HI Uplift: ‘More consolidation for operators on the way’

HI Uplift: ‘More consolidation for operators on the way’

Published by Mike Stones in Helicopter Investor’s Specialist Insight newsletter on November 17, 2022.

The helicopter industry faces more operator consolidation, as it continues to slowly emerge from “nuclear winter” and “rotational pain,” according to speakers at Helicopter Investor’s forum Financial Options for Operators, staged at last week’s European Rotors event in Cologne, Germany.

Oliver Althoff, MD, Seabury Securities told the audience: “We are seeing green shoots in certain areas but there are also rough patches in others.” Mission critical helicopter flights – such as Helicopter Emergency Medical Services (HEMS) – are proving relatively recession proof and uncorrelated to the economic cycle. The utility sector and fire-fighting demand were doing quite well – with firefighting showing about 8% growth (unrelated to the economy) over the past 15 to 20 years. “But everyone at the moment is feeling cost pressure from an inflationary perspective,” he added.

Other sectors, such as offshore oil and gas, while showing some signs of recovery were still enduring “a lot of rotational pain”. Althoff added: “Margins and contract rates from the offshore integrated oil companies are improving, but they are still not where they need to be for operators.” Contract rates from the offshore integrated oil companies were still not sufficient to generate sustainable margins or to secure the entry of new assets into the market. The cancellation of contracts for convenience also continued to blight the sector.

Clark McGinn, principal of the helicopter consultancy Uplifting Advice, described the operator sector as “emerging from nuclear winter”. Acknowledging signs of recovery, McGinn said such signs had been seen before without maturing into full industry recovery. “The problem has been the disparity between the number of operator competitors and the much larger mission owners – whether that’s the hospitals or the oil majors,” he said.

Drawing the problem of meagre offshore oil and gas margins for operators into perspective, he noted: “The board of [oil giant] Chevron earns more in their present pay than the helicopter industry makes in a year.”

Searching for positives, McGinn said OEMs’ decision to slow production and to avoid the production of speculative aircraft had brought stability to some helicopter types.

OEMs were experiencing “brisk” demand for military helicopters, said Althoff. For civil helicopters, manufacturers were running at perhaps 60% of capacity.

Supporting encouraging prospects for OEMs, Patrick Moulay, senior vice president International Sales, Bell told Helicopter Investor at European Rotors (pictured top) this year would prove the company’s best for “a very, very, very long time”.

But both Althoff and McGinn predicted thin operator margins and uncertainty would lead to growing concentration. “Are we about to see a rising tide of concentration – yes,” said Althoff. “M&A [mergers and acquisitions] are absolutely going to be active and we are participating in a good number of those transactions as banking advisers either on the sell side or buy side.”

This partly reflects a period of readjustment, according to Althoff. “We are seeing that folks who purchased operators at a high price in 2012/13/14 and were not willing to take the losses earlier in selling their business, have now made peace with not seeing a full recovery of their investments from that time period,” he said. “If you are in the oil and gas sector, you are seeing a brighter future now. They are willing to move – dare I say throw in the towel – and realise they overpaid originally, and transactions are now occurring.

In other sectors too, infrastructure funds, for search and rescue and firefighting, not just in Europe but North America are on the move, added Althoff. Some operators simply don’t want to invest anymore. “So, we are seeing the opportunity for management buyouts or to bring in new investors – either as growth capital or as the new owner who is willing to invest in the business.”

McGinn, at Uplifting Advice, also thought more industry consolidation was inevitable. “The way an industry that isn’t earning enough gets out of that problem is by consolidation.” In the oil and gas sector, he questioned the UK Competition and Market Authority’s decision to force CHC to sell the Babcock business. “There’s more competitors in the UK [oil and gas] market that we have seen since 1972,” he said. “But the market is not earning 1972’s money.”

An oil price lift of about $15 a barrel was probably directly attributable to the war in Ukraine, said Althoff. A price of about $50 to $55 was the breakeven point, with production at prices of around the mid $60 mark marginal but prices in the mid $70s generating good profits.

Helicopter Investor’s forum on Financial Options for Operators took place at European Rotors, Cologne, Germany on Wednesday, November 9th. Watch out for more reports from our forums on How Helicopter Leases Can Give Operators Flexibility and Trading Helicopters later on.