Critical Elements of Helicopter Value - Part 2 of 2

In Part 1 we defined micro elements are those which are inherent in the helicopter itself. Let's then define macro elements as those which are external to the helicopter and are imposed by the general economy: supply and demand, industry growth or contraction, client growth or contraction, availability of capital, and force majeure.

Macro Elements of Value

Supply and demand

This is an easy concept that we all use every day. In spite of the P/Q/E Marshall graphs you studied in Economics 101, most of us think in simplified terms that work well enough for this topic: More demand and less supply = higher prices; less demand and more supply = lower prices.

From 2004-2008, the helicopter industry enjoyed its own value bubble. With the advent of abundant capital, helicopter operators were able to finally begin fleet replenishment – replacing 10-20 year old machines with newer, more modern aircraft. The ability to get easy financing let to a sort of hysteria in the market, with orders for new helicopters doubling and then tripling in the space of just a few years. This in turn led to speculators placing orders, and then selling their "positions" or serial numbers, at or before their scheduled delivery date. When no positions were available and manufacturer backlogs for popular models exceeded two years, operators began paying increasingly higher prices for used helicopters of the same model. By mid-2008, the extremely popular Bell 407, for instance, cost US $2.4MM from the factory, with a 3-year delivery wait – or $2.7MM off the street with fully half of its component hours used, but available for delivery immediately.

In the last half of 2008, the price of crude oil fell from $130 bbl to nearly $30 bbl. Oil companies reduced their production, which reduced the number of helicopters needed to fly to the rigs. The flow of helicopters entering the resale market increased almost daily, and where once an operator had to knock on doors with cash in hand to find a viable Bell 407 to fulfill a contract, today there are more than 60 of them available with asking prices starting at $1.5MM and with average marketing periods of up to a year.

The economic principle of supply and demand differs from, but is closely related to, the economic principle of substitution which states that a prudent buyer will pay no more for an asset than it would cost to replace it with an equivalent property. So if you need a Bell 407 today, and one is available on the market for $2MM, you would not pay $2.5MM for an equivalent 407 (one with the same component status and equipment).

Industry and client growth and contraction

Popular uses for helicopters include offshore oil support, emergency medical transport, Electronic News Gathering, firefighting, construction, logging, aerial patrol, executive transport, mining, seismic survey and support, sightseeing, fish spotting, ranching, and agricultural spraying. These markets all play a role in determining marketability and therefore value as well.

By far the largest driver of the helicopter market is offshore oil support. While not on a par with jets or business aircraft, the offshore operators fly far more than any other helicopter operators. For example, in the Gulf of Mexico, in an area only 125,000 square miles, there are almost 500 helicopters, supporting over 5000 platforms, and making 2572 trips per day. This comprises almost a million flights per year, carrying 2.33 million passengers per year in 334,000 flight hours. The North Sea, Brazil, and several other oil fields require even more helicopter operations. The typical offshore helicopter flies 1200 hours per year. When you consider that each helicopter requires from 1 to more than 5 hours of maintenance for each hour of flight time, that's an extraordinary effort.

The oil industry is stretching farther and farther, to big rigs 150 miles offshore. To make these trips, helicopter operators are buying ever-larger helicopters with long-range fuel reserves, sophisticated electronic cockpits, and large payloads. These operators are moving away from short-range machines costing one to five million dollars that can carry 6-10 people, and into heavy twins that cost up to twenty-five million dollars and can carry up to 20 passengers. In spite of the viability of this market and the upward trend in oil prices, contracts for crew transport have not been increasing as quickly as hoped, leading to the placement of yet more helicopters into the resale market.

Another significant market is Emergency Medical Services. The EMS sector alone uses over a thousand helicopters ranging from million dollar single-turbine machines that barely fit a single stretcher up to sixteen-million-dollar medium twins that can carry several patients at a time, or can instead be fit with a flying emergency room. This end of the market is undergoing constant mergers and acquisitions, leading to consolidation in the hands of very few operators.

