State of the Industry
In the course of my work and researching a multitude of detail across the entire industry, it is becoming increasingly apparent that various and disparate sectors of the helicopter industry are entering an adjustment phase quite unlike anything that has ever been experienced before. There have been plenty of them in the past, and many of us have been caught in the cycle, either at a global or regional level and they are very painful and often humbling experiences.
My immediate focus was the large players in the Oil and Gas business, principally because of the scale of their business and revenues, the size of their fleets and workforce, but also their global reach. They are also a major driver in the Manufacturing, Leasing, MRO and technology development arenas as well, specifically as they completed a total fleet upgrade cycle during the past decade, which resulted in massive investment in very diverse large young fleets, that have now suddenly found themselves with precipitously declining demand. With the continued low price of oil, in my opinion, there is a genuine risk to all businesses in this sector, due to falling demand for helicopters, the massive debt carried by all the players, the size of their businesses and the real likelihood that any real recovery will lag the oil price so far, that potentially within the next two years the landscape may be quite unrecognizable.
Focussing on O&G, the current lack of Capital investment in the exploration and subsequent production phases, other than projects already funded and in most cases being delivered in 2016/17, predicts there is going to be a void in new business for some time. As the necessary Capital commitments will only be made once there is a sustainable recovery of the Oil and Gas price, this could be potentially end up being measured in years as opposed to months, depending on the duration of depressed pricing. There is no shortage of oil in current global production, despite what people have been predicting for years, and the current price and oversupply demonstrate this quite clearly. The global helicopter demand in the existing current O&G production business is very predictable, although perhaps more inclined toward further reduction driven by further efficiencies and cost savings. Therefore the number of operational helicopters could fall across the board, impacting every company out there. Contracts may change between operators, but essentially the fleet size and demand will remain constant, or slowly decline.
So what is going to happen? I don't know and these are only my opinions, so I am very interested in counter arguments and the opinion of others. If the decline continues, there will be a pretty constant number of helicopters in operation, with no new business opportunities, a large number of helicopters are going to end up parked and generate no revenue, no payments to banks or lessors, and no employment for their staff. Assuming that this will ultimately affect each operator equally (more or less), what is the market going to look like and what are these individual businesses going to look like?
There are a couple of lessons to be learned from the recent CHC Chapter 11 filing, although the root causes for this specific business were set back almost to the time of the acquisition. Some very important caveats became apparent, because the debt/lease load could not be sustained by a long term downturn in their Customers business. These business predictions and assumptions based upon a historic cyclical oil business, and a relatively reasonable assumption of market oil prices, immediately jeopardize the financial health of the business, should the bottom drop out of it, and prices start falling and maintaining low levels based on global economics. As we saw with CHC, shrinking demand left significant excess non-revenue generating capacity. More alarmingly, was the threat to their continued existence once the normally highly confidential terms of their leasing and banking covenants were revealed, the leases they were carrying left them with no option other than file for Chapter 11 protection and immediately terminate a large number of leases. Their current restructuring plan, sees a further removal of all leased helicopters in their fleet in the very near future.
This could potentially happen to most other operators out there, as the industry comes into focus and investors pull out of their stock positions driving the stock price down. This limits the ability to borrow, but a Chapter 11 filing by arguably the largest operator in the world at the time, will spook the lenders; who are going to become risk averse in the sector, affecting every type of affected business, the appetite for continued current and future investment and ready access to cash.
Are other operators going to end up forced into the same position as CHC, simply by the volume of expensive and parked non-revenue generating assets?
Will the overall reduction in demand be shared amongst all the operators in the O&G sector?
Will the declining value of collateralized assets owned by operators affect their continued access to credit for normal business operations?
Will matching expenses to revenue result in continued significant terminations of leased assets and employees?
Will there be a shared downsizing of all the major players in the same manner as CHC, to scale each business to the current and anticipated future demand?
Will helicopter lessors be able to sustain and survive not only the impact of CHC's actions, but potentially other operators in the same situation?
Will the resultant price reduction/valuation from large numbers of surplus helicopters effectively negate any equity in the asset?
Will the large number of aircraft in the secondary resale market curtail the new helicopter manufacturing sector and any new models in development and pre-production?
With the significant reduction of operating hours, what effect will this have on the entire MRO and support business, both OEM and independent?
Have OEM's applied limitations to manufacturing and inventory orders that will impact supportability in the short to medium term.
I don't want to focus on the EC225, but it is such a significant unknown at this time and is a the largest single variable in this market - there are other threads discussing this at length. What happens if it's marketability and market share fall significantly due to customer determination?
I am a very optimistic person, but also a realist. This is not intended to be alarmist or negative, but I am genuinely interested in the thoughts and opinions of others in the business. These are only opinions, and I have no belief that my opinions or assumptions are either correct or the only ones out there. I'm quite open to being shot down on any opinion I share.
I do know however, that a there are a significant number of intelligent and informed individuals on PPRuNe that have insight and very valid opinions on the current and future state of the business.
It is my intent to post various contemporary reviews and analysis on this thread regarding the various companies, and would encourage anyone else so inclined to please do the same.
There's a lot in play right now. I would much rather see a rapid oil price and business recovery and consequent return to normality.