The recent decline in oil prices has affected dozens of support industries that provide services used in producing oil and natural gas. For example, the need to transport helicopter crews to offshore rigs and platforms has been in decline as oil producers accelerate the decommissioning of mature offshore properties and curtail exploration. Nevertheless, it's important to retain a sense of perspective as long-term demand for helicopters continues to grow. Here's why…
Despite the curtailment of offshore oil and gas exploration, most offshore helicopter operators earn the majority of their revenues from the production phase, which has not experienced the same downsizing compared to the exploration phase. Helicopters for the oil and gas industry account for less than 10 percent of the overall commercial helicopter market, as measured by number of aircraft. As measured by cost of aircraft, the percentage is higher, because oil transport requires larger, more expensive helicopters to reach rigs and platforms that often are more than 100 miles offshore. Yet the downturn in energy-related transport is overshadowed by growth in other sectors.
Once limited primarily to military use, commercial helicopters today are used in a wide range of industries, including law enforcement, construction, firefighting, search and rescue, medical transport, tourism, agriculture and media. More industries continue to find uses for helicopters, creating a growing and diversifying commercial market.
Lower fuel prices may be subtracting from one segment of the market, but they are adding to others. The lower costs are helping to spur demand for aircraft in price-sensitive markets such as tourism, charters and corporate services as the fuel savings are passed on to customers. In addition, demand continues to rise in sectors such as emergency medical services, search and rescue, firefighting and construction.
The average age of commercial helicopters is approximately 20 years, with a significant number of helicopters older than 30 years, which means that many operators will need to replace their fleets with new helicopters over the next few years.
Changing Aircraft Needs
This follows a trend of the past decade in which niche markets have driven commercial helicopter growth. In particular, the expansion of EMS services and the offshore oil industry has increased demand for larger, twin-engine aircraft with greater range and safety features.
Most commercial helicopter technology is still derived from military designs, but during the past decade, commercial sales have become an increasingly important part of manufacturers' revenue as military spending has declined. With military budgets under pressure, manufacturers realize they can no longer expect to produce hundreds of aircraft for the armed services on an ongoing basis.
In the coming years, the industry is likely to evolve further. Other than improved avionics in the cockpit, helicopter technology has changed little over the past 30 years compared with advances in fixed-wing aircraft. But that's likely to change soon as manufacturers become more focused on commercial specifications.
Commercial users are focused on the need for greater range and speed, which is likely to drive demand for more twin-engine aircraft, lighter designs that incorporate more composite materials to reduce weight and save fuel, and advances in rotor technology that will enhance flight speed.
At least one major manufacturer is developing a commercial tilt-rotor, a concept similar to the U.S. military's V-22 Osprey, and others have considered it. Tilt-rotors offer the versatility of a helicopter's vertical takeoffs, landings and hovering capability, while delivering greater speed when the rotors are turned horizontally like a fixed-wing aircraft.
In addition to new designs, many of the commercial fleet, especially in EMS and search and rescue operations, is aging, which is driving sales for replacement aircraft.
The Allure of Leasing
The increase in commercial helicopter demand has also driven a rapid expansion in helicopter leasing.
During the past four years, a number of new lessors have entered the market, and CIT has provided financing options to help fuel their growth. Our decades of experience in aviation finance provides us with a different perspective on helicopter leasing. We examine the asset quality first, rather than simply considering a lessor's cash flows and debt service history. We study both the aircraft and the markets in which they will operate. This helps us ensure we're lending against quality assets that retain their value, and that they are operated in markets with plenty of activity to encourage reuse. As a result, we are often able to support lessors and other purchasers who are interested in financing the acquisition of a single aircraft or need credit lines to acquire a fleet.
This approach will be increasingly important as demand for bigger, faster and more fuel efficient helicopters continues to grow. Even in the oil industry, the slowdown may be temporary. Energy companies continue to drill deeper wells, moving ever farther from shore. As they find new discoveries, they're going to need a way to get crews to those rigs. In other words, now is the time to read beneath the headlines and start developing innovative financing solutions that tap into a rapidly emerging market for commercial helicopters.
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Large markets in Asia, such as China and Indonesia, were big contributors to business aircraft order books. However, with the recent economic slowdown in the Far East, it's likely that this rosy picture will not return for some time.