A new, rapidly growing segment is Search and Rescue. SAR contracts are typically for ten- to thirty-million-dollar medium- to heavy twins with enough power to lift a great deal of sophisticated mission equipment including glass cockpits, icing conditions equipment, life rafts, Doppler auto-hover, rescue hoists and winches, emergency flotation gear, rappelling devices, and crews of 5 or more. "Rapidly-growing", however, refers to dozens, not hundreds or thousands, of SAR helicopters in the world at this time.

Availability of capital

In 2008 the liquidity crisis first hit aircraft financiers. Changing bank and government regulations, risk level definitions, and capitalization requirements decreased the available money supply, borrower delinquencies, defaults, and bankruptcies increased dramatically in the two years leading up to the liquidity crisis. Helicopter industry consolidation led to lenders' and lessors' portfolios becoming increasingly concentrated, leading to loan refusals simply because the customers had exceeded their allowable portfolio credit limits. Equipment finance company consolidations have led to a vanishingly small number of financiers who fund helicopters. On the bright side, private equity and investment funds have entered the helicopter finance market, allowing transactions to proceed while the finance industry resets itself into new configurations for the new economic and regulatory realities.

Force majeur

The impact of force majeur on helicopter operations, and therefore helicopter values, cannot be predicted, but can be considerable. As an example, look at the Gulf of Mexico's Deepwater Horizon explosion in April 2010. By the end of May there was a U.S. moratorium on deepwater oil drilling. Gulf-area helicopter operators claimed a loss of contracts due to the moratorium, although Bristow Group was the only offshore helicopter operator to publicly release hard data. By June 11, nine of their helicopters had been affected by the ban, seven of which were released by their customers for the duration of the moratorium. These seven helicopters had been generating $3.8 million per month for Bristow. It is reasonable to believe that the other major Gulf operators saw a similar impact.

Conclusion

A helicopter is a fascinating, quirky asset. Although it bears much commonality with airplanes, it has several different properties. The more utilitarian viewpoint of its buyers makes it less vulnerable to wear-and-tear deductions from the value. The vast number of components, each with a separate maintenance schedule, makes careful, line-by-line component analysis a requirement. The different market sectors, utilizing their individual requirements to determine their "ideal" helicopter, combine with the pressure-cooker of today's low demand and high supply to create a complex web of betterments and detriments to a helicopter's value. And the maze of federal codes and agencies, regulations and treaties, insists upon a deeper-than-skin-layer analysis of consequences of potential acquisitions and potential uses in a variety of different countries and cultures.
Understanding the helicopter and its resale market, its function in the world and the needs of its operators, and the needs and requirements of the lenders and lessors who bring life to this small industry, are all critical aspects to a viable determination of this terrific little machine's value.

Critical Elements of Helicopter Value - Part 1 of 2

Are you thinking about buying a helicopter? Selling one? Funding a purchase or lease? As in economics, there are both micro and macro elements critical to its value.

Let's define micro elements as those which are inherent in the helicopter itself. These are the things that a buyer looks for: the status of the components as a percentage used, the existence of power-by-the-hour contracts on the engine(s) or drivetrain, the configuration and installed equipment, the avionics, the country of registry, and the quality of the operator who has been using it.

Micro Elements of Value

Component status

Arguably the most famous definition of a helicopter is "an assembly of forty thousand loose pieces, flying more or less in formation." Given a specific helicopter, the most important micro element of value is the components' Time Since Overhaul (TSO) or Time Since New (TSN). This includes the dynamic components such as engines, transmissions, swashplate, main- and tail-rotor blades, drive shafts, and flight controls; and we'll throw in the major airframe inspection as well. "TSO" is used for components which must be periodically overhauled and then returned to service. "TSN" is used for components which must be removed and replaced with new or serviceable components at specific intervals. The second are often called "life-limited" components and the first "rotables."

Most serial-numbered components are given a finite amount of flight time before they must be removed. The percentage of flight time used is the primary determinant of a helicopter's value relative to the resale market. More flight time used = lower value; less flight time used = higher value. However, when these parts time-expire, they can be replaced or overhauled, which raises the helicopter's value by approximately the cost of the overhaul or of the replacement part.

flight-graph

As you can see from the chart above, not every component depreciates over the same amount of flight time. A series of formals is used to determine the average of all the components' percentages used at any point during its life, allowing the helicopter to be accurately measured against comparable sales, offerings, and pending contracts.

