LCI sees demand increase, but faces a shortage of cells
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After the pandemic, the helicopter market is recovering much faster than anyone could have predicted. Operator demand for cells exceeds availability, particularly in the rental market.
According to Lease Corporation International (LCI), which has models from Airbus, Bell, Leonardo and Sikorsky on its books, there are signs that this situation will persist.
“We are seeing real firmness in the market,” said Jaspal Jandu, CEO of the company. “The industry was hit by three issues from 2014/5, including an oil price shock, a tragic incident off the coast of Norway and then a series of financial failures. These were complex issues that required time and effort to resolve.
“The Covid pandemic then took hold in early 2020; although it can be said that the industry has learned a lot in the previous years. We now find ourselves in 2022 facing a unique confluence of supply, demand and sentiment factors pushing a tighter market in all directions. Interestingly, this is evident both in the organic growth of the new helicopter market, as well as on the replacement side, where a delayed cycle is quickly resolved.
It is estimated that 50% of the world’s current commercial helicopter fleets are over 20 years old. Their replacement, which should have taken place between 2015 and 2020, did not take place for several reasons.
“During a downturn, asset-intensive sectors such as helicopters, fixed-wing aircraft, shipping and rail tend to delay new purchasing decisions, favoring longer usage and of existing equipment. OEMs are also reducing supply as supply adapts to demand. However, at some point, these changes are significant and must be taken into account,” Jandu explained. .
“For example, there is a renewed philosophy around safety and technology, so when an end user asks for the inclusion of, for example, TCAS [traffic collision avoidance system] II or HEEL [helicopter emergency egress lighting] systems, we are collectively required to provide this, and we find that older models do not have these capabilities.
Apart from technological issues, the Russian invasion of Ukraine will continue to impact the global helicopter market, he noted. All operators using Russian equipment felt an immediate impact, such as those involved in supporting United Nations operations, firefighting and logistics – all of which slowed down or ceased altogether. There is now a need for Western types to fill these operations.
Added to this is the looming crisis in the oil and gas market as Russia cuts supplies to many countries, with international and domestic energy companies having to make up the shortfall. Across the Americas, Europe, Africa and Australasia, national energy security and supply is going to be of critical importance in the future.
All of these factors mean that we are moving up the “demand curve”, Jandu said, and operators are now looking for new and used helicopters in large numbers.
“While the demand side becomes clearer, the supply side is more complex as it involves the stocked and leased fleet. Additionally, OEM production slowed during the pandemic and was relatively inelastic during the recovery. Added to all of this are real supply chain issues around the world,” he explained.
“We must also remember that there is a great military dynamic in the helicopter market, which is not so apparent in, for example, the commercial market for fixed-wing aircraft. Many countries have dramatically increased their defense spending due to the war in Ukraine. For an OEM, there are concrete decisions to be made regarding the allocation of manpower, resources and production lines. »
Despite the complicated external factors, the helicopter market, from the lessor’s point of view, is stable.
For LCI, a significant increase in requests for information has also been accompanied by an extension of delays. Operators looking to secure their operations in 2024-25 and beyond are now turning to lessors such as LCI to arrange capacity. In many cases this has led to multiple operators bidding for the same unit.
“We are seeing rental rates increasing and pricing firming up, and it’s hard to see how some of the aforementioned factors are resolving anytime soon,” Jandu noted.
The positive outlook for helicopter leasing in the coming years is not limited geographically, according to Nigel Leishman, Executive Vice President and Global Head of Marketing: “The situation is certainly not limited to certain countries or regional markets; there is potential all over the world.
“If we look back to 2019, the market was already recovering from the 2014 oil price drop and the offshore market crash. As we entered 2020 and Covid hit, there was uncertainty across the world in all markets, but it quickly became clear that helicopters were mission critical,” he said. .
As operators adapted their cockpits and cabins, many were able to resume their day-to-day activities in the offshore market, while emergency medical services (EMS), unsurprisingly, saw increased activity. The recovery of offshore operators has been rapid – in many cases operations were back to normal levels by 2021. Now, 12 months later, operational rates are higher than in 2019.
Nonetheless, the past year has been difficult for operators, Leishman explained. “They’re on a mission to deliver capability to the end user, whether it’s oil and gas or government. During Covid we saw a situation where we thought a lot of contracts were coming and then they were postponed for obvious reasons. There were a number of extensions to our leases that we thought we had re-leased with new contracts and operators. That wasn’t a bad thing during Covid, but it has led to this current surge in demand as confidence returns, and tenders have gone out that should have been lifted two years ago. There are a lot of them hitting the market at the same time.
This demand has resulted in a shortage of high-quality helicopters that meet operators’ requirements. The impact of the geopolitical situation, as nations worry about securing and growing their energy supply, has increased the demand in the helicopter rental market.
“It’s an uncomfortable situation for me regarding my customer relationship. I say we can have a helicopter available, the current operator then wants to keep it, but the new client is happy to pay a premium as they need the helicopter ASAP so they can bid on other contracts” , Leishman said.
“This is happening all over the world, with strong demand in Europe and Latin America, and particularly in Brazil with its booming offshore market. There are a host of countries developing their energy markets that will need helicopter support. Nations want to increase their domestic supply.
For the EMS market, some of the demand is created simply by the need to replace older twin-engine types likely carried over from the pre-Covid era. In the United States, single-engine EMS types are being replaced by newer technology on next-generation models.
“My team is very, very busy right now,” Leishman observed.
Airbus has released its 20-year forecast which predicts demand for around 16,500 helicopters through 2041. To reiterate the point on replacement cycles, Jandu points out that the ratio of replacement deliveries to growth has reverse.
“In the early 2000s it was 60% growth and 40% replacement, and now it’s the reverse with 66% replacement and 33% growth. It’s even more skewed if you look at the types larger helicopters,” he said.
“It is clear that if you suspend a replacement cycle for five years, then you will have to catch up at some point. OEMs bring new technologies to market and end users place similar demands on the helicopters they will use. These have become the table stakes and end users are telling operators not to bid unless certain minimum criteria are met. »
Such requirements have set an industry-wide benchmark that some operators are unable to meet. Helicopters have extremely long and useful economic lives with around 50% of 37-year-old aircraft still in service, for example.
In industry, this is known as the survival curve and many of these older types take on secondary roles, such as utilities and firefighting. LCI is seeing an increase in demand for replacement newer and newer machines in the market.
“This has created a push-pull situation where an operator may have older helicopters which may well be ideal for a second life in the utility market, but they also need new types for new contracts. This presents us [LCI] with a challenge,” Jandu said.
“As a lessor, you therefore need to have different channels to acquire, finance and supply a diverse set of helicopters to operators. If we only go to OEMs, for example, we have to work around slot availability and production.We also need to consider the PBH [power by hour] spare parts arrangements and support, which are not as cheap as two or three years ago.
“At the macro level, we are also all facing rising inflation and rising interest rates. As a lessor, we are working very, very hard to address the financial and capacity issues for operators and end users – it is our very job to facilitate these exchanges.
The replacement cycle bow wave rippling through the helicopter industry shows no signs of an imminent end and that means lessors must continue to perform a very smart juggling act.