company, onto a group of service providing businesses, and deflecting it from where some might believe it truly lies; right in the hands of the current ownership, and past management of CHC.
Just to be clear, I am not involved in the leasing business or CHC.
Leasing makes sense from many angles, and is, normally, actually a very good business to be in; and I would suggest that when business is good, is more profitable than running the helicopter operation side of the business, as it carries a guaranteed return, with calculable, or at least, manageable, risk.
Leasing allows a company to acquire and operate the core assets they require to run their business, without the necessity to raise and commit huge capital expenditures for the purchase, and allows a straight deduction of operating expense on a predictable hourly rate, especially if it is a new product run on an OEM Power by the Hour basis. It also keeps all those expenses and debt off the Balance Sheet, which is where one of the major issues with CHC has occurred, as the covenants and remedies for default can be greater than the resources of the company. Leasing assets, also throws the debt, amortization and depreciation into the hands of the lessor, as well as the ultimate disposal of the asset; which as any of you who have ever visited a major operators hangars, would have seen surplus aircraft that were difficult or impossible to sell. Plus these assets are almost always on the books at values far beyond their sale price and those accountants don't like taking the blame when they hear what the true market value is.
Leasing is a business, just like any other. In this instance it requires huge capital investment, forward ordering commitments to meet anticipated demand and a reliable payment from the customer so they can meet their own cash flow requirements and make their own payments. Although these companies may have some original capital investment and funding from private investors and equity funds, beyond that they borrow from banks just like every other business. A quick browse through the Internet will take you to all kinds of sources of information on the scope of borrowing and the lenders. So if you suddenly see a collapse, and worse still a prolonged adjustment of an entire business sector as we have here, the leasing organizations may be unable to service their own debt, unable to place or sell surplus aircraft in the market due to overcapacity and lack of demand, and there is potential for yet another bloodbath in an ancillary sector.
The phenomenal recent rise of the leasing business was fuelled by contemporary business management practices, but equally importantly, the availability of vast amounts of cheap money looking for a good, secure and predictable return, like maybe your own pension accounts?
No company was ever forced to enter into a lease agreement with anyone. They willingly entered into them, understood the limitations and remedies provided within the contracts and perhaps more importantly in recent times, utilized their own resources for the Sale and Leaseback of their own existing assets to provide cash and remove debt from the Balance Sheet. So now because they won't renegotiate the pricing, they have become root of all evil that has befallen CHC.
Chapter 11 contains some very specific remedies and provisions for the financiers and lessors of aircraft, again as many have noted the airline industry has been full of bankruptcies for decades! Some of the assumptions made here about how Chapter 11 specifically functions are generalized and are wholly incorrect. CHC and the lessors both know exactly how the process works. This explains the presence of one of the consultants specializing in aviation assets. Strategically, the lessor may be very unlikely to engage in any kind of negotiation if a Chapter 11 filing is the most likely outcome. They are better to let it go through the cycle and see what exactly the reorganization plan is and how best to ultimately package and protect all their assets with the debtor and gain the maximum return and protection. If you are pitting one lessor against another with the scale of fleet reduction being discussed, CHC may still be able to negotiate some significant benefit.
The one complete unknown at this time, is the future status of the 225, both in terms of airworthiness and customer acceptance. Any prolonged inability to get this helicopter back into service will have a major impact on the lessors and operators, as there are a multitude of spare aircraft that can step into the role. Already lessors had been placing 225's with other than the originally assigned operator, and a number of brand new aircraft were already in storage straight from the factory. An untimely or bad resolution to this issue may cause major issues in the leasing and operator sector, let alone for the manufacturer.
The helicopter market, demand for specific used helicopter models and pricing have always been cyclical. Many have seen models that were selling for a couple of hundred thousand dollars when the market was depressed selling for millions a year or two later and this will never change. The big issue is when new production aircraft cannot be placed into service, or aircraft in their first lease cycle get terminated. The conditions in the leasing contracts might potentially force other operators into Chapter 11, for no reason other than they can't generate revenue with the asset and the lease default covenants may make cash demands the company is unable to meet.
A recovery in the O&G field is critical for the offshore helicopter business to survive this downturn. In past times, helicopters exiting the offshore sector were always in demand for some utility or other application. Currently that market too is oversupplied and a lot of machines are re-entering the marketplace with nowhere to go, despite very attractive pricing for good equipment. As an example, when the 332 exited the market, they all came out of service, but you haven't seen too many enter into a secondary operational role.
There have always been helicopter leasing businesses around, but the current scale and trend is unprecedented. Many companies owned holding companies that leased their assets back to themselves, which made for good business. Operators leased helicopters to their operating partners or even their competitors if they failed to win a contract. It has always been there and is a good, profitable business to be in, and more importantly, means an asset is generating cash. For anyone with a good long memory, CHC actually formed a helicopter leasing company in Ireland, partnered with Guinness Peat Aviation, but it was a concept before its time, and too many of the potential customers were it's competitors.
There have been past failures in the aviation leasing business, the biggest that I personally was involved with was CIT. I did a lot of work with them repossessing assets and ultimately delivering them to new operators, but they themselves got caught out in a business deal that took them into Chapter 11.
I have been directly through two Chapter 11 bankruptcies. Both companies were successfully recovered, but both were very different organizations at the completion of the process. One company emerged and was purchased by a smaller company that grew the combined group into a major player. The other refocused its business and continues to this day as a small business. I've also worked and been involved in the purchase and reorganization of various other companies in various stages of distress or bankruptcy and it all comes down to strategy and planning.
I hope it all works out well for everyone concerned. There are a lot of downstream suppliers and vendors that may be very seriously impacted by this, and I wish them all the very best of luck getting through it as rapidly and beneficially as possible.