Component times are determined by examining the helicopter's flight and maintenance logbooks. The logbooks record every minute of flight time, every component change, every overhaul and inspection related to that particular airframe or engine. Additionally, every serial-numbered component has a hard card (the flight and maintenance records for each individual component) that follows it throughout its life, from birth to death, regardless of what helicopter the component is installed in at any given moment. Components move frequently from inventory to airframe, and from one airframe to another. It's faster to remove a component and replace it with a fresh one than to take a helicopter out of service while waiting weeks for an inspection or overhaul. This is as true of a small component such as a hydraulic servo as it is of a large one such as an engine. With so many component changes occurring at any time during a helicopter's operation, individual records are required for every component as well as for the helicopter itself. (These required records are absolutely critical to the operation of a helicopter and its resale value. Any FAA inspector can shut down the helicopter at any time if he requests a record that does not exist or is inaccurate. Questionable records could do more than shut down the helicopter, they could shut down an entire operation. Clean, detailed, accurate records are a point in favor of a helicopter at its time of resale, regardless of your role as buyer, seller, or financier.)

Power-by-the-Hour

A Power by the Hour (PBH) contract is essentially a prepaid maintenance agreement in which the operator sends the manufacturer a fixed hourly payment and the manufacturer provides a freshly overhauled replacement part for every component under the contract term that comes to its life limit (or fails). The PBH-covered parts and components are therefore considered to always be guaranteed to be either actually in, or to be qualified for restoration to, a "zero" or "low" time service life condition. They each retain a high dollar value, regardless of their actual service life status, by virtue of remaining in "like new" condition as a result of the paid-up PBH program. Because PBH includes scheduled maintenance, it is far more than an insurance contract, and carries far more weight when valuing the helicopter.

Configuration and installed equipment

Installed equipment and avionics values are unique to each helicopter. Those items that translate well across multiple usages like air ambulance, offshore oil support, and personal use, or those that improve the performance of the helicopter, are those that supplement the helicopter's value the most. Three examples: 1) the Carson Helicopters composite main rotor blades for the Sikorsky S-61 can increase the value of the helicopter by more than the cost of the blades. 2) The Garmin 430 GPS is the most popular navigation aid in a helicopter's cockpit across all models and all usages, and correspondingly adds more value than smaller or less popular models, and an equal amount to larger, more expensive units. 3) A Restricted Category certificate of registration will reduce the value of the helicopter except in very specialized models and usages.

Country of registry

A financier will want to know the country in which the operator will be operating. Some countries carry inherently higher risk, such as those which have been known to exercise eminent domain under questionable circumstances on assets with liens perfected by someone else. Higher risk causes the financier to charge accordingly higher rates. Countries which are signatories to the Cape Town Convention (properly known as The Convention on International Interests in Mobile Equipment and Aircraft Protocol) offer the lender better remedies for default conditions, among other improvements in perfecting their interests.

Quality of previous operator

Buyers and financiers alike want to know the quality of the previous operator before investing in a helicopter. Their predominant interest obviously lies in the maintenance of the helicopter, since that directly impacts the helicopter's value in terms of the status of the components' TSOs and TSNs. Because of the chain of liability, buyers and sellers will also want to know whether there are any pending or contingent charges, liens, or litigation against the previous owner and/or operator.

End of Part 1

2014, Q2 Blue Book Pricing Update

Quarterly Pricing Update

For over 35 years, The Official Helicopter Blue Book® has provided the most accurate and up to date resale information in the helicopter industry. HeliValue$ is consistently working to improve The Official Helicopter Blue Book®, and this year has seen some big improvements with the launch of our new website. As part of the improvements being made, we will be publishing a quarterly pricing update that will notify our customers to changes made to each model as a result of our quarterly pricing meetings. Our quarterly pricing updates are one of the many ways we ensure that we are providing the most up to date resale information available. HeliValue$ is constantly gathering information from brokers, owners, operators, lenders, leasing companies and equipment manufacturers worldwide. The HeliValue$ team then reviews every model covered in The Official Helicopter Blue Book®, discusses and analyzes the transaction information received from our sources in the helicopter industry, and makes adjustments to each model as needed.

