Screen Shot 2015-01-12 at 12.09.4529th December, 2014 – Several key players dominate the helicopter leasing market: Gecas/Milestone Leasing, Lobo Leasing, Waypoint Leasing, Lease Corporation  International, Macquarie Rotorcraft Leasing and  Era Helicopters. The challenges these leasing companies face share some similarities to their fixed-wing counterparts; however, the helicopter  market differs significantly from the fixed-wing  market.

Airlines have long been aware, and enjoyed the benefits, of operating leases, such as increased  fleet flexibility, which allows them to get rid of aged assets at the end of the lease term.  Helicopter operators, however, are less aware of the potential benefits of operating leases, according  to Lobo Leasing chief executive officer  Bill Wolf.

“Many operators have a strong preference to own aircraft – not just because of the operational  benefits of doing so – but also because they believe in the longer-term value proposition of the helicopter residual values,” he tells Airfinance Journal.

He adds: “Operators have made money over the years owning their own equipment and then selling it at an opportunistic time or refinancing it with traditional bank sources. This preference  is both a result of their previously only having traditional lending and/or finance leasing available to them as financing alternatives, and a result of operating lessors like ourselves not yet  promoting and educating the market on the full advantages and cost of capital benefits of leasing  relative to other alternatives and as component of a diversified fleet financing strategy for helicopter operators.”

The helicopter leasing market is significantly smaller than the fixed-wing market (see Helicopter financing, page 32). Another challenge facing the market is how quickly lessors can build scale  in comparison to the fixed-wing leasing business.

“While the larger and intermediate twin helicopters are reasonably large capital assets,  the amount of work required to document and close a single- or two-helicopter deal is the same as if you are doing a large fleet transaction,” says  James Clark, chief executive officer of Macquarie  Rotorcraft.

“Coming from the fixed-wing world, the work is the same but the dollars we put to work tend to be smaller,” he adds.

Despite this, the returns for helicopter investors can be worth it. In the words of Bill Wolf, helicopters are an “attractive risk adjusted returning asset class with potential for strong double-digit percentage returns on equity over time”.

But, he cautions, the devil is in the detail.

“The key to earning those types of returns depends on one knowing the asset class and the underlying markets extremely well,” he  says, adding: “Much of the strong interest in helicopter leasing as an investment opportunity has attracted some participants with relatively short-term investment horizons that may not appreciate the potential pitfalls of the helicopter leasing space.”

Although lease rates for helicopters are in general decline, there are things lessors can do to  continue reaping good returns.

“While you are definitely seeing declining lease rates, many of the specialty helicopter lessors utilize substantial leverage in their capital  structure to maintain strong returns to equity  holders, despite declining lease rates,” says Paul  White, senior vice president, commercial, Era Helicopters.

He adds that the recent “influx” of new  capital and entrants into the helicopter leasing  market means that Era no longer competes for  leases if they are purely related to a financial  lease and cost of capital.

White says: “Areas where we continue to add value to our customer base and see growth is not  for dry leases but for damp or wet leases.”

Bill Wolf, CEO, Lobo Leasing

AfJ: Are we seeing declining returns in the market  because of more competition?

Bill Wolf: In any sector which undergoes dramatic growth, like the helicopter operating leasing space is undergoing  right now, there is usually some compression of  returns while entrants come into the marketplace  seeking to have a position in the market. It is still very early days, and the initial and potentially  short-term exuberance for the space will evolve  as the competitive dynamics unfold and as the  business goes through cycles.

In a larger context, if all of the competitors  in the operating leasing space behave the  same way as the much larger and more evolved  fixed-wing aircraft leasing space, then returns for anyone who is competing based solely on price will experience lower returns over time.

But in the same way that players in the fixed-wing  space have used strategies to specialize and  or expand the competitive offering beyond simply  renting out their capital, Lobo intends to use  our inherent competitive differentiators to earn  strong returns as the helicopter leasing space  matures and goes through economic cycles.

The race by some players to build scale at  almost any cost suggests an undisciplined and frankly short-term orientation to their strategy.  Those players may be attempting to build up the  business quickly and hope for a liquidity event  such as an IPO [initial public offering] or sale of  their business to make their returns work.

James Clark, CEO, Macquarie Rotorcraft

AfJ: What prospects for growth are there,  both for your company  and in the market as a  whole?

James Clark: On a macro-level, the new  delivery market is circa $5 billion per year.  Notwithstanding the current uncertainty in  oil pricing, the long-term prospects for oil  and gas operations remain quite bullish, and  the need for the helicopters that are required for  this market as well as for SAR

  applications is there.

So, we are well positioned now in our  second year to continue capturing a good share of the opportunities for new deliveries  as well as for sale/leasebacks, as operators  are adopting operating leasing as a strategic  financing option. One of the really encouraging  developments is the growing participation  of money centre banks in helicopter finance  as an asset class. While we have the benefit of  growing our business with the balance sheet  of our parent Macquarie Bank Limited, the  growing participation of banks which have  traditionally financed commercial aircraft  bodes very well for the development of a  more transparent and robust secondary market  over the next several years.

What kind of returns can helicopter  investors expect?

The assets are very attractive from a value retention standpoint, and there are sufficient  opportunities for investors to make a safe  high single-digit to low double-digit unlevered  IRR [internal rate of return], which is  pretty healthy in a low interest rate environment.

Much of the return uncertainty remains  not surprisingly in residual realization. So,  care about maintenance and well-defined return  conditions are critical to ensuring investors  are able to have a reasonable opportunity  to achieve their anticipated returns.

One of the key benefits we see is the adoption of OEM [original equipment  manufacturer]-sponsored power-by-the hour  arrangements, which can cover the most  critical parts of the helicopter for a significant  period of the life of the asset. These  arrangements, which are also being adopted  by the large MROs [maintenance, repair and  overhaul companies] like Heli One, remove  much of the risk of the technical condition  of the helicopter.

Paul White, senior vice president, commercial,  Era Helicopters

AfJ: What is the biggest challenge you face in the  market?

Paul White: The influx of  new capital and entrants into the helicopter leasing  market over the past few years has definitely altered  the dynamics in the space. Any time significant new  capital enters a market it can often test the business  models of both incumbents and new entrants.

Era is the only truly hybrid operating lessor in  that as part of our core business we both operate  aircraft for our own end customers and lease out  aircraft to other operators. This strategy affords us  multiple opportunities to capitalize on the inherent  value and returns helicopters can generate while  differentiating ourselves in a now much more  crowded helicopter leasing market.