29th 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
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.