As always we look forward to our subscriber's feedback on any changes as well as any suggestion for future improvements. If you have any comments or suggestions, please contact us at [email protected].

Results of our July 15, 2014 Pricing Review

The following models each had a resale pricing change. If you would like to view the changes for these models log into your HeliValue$ account and click on the resale trends page for each model.

AgustaWestland

Airbus

Bell

Sikorsky

A109C

AW109E Power

AW109S Grand

AW119 Koala

AS-350B Astar

AS-350B1 Astar

AS-350B2 Astar

AS-350B3 Astar

AS-350BA Astar

AS-350D Astar

AS-355F / F1 TwinStar

AS-355F2 TwinStar

AS-355N / NP TwinStar

AS-365N1 Dauphin 2

AS-365N2 Dauphin

AS-365N3 Dauphin

EC135P1

EC135P2

EC135T1

EC135T2

EC155B1

206L-1 LongRanger II

206L-3 LongRanger III

206L-4 LongRanger IV

412

412EP

430

430 with Skids

S-76A

S-76B

S-76C+

Subscribe To The Official Helicopter Blue Book® Now!

“Don’t Look Back; the future may be gaining on you”

Everyone with any experience in the helicopter industry knows how and why helicopters are different from fixed-wing airplanes. Helicopter people also know that these differences are a “good thing”. The helicopters’ uniqueness is an irreplaceable asset - until the times comes to explain it to important people.

Some of the “important people” in the life of helicopter people are:

Financiers: Most directly the lenders and lessors;

Insurers: Primarily the agent/brokers, and the companies they sell for and represent, and, probably most important, the insurance underwriters who really determine coverage and rates;

National regulators: Who can either encourage the development of local helicopter operations, or, they can make sure that local helicopters (word play intended) “never get off the ground”.

Non-helicopter people frequently try to say what helicopters ARE. Helicopter people are most

often telling the world what helicopters are NOT. Helicopter people know that the helicopter is

not a car or a bus, they are not trucks nor are they trains, and finally: (this is where we really lose them) helicopters are not airplanes. In fact, most of the economic and mechanical facts that the important (fixed-wing) people know about airplanes is directly opposite with helicopters!

As the misconceptions about helicopters continue, so do the myths, misinformation, wrong impressions, and (most annoying), the chorus of useless chatter from incorrect “experts” that prevents the important people from seeing what’s truly going on in the world of helicopters. What’s going on in the world of helicopters is simply this: Helicopters are getting more and more like fixed wing.

One way helicopters ARE like fixed-wing airplanes is how both groups of aircraft actually do fly

in/through the air. This is true, despite the popular conception that helicopters have to spend

most of their flight-time simply beating the air into submission! But the real way helicopters

ARE like their fixed-wing relatives, is how much some new helicopters are becoming more and more like airplanes.

Helicopters are getting bigger, faster, and, more economical on a cost-per-hour operating expense viewpoint. Cases in point: The Bell-Boeing V-22 “Osprey” tilt-rotor transport currently on active duty with the U.S. Marine Corps is paving the way for fast, safe and dependable “Vertical Replenishment” of troops and materiel under some of the most complex and inhospitable conditions. The “Son of Osprey”, the Agusta Westland AW609, (also a tilt-rotor) scheduled to finally enter commercial service reasonably soon, will look like and act like a modern “light-twin” business-class turboprop. Except that it can carry an oilfield drilling crew to the rig 100+ miles out at sea in airliner comfort and speed, yet descend vertically onto the rig’s small space of the existing helideck with no “runway” or flight deck needed.

Just to add to the equation, Eurocopter is currently giving demonstration tours of its X3 compound helicopter. The X-3 is unique in that it has a standard main-rotor assembly, but no tail-rotor/fenestron. Instead, the X-3 has a “wing” on either side of the fuselage which holds the forward-facing (only) engines and propellers, so “voila”: instant turbo-prop speeds and economy of operation once it’s away from the take-off or landing area.

With the hugely increased capabilities, flexibility, reliability, and maintainability of these newest helicopters, fixed-wing manufactures may not want to look over their shoulder: They’ll probably see what’s rapidly about to overtake them.

“What do we learn from trade shows?”

Trade shows are more than a place to “meet and greet” old friends and business associates. Trade shows tell us the health of an industry, and, more important, they help to tell us who, and what, will be important in the near future. The Helicopter Association International’s (“HAI”) “Heli-Expo” held in Dallas, Texas earlier this year gave the helicopter industry more than it needed to know about how we are doing. Taking up the most convention center floor space than ever before (more than one million square feet), with more exhibitors (close to 700), and with what seemed like more attendees coming through the doors to attend the numerous seminars, complete the courses of instruction, and see the endless rows of exhibits, we know this was truly “the big show”!

But the heart of the matter is that we have all come to realize that helicopters, and helicopter operations, have finally moved into position where they are recognized to be a large, expensive and consistently profitable portions of the aerospace business. In fact, we predict that in 2012, the helicopter industry may well prove to be the one of the most important “engines” which powers many countries economic recovery.

Can you believe it? It’s almost a real-life Cinderella story! Here’s the helicopter industry in the real world: and it is actually discarding the impression which has held that it’s the “step-child” of aviation, and therefore not to be taken seriously as investment-quality assets. Yes, and not only that, but helicopters, their builders, their owners and operators, their vendors and suppliers, their maintenance and logistics infrastructure corporations, have all suddenly blossomed into the open to take center stage before an impressed audience.

And the audience is filled with the “heavy hitters” of aerospace: Finance and leasing wizards, operations and contracting moguls, and even fixed-wing airline promoters. Many of them may not have cared much about helicopters. Now, it’s as if Prince Charming has kissed them and awakened them to a whole new world! What’s really happening is that big banks around the world have to shift assets and make major changes to their own balance sheets. Assets that they once may have been heavily invested in may have to been removed from their portfolios. In some cases, their “home office” governments made these decisions, not giving the banks any opportunity to show how well the helicopter loan portfolio had performed. So, that could help to explain why many of the “too big to fail” mega-banks around the world who used to deal

with helicopter have been replaced on the scene. Now the new players have come to the table: not to gamble, but to put their money into what they know to be a durable, solid, predictable and responsible profit-oriented industry.

Guess what? It’s only taken about ten to 15 years, but the financial world has finally realized an embarrassing (for them) fact: After each financial meltdown, or, after each grave political or military crisis, there was NEVER a commercial helicopter parked next to the hundreds of commercial airliners sitting in the dirt of the “bone yards” in the state of Arizona in the southwest part of the U.S. Every crisis of this type put the world’s commercial airlines further and further into the financial emergency room, with many of them becoming permanently addicted to monetary life-support.

In HeliValue$’s experiences at this recent Heli-Expo, we can attest to the fact that this new breed of funding seems to be many things - they are:

Highly educated about aviation in general, and very understanding of how and why helicopters are such a different investment vehicle than commercial and private (fixed wing) airplanes;
Realizing that no “national” helicopter-operating company has been “bailed out”, and then kept running, by its government;
Genuinely interested in providing the large amounts of money needed to assist the fleet owners acquire their “latest and greatest” new helicopters;
Not afraid of older-technology machines, nor are they automatically afraid to consider older (calendar-) age units;
Not adverse to allow some of their collateral go on contracts where there may be unstable military and/or political situations;
Sometimes willing to take parts, components, accessory kits, and tools as valid collateral;
Able to make decisions quickly.

It’s not that the “old school” banks and leasing companies could not do any of these things during the time when they held (and dealt) most of the cards at the helicopter-funding buffet table. It’s just that most of them simply would not do all of these details all of the time. So, now that there seems to be some bright prospective paths for the helicopter industry to explore. Will the “new kids on the block” eventually place us on a strict diet, again leaving the industry to become lax and listless while waiting for the next transfusion? Or, will these new funders keep their positive attitudes and be able to sustain the helicopter industry’s constant appetite for dependable capital sources? Of course, only time will tell if and how the industry’s money supply will keep up with demand. But, judging from the substantially-positive numbers from this most recent Heli-Expo, the helicopter industry is showing it’s “out-performing” virtually every other segment of the aerospace industry, so how well can the “money-dealers” keep up with